I’m sure we’ve all seen the following chart which shows the growing disparity between the income growth of the top 1% of tax payers, and all other groups.
This chart has caused quite a stir among pundits, taxpayers and income earners in the United States and rightfully so. The right, and the rich, and their hired pundits have called the reaction ‘The Politics of Envy’ meaning the left and the left leaning pundits have stirred up the pot of discontent by using envy as the driving force.
This chart comes from analysis of a report by the CBO for which I’ve attached this link:
According to this document, the top 1% have benefited greatly from changes in tax policy and the other income groups have not. It occurred to me that if that was true, I should be able to track those policy changes and see how and where this inequity came from.
They, the right and the rich and their pundits, feel that those of us who are not in the top 1% of income earners are just jealous of their success and wealth.
That’s simply not the case; as I’ve mentioned in some previous posts, it’s not that we’re envious that other’s have more money, it’s that they have access to the politicians who create the policy that enables the very rich to get richer while the rest of us remain about the same in relation to our incomes in previous years. And it’s our suspicion that our politicians are more than willing to sell influence to the highest bidder.
Before we look at the charts and policies that changed income distribution in the United States, lets explore what forces the top income earners could apply to the politicians to influence this massive shift in income.
Lobbies and Lobbyists: The very rich can and do use public relations firms to advance their agenda’s. This is totally legal but it’s not an avenue open to the average income earner.
Campaign Contributions: The very rich contribute huge amounts of money to campaigns. In return they get access to the politicians, and perhaps even the promise of influence sharing. This is especially alarming in light of the Citizen’s United decision by the Supreme Court which allows unlimited cash contributions to Super PACs.
Ear Marks: The super rich, just like many businesses, can donate to a campaign and reasonably expect a return on their investment via earmarks. This is common and observable and will be covered in detail in a coming post.
Favors: You and I may not be able to contact our elected representatives and offer them favors in return for favors because we just don’t have the access. The rich do.
OK, let begin looking at the original chart and notice that all income groups experienced gains in income that were fairly equal before 1981. Then things began to change in favor of the top 1%.
What happended in 1981?
Economic Recovery Tax Act of 1981 Signed by Ronald Reagan
- Individual income tax reductions. Reduced marginal tax rates 23 percent over three years; reduced maximum rate to 50 percent and maximum capital gains rate to 20 percent; indexed income tax brackets, personal exemption and standard deduction for inflation beginning in 1985; and provided new deduction for two-earner married couples.
- Capital cost recovery provisions. Replaced facts and circumstances and the AssetDepreciation Range guidelines with Accelerated Cost Recovery System. Faster write-off of capital expenditures under simplified rules. Most equipment written off over 5 years, structures over 15 years. Allowed liberalized safe-harbor leasing rules, which effectively allowed companies to sell tax losses.
- Estate and gift tax provisions. Permitted unlimited marital deduction: increased estate credit to exempt from tax all estates of $600,000 or less; and reduced maximum estate tax rate from 70 to 50 percent.
Here’s a chart showing the effects of that 1981 tax policy change:
I apologize about the fuzzyness of the chart, but the math isn’t fuzzy at all. It’s very clear that folks who earned above $200,000 benefited by a net change (reduction) to their tax bill to the tune of $ 58,250 per year.
But that’s just the beginning, here’s a chart showing what happened in 1986.
Tax Reform Act of 1986 signed by Ronald Reagan
- Individual income tax provisions. Lowered top marginal tax rate to 28 percent; increased standard deduction to $5,000 for married couples; increased personal exemption to $2,000; and increased earned income tax credit.
- Repealed two-earner deduction, long-term capital gains exclusion, state and local sales tax deduction, income averaging, and exclusion of unemployment benefits. Limited IRA eligibility, consumer interest deduction, deductibility of passive losses, medical expenses deductions, deduction for business meals and entertainment, pension contributions, and miscellaneous expense deduction.
- Reduced top corporate marginal tax rate to 34 percent, and tightened corporate minimum tax.
- Repealed the investment tax credit and lengthened capital cost recovery periods.
As you can plainly see from the charts, the income of the super rich continued to rise (with a few exceptions) steadily while the income of the bottom 99% (it’s just a number here, not a movement, but I can see how they got their name) continued to remain farily stable in comparison.
Let’s move to the era of ‘Read My Lips – No New Taxes’
Omnibus Budget Reconciliation Act of 1990 signed by G.H.W.Bush
- Individual income tax rate increases. Increased top statutory tax rate from 28 percent to 31 percent, and increased the individual alternative minimum tax rate from 21 percent to 24 percent. Capped the capital gains rate at 28 percent. Limited value of high income itemized deductions: reduced by 3 percent times the extent to which AGI exceeds $100,000. Modified the bubble: temporarily created the personal exemption phase out applicable to the range of taxable income between $150,000 and $275,000.
- Payroll tax rate increases. Raised the cap on taxable wages for Hospital Insurance (Medicare) from $53,400 to $125,000. Extended social security taxes to state and local employees without other pension coverage. Imposed a supplemental 0.2 percent unemployment insurance surtax.
- Earned income tax credit (EITC) expansion and other low-income credits. Adjusted EITC benefit levels and phase-in and phase-out rates for family size. Created a low-income credit for the premium costs of health insurance that includes coverage for children.
- Income tax base erosion. Extended expiring provisions: tax credits for research and exploration, low-income housing, business energy, targeted jobs, and orphan drugs; tax exemptions for mortgage revenues and issue bonds; exclusions for employer-provided legal and educational assistance; and 25 percent health insurance deduction for the self-employed. Extended and created new energy producer tax benefits: extended non-conventional fuels credit and tax incentives for ethanol production; created a new credit for enhanced oil recovery costs; amended percentage depletion; reduced alternative minimum tax preference treatment of energy items. Created a small-business oriented credit for accommodations for disabled persons. Modified estate freeze rules. Eliminated appreciation of certain donated property as a minimum tax preference item.
Omnibus Budget Reconciliation Act of 1993
- Individual income tax rate increases. Imposed new higher tax rates of 36 percent and 39.6 percent. Increased tax rates and exemption amounts under the AMT. Permanently extended the itemized deduction limitation and the personal exemption phase-out legislated in OBRA 1990.
- Corporate tax rate increases. Increased corporate tax rate to 35 percent on income above $10 million.
Please note that these policies didn’t help the rich get richer, rather they increased the taxes on the rich. Let me remind you that G.H.W. Bush was a one term President.
Let’s continue to drill down, here’s what happened in the Clinton years:
Taxpayer Relief Act of 1997
- Estate and gift tax reductions. Boosted the present law unified credit beginning in 1998 from $600,000 per person to $1 million by 2006. Also indexed other estate and gift tax parameters, such as the $10,000 annual gift exclusion, to inflation after 1998.
- Capital gains rates reduction. Reduced capital gains tax rates from 28 percent and 15 percent to 20 percent and 10 percent respectively.
Please do notice that the top 1% made constantly huge gains during the 8 years of Clinton’s presidency. This is not only due to tax policy changes that helped the rich, it’s also due to the massive deregulation that occurred under Clinton. We’ll explore that in an upcoming post.
Of course the benefits to the top 1% didn’t stop with Clinton, next we have another two term president who put his own fingerprints on the tax code:
In answer to the recession of 2000, G.W. Bush passed the following tax bills with remarkably telling titles:
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
- Individual income tax rate reductions. When fully-phased in 2006, levied a new 10 percent rate on the first $12,000 of income for a married couple ($10,000 for a single head of household and $6,000 for an individual); the 15 percent rate begins thereafter; reduced 28 percent rate to 25 percent, the 31 percent rate to 28 percent, the 36 percent rate to 33 percent and the 39.6 percent rate to 35 percent. Repealed the phase-out of the itemized deduction and personal exemption by 2008. Made the 10 percent bracket retroactive, resulting in refund checks of up to $300 for individuals and $600 for couples 4-5 months hence.
- Estate and gift tax reduction and elimination. Gradually reduced the estate and gift tax rate from 55 percent to 45 percent by 2007; raised the effective exemption from $1 million in 2002 to $3.5 million in 2009. Eliminated the estate tax portion entirely in 2010 in lieu of a capital gains tax with high disregard ($3.3 million) for transfers to a surviving spouse.
Job Creation and Worker Assistance Act of 2002 (JCWAA)
- Depreciation allowances. Allowed additional first year depreciation or expensing equal to 30 percent of the adjusted basis of qualified property.
- Five-year carry back provisions. Allowed five-year carry back of net operating losses (NOLs). Temporarily extended the NOL carry back period from two to five years for NOLs arising in taxable years ending 2001 and 2002.
Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)
- Accelerated provisions of EGTRRA (2001). Expanded child tax credit to $1,000 per child for 2003-04, reverting to present law (2001-enacted phase ins and outs) in 2005; expanded 15 percent tax bracket and standard deduction for joint filers to double the ranges and levels for single filers for 2003-04, reverting to present law in 2005; expanded 10 percent bracket for 2003-04, reverting to present law in 2005; implemented 2006 rate schedule: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent; increases individual AMT exemption amount by $4,500 single and $9,000 joint for 2003-04.
- Capital gains and dividends. Taxed capital gains with a 15 percent rate for most gains and 5 percent for gains of moderate income taxpayers for 2003-07; becomes 5 percent/0 percent in 2008 and reverts to present law in 2009. Taxed dividends with a 15 percent/5 percent rate structure for 2003-07, 15 percent/0 percent in 2008, reverting to present law in 2009.
- Depreciation. Increased bonus depreciation or expensing to 50 percent for physical asset purchases for 2003-04, reverting to present law in 2005; increased section 179 (100 percent) expensing by raising expensible amounts from $25,000 to $100,000 and the phase-out threshold amount from $200,000 to $400,000.
American Jobs Creation Act of 2004 (AJCA)
- Provisions related to repeal of exclusion for extraterritorial income (ETI). Provided transitional relief for taxpayers subject to the ETI repeal by allowing a tax exclusion of 80 percent in 2005 and 60 percent in 2006 of extraterritorial income; created deduction relating to income attributable to U.S. production activities.
- Business tax incentives. Increased section 179 expensing from $25,000 to $100,000 and increased the phase-out threshold amount from $200,000 to $400,000; included software in section 179 property; and extended indexing of deduction limit and phaseout threshold through 2007; instituted 15-year straight-line cost recovery for qualified (1) leasehold improvements and (2) restaurant improvements, through 2005 only; provided S-corporation reform and simplification; repealed 4.3-cent General Fund excise taxes on various fuels usually through 2005 or 2006; and modified application of the income forecast method of accounting; provided incentives to film and television production and repealed some taxes on distilled spirits, wine, and beer, among other incentives.
- Provisions relating to tax relief for agriculture and small manufacturers. Provided that the General Fund be used to pay all alcohol and fuel and excise taxes; provided outlay payments (in lieu of excise tax credits and refunds) to producers of alcohol fuel mixtures; and provided tax credits for biodiesel (again, from the General Fund); extended some bonus depreciation rules for certain aircraft, among other items.
Tax reform and simplification for U.S. businesses. Provided incentives to reinvest foreign earnings in the U.S.; installed new interest expense allocation rules; re-characterized overall domestic loss; applied look-through rules for dividends for certain section 902
In terms of making the super rich even richer, the most effective Presidents have been Reagan, Clinton, and G.W.Bush. Good job boys.
Let me also note that while the income of the top 1% rose from about $100,000,000 a year to over $350,000,000 a year. Their share of the nation’s wealth also grew at astronomical dispreportions to ours.
While the Bush tax cuts helped reverse the post 9/11 recession, they were not the driving force behind the economic recovery. We can attribue that not to Supply Side economics, but directly to Demand Side economics.
We’ll explore this in a coming post.