Taxing the Rich or the Poor?

By Charles P. Alexander

Supply-siders say the wealthy carry more of the load than before

Democratic presidential candidates have repeatedly charged that Reaganomics is a windfall for the wealthy. Jesse Jackson called the President's program a "reverse Robin Hood process, taking from the poor and giving to the rich." Walter Mondale said that the Reagan Administration was "of the rich, by the rich and for the rich." The Democrats received some ammunition this month from the nonpartisan Congressional Budget Office in a report that compared the size of tax cuts gained by different income groups. From 1983 through 1985, the CBO estimated, the 1.4 million households with incomes of $80,000 or more will receive income tax reductions totaling $35.4 billion, while the more than 40 million households that earn $20,000 or less will get cuts worth only $23.4 billion.

The figures have spawned protests from supporters of the Reagan tax cuts, including such leading supply-side theorists as Paul Craig Roberts, an economics professor at Georgetown University, and George Gilder, author of Wealth and Poverty and program director of the Manhattan Institute for Policy Research. They argue that the CBO figures are merely projections based on standard economic models and do not take into account the impact that tax cuts will have on the investment strategies of the wealthy. With tax rates reduced, the supply-siders say, the rich will move away from tax shelters and channel more of their money into conventional investments. As a result, the taxable income of the wealthy should rise, and they may wind up paying more to Uncle Sam than they did before tax rates were slashed. Says Gilder: "This is the most confident short-term prediction of supply-side economics."

Supply-siders point out that the amount of tax paid by the rich jumped after Presidents Harding and Coolidge cut tax rates in the 1920s and after Kennedy and Johnson did so in the early 1960s. Between 1963 and 1965 the maximum tax rate dropped from 91% to 70%, but revenues from households with incomes of $100,000 or more rose from $2.5 billion to $3.8 billion. The percentage of taxes paid by the 5% of taxpayers with the highest incomes increased from 35.6% to 38.5%. Observes Roberts: "This has always happened in our history."

It may already be happening under Reagan. The Wall Street Journal, which has long been an advocate of supply-side economics, published on its editorial page a table showing how the share of taxes paid by different income groups shifted between 1981 and 1982, the first full year following the reduction in the top tax rate on investment income from 70% to 50%. Compiled from U.S. Treasury statistics, the table revealed that the percentage of income tax collected from taxpayers earning $50,000 or more rose from 32.9% to 35.4%. At the same time, the share paid by those making $20,000 or less fell from 17.1% to 15.5%.

Liberals like Robert Mclntyre of Citizens for Tax Justice, a Washington public interest group, attacked the Wall Street Journal editorial. Two factors, they say, accounted for the shift in the tax burden, both of which had nothing to do with supply-side economics. First, inflation pushed many people into the $50,000-and-up bracket. Second, 1982 was a recession year, and unemployment reduced the earning power and taxes paid by low-and middle-income groups. Says Barry Bosworth, a senior fellow of the Brookings Institution in Washington: "If you looked at other recession years, you'd see the same phenomenon. It has little to do with the tax cuts, and the figures are misleading."

Not so, says Manuel Johnson, an Assistant Treasury Secretary and one of the Administration's most ardent supply-siders. Johnson reworked the tax figures to account for the impact of inflation and unemployment. He found that even after those corrections, the share of taxes borne by the 5% of taxpayers with the highest incomes had risen from 32.9% to 34%. Says Johnson: "A perfectly plausible explanation for this phenomenon is that upper-income people are diverting more of their income away from tax shelters into taxable investments."

Critics of supply-side economics point out that the tax-shelter industry seems to be flourishing. As of late last year, the Internal Revenue Service was examining about 335,000 tax returns for questionable shelter deductions, compared with 285,000 in 1982. Johnson argues, however, that those figures may simply mean that the IRS is searching returns more carefully for shelters. He concedes that the amount of money in tax shelters is growing, but contends that the percentage of new income going into these gimmicks may be declining.

Critics of Reaganomics maintain that low-income Americans are now carrying a heavier tax load than they were in the 1970s. One reason: tax breaks that are of greatest value to the poor, including the standard deduction, personal exemptions and the earned income tax credit, have not been increased to keep pace with inflation. In addition, Social Security payroll taxes, which weigh most heavily on the working poor, have been rising steadily, from 6.13% of wages in 1980 to 6.7% this year. By 1985 the Social Security rate will be 7.05%.

The Center on Budget and Policy Priorities, a nonprofit Washington research organization, charges that the combined income and Social Security tax burden has nearly doubled for a family of four at the official Government poverty line. In 1980 such a family earned $8,410 and paid 5.4% of its income in federal taxes. By 1983 inflation had pushed the poverty-line income to $10,166, and a family at that level paid an estimated 9.8% of its earnings in taxes.

These figures show that Reaganomics may need to be refined to provide more tax relief for the working poor. But the evidence marshaled by the supply-siders indicates that the wealthy are not getting a free ride at the expense of the poor. Despite the rhetoric that President Reagan is a "reverse Robin Hood," the share of taxes paid by the richest Americans is on the rise.

--By Charles P. Alexander.

Reported by Richard Bruns/New York and Christopher Redman/Washington

With reporting by Richard Bruns, Christopher Redman