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Did Tax Cuts for the Rich Create the Great Divergence?

June 5, 2012



Income tax rates have changed dramatically during the past 30 years. During the Reagan administration (1981-89), the top marginal rate dropped from 70 percent to 58 percent, and eventually to 28 percent. Under subsequent presidents, it has hovered between 30 percent and 40 percent.

But effective tax rates—what people actually pay—didn’t change nearly as much. For incomes in the top 1 percent, the effective tax rate went from 37 percent in 1979 to 29.5 percent today, with a big drop and subsequent rise during the 1980s. For incomes in the bottom 20 percent, the percentage change in the effective tax rate was much more dramatic—it was halved, from 8 percent in 1979 to 4 percent in 2007. But to contribute to the Great Divergence, the bottom quintile’s effective tax rate would have to have increased.

Tax cuts for the rich certainly contributed to the Great Divergence. But it would be hard to argue, based on this data, they were the major factor.

On the other hand, the nature of tax may very well have significantly contributed to the Divergence. The lowering of tax rates on “unearned income,” capital gains and pass-throughs probably did encourage the wealthy to shift their sources of income to take advantage of the must lower rates.

The question remains if the top 1% have seen their Federal taxes reduced by almost 1/3 and the lowest 20% by half, who has been paying for this huge increase in government spending we have been hearing about*?

Effective Tax Rates and Subsidies

Effective Tax Rates and Subsidies (Photo credit: citizens4taxjustice)

Actually, it has been paid for through borrowing by the Republican administrations and by various forms of bracket creep on the middle class occurring during every administration.
* Only entitlements and defense spending have been increasing, discretionary spending has become an ever-shrinking portion of the Federal budget. Many civilizations and empires have collapsed under those budgetary circumstances).

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