Effective Tax Rates- taxes on the wealthy spurring surplus

Nathan Newman nathan.newman at yale.edu
Sat Jan 30 10:46:34 PST 1999


This week's ECONOMIST (Jan 30th) has a lovely graph showing why the Republicans are going to have so much trouble selling their tax cut plans. What it shows is that while tax revenue as a share of GDP is at historical highs, "most of this increase [in the last few years] has come from the top income brackets...'Ordinary' Americans have not seen their effective tax rates rise."

One interesting fact is that despite all the swings of tax cuts and tax increases since 1977, the effective tax rate on the middle 20% of Americans has remained almost rigidly the same - at just under 20% of income. Largely due to the Earned Income Tax Credit, the botton 20% of Americans have seen their federal taxes drop to just under 5% of income.

The top 1% of income groups saw their effective tax rate plunge from about 35% in 1977 down nearly to the same rates at middle income taxpayers by 1985 (at about 24%) and then shoot up again in the 1990s to the same effective tax rate as before 1977 by 1995. The last couple of years have seen a small erosion in that tax rate for those high income makers, but not that much.

Which is the frustration of the GOP and their wealthy backers. A relatively large minority of poorer folks are paying very little federal taxes, while any serious tax cut for the middle income folks would have to also confront Social Security taxes - a can of worms that the GOP sure don't want to tangle with.

So their proposal of a 10% rate cut or almost any other variation will inevitably do little to cut the taxes for average folks - a fact unlikely to be lost on them. Which is why polls have been showing that the GOP is not even that trusted on tax issues any more - once their core political strength.

Worse, as the ECONOMIST even notes, "Nor is it clear that a broad-based tax cut makes good policy." If the present tax distribution is fueling a surplus, delivering goodies for the rich at the expense of Social Security or just plain paying off the debt (for the Perotista in the audience) will be a real political loser.

Which probably expains the drawn out Monica trial. The GOP is scared of dragging the trial out, but they are probably more scared of a serious discussion of issues where they have a very weak hand.

The only question is how progressives can use the situation to move the debate from the center back to a progressive tilt.

--Nathan Newman



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