Americans now get less from their federal government than they used to. But most people pay about as much in taxes or more than they did in the past. That's mainly because of a huge shift in government spending away from programs and into interest on the national debt. That debt was vastly swollen in the 1980s primarily because of so-called supply-side' tax changes adopted in 1978 and 1981 that showered tax breaks on corporations and the wealthy.
After 1981 most notably in the 1986 Tax Reform Act and President Clinton's 1993 deficit reduction act steps have been taken to mitigate some of those regressive tax-shift policies. These reforms have been good news for most families.
By reversing some of the Reagan-era tax cuts for the rich, President Clinton's 1993 deficit reduction act has helped lower the budget deficit by more than half as a share of the economy. It has also helped stem the tide toward ever-increasing income inequality.
But the current leadership in Congress is bent on taking us back to the bad old days. Both their 1995 tax cut program and their various proposals for a flat tax' or a national sales tax would give gigantic tax reductions to the very wealthy. Unless they are prepared to balloon the deficit again, that inevitably would mean either much higher taxes on average families or further draconian reductions in government services or both.
Who wants to give a bigger tax break to average working families: President Clinton or congressional Republicans?
Actually, in total dollar terms (fiscal 2000), the plans are quite similar. To be sure, the Republicans' $500 per child tax credit costs almost twice as much as the President's $500 credit. (That's because the GOP plan goes to children up to age 18, rather than 12 under the President's plan, and because the President's credit is phased out between $60,000 and $75,000, rather than above $200,000 under the GOP plan.) But the President's plan adds a costly new deduction for college tuition and does not propose large reductions in the earned-income tax credit. By fiscal 2000, the net "family" tax cuts in the GOP plan are estimated to cost $20.4 billion; under the President's plan, the cuts cost $19.4 billion.
On top of their "family" tax cuts, however, the GOP tax plan offers another $20 billion or so in new tax breaks targeted to upper-income people and corporations. In contrast, the President's plan actually closes a few high-income and corporate loopholes. As a result, the overall net cost of the GOP plan in fiscal 2000 is more than $40 billion a year, while the President's overall plan costs only $7 billion a year.
Who would win-and who would lose-under the congressional tax plan that Clinton vetoed last year?
CTJ's microsimulation analysis of the tax plan approved by Congress last November shows that about two-thirds of all families would get nothing or pay higher taxes under the GOP tax plan. That includes nine million families with tax increases, mainly due to the GOP proposed reductions in the earned income tax credit for low- and moderate-income working families.
Overall, CTJ found that the median family would get an average tax reduction of only $114 a year under the GOP tax plan, while the best off one percent would save $10,476 a year in taxes mainly from the GOP's proposed capital gains tax cut.
Is Clinton's plan to give a tax deduction for college tuition a sensible way to subsidizecollege expenses? Or is it an upside-down subsidy that favors better-off people?
It might be a nice idea to help families send their children to college if we could afford it. But Clinton's proposed tuition tax deduction is a very odd way to structure such a subsidy.
The President has proposed to allow people to deduct up to $10,000 a year in college tuition or training expenses. The tax break would be phased out between $100,000 and $120,000 in income for couples, and between $70,000 and $90,000 for unmarried people.
Because it's a deduction, the benefits depend on people's tax brackets. In other words, the more you make (up to the income cutoffs), the larger share of your college expenses will be subsidized. For example, a family making $100,000 would get 28% of its college expenses paid for by the government; a families making $25,000 or $60,000 would get only a 15% subsidy.
Anti-government activists say the government gets fatter every day. Right? Or wrong? What's actually been happening to the deficit, spending and taxes in recent years?
This year, the federal budget deficit is expected to be 2% of the gross domestic product, its lowest level since before Ronald Reagan took office. Just four years ago, in fiscal 1992, the deficit was a staggering 4.9% of the GDP. The deficit has come way down (and is projected to decline even further next year) because the overall economy has done well and because of the 1993 deficit reduction act. That legislation increased taxes, mainly on the very wealthy, and reduced spending.
In fact, since fiscal 1993, total federal spending has fallen from 22.4% of the GDP to 21.2% the lowest since 1979. Even more notable is the sharp decline in spending on everything but Social Security and interest on the national debt. Since 1981, such spending has fallen from 14.9% of the GDP to only 11.5% a drop of 23 percent ($246 billion in 1996 terms) and is slated to plummet even further in future years.
President Clinton's 1993 budget act has been called, in Bob Dole's memorable phrase, "the biggest tax increase in the history of the universe." Is that right?
No, it's silly. Clinton's 1993 tax act only raised overall taxes by about 3 percent. Obviously, taxes didn't get to their current level without some considerably heftier tax hikes in the past.
This fiscal year, Clinton's 1993 tax act will raise an estimated $44 billion, or about 0.6 percent of the gross domestic product. How does that compare with other tax increases in the past half-century?
Remember World War II? To help pay for it, federal taxes were increased by a staggering 14.8 percent of the GDP (from fiscal 1940 to 1944). By 1996 standards, that's a tax hike of $1,086 billion a year 24 times as large as Clinton's 1993 act.
The Korean War required a federal tax increase of 4.6 percent of the GDP. That's $337 billion in 1996 terms more than seven times bigger than the Clinton act.
The surtax enacted at the end of the Johnson administration to finance the Vietnam War amounted to 2.1 percent of the GDP. That's $154 billion a year in 1996 terms or three and a half times larger than Clinton's annual tax boost.
In 1982 Ronald Reagan signed Bob Dole's Tax Equity and Fiscal Responsibility Act. Still in effect, those tax hikes will raise an estimated $68 billion in fiscal 1996 ($72 billion if you count the gasoline tax hike also enacted in 1982). At one percent of the GDP, the Reagan-Dole 1982 tax increase is half again bigger than Clinton's 1993 tax act.
One might also note that two tax bills enacted in 1983 and 1984 one to rescue Social Security, the other for deficit reduction will raise about $67 billion in fiscal 1996 again considerably more than Clinton's tax hike.
So is Clinton's 1993 tax boost the "largest increase in history"? Not even close.
Just as important, the 1993 tax changes were very progressive, concentrating mainly on taking back a portion the supply-side tax cuts that had gone to the very rich. In fact, except for a 4.3 cent increase in the gasoline tax, most families didn't pay a penny more in federal taxes as a result of the 1993 act. The boost in the top personal income tax rate affected only the best-off one percent of all families, and the expanded taxationof Social Security benefits hit only 3% of all families (also generally better-off ones).
Overall, only 4.2% of all families saw an increase in their personal income taxes as a result of the 1993 tax act. In contrast, 14.9% of all families got an income tax cut, due to the expanded earned-income tax credit for working families. In other words, Clinton's 1993 tax act cut income taxes for far more families than it raised them.
Of course, there is that pesky 4.3 cent increase in the gasoline tax. Obviously, that affects average families. But the bottom line for people in the middle is that they pay $1 a week or so in additional taxes as a result of the 1993 tax act, while the federal budget deficit has been cut by more than half. It seems a small price to pay.
The shift in income over the past two decades away from the middle and the bottom and toward the top is well known. But what's happened since Clinton took office? Same old same old? Or something completely different?
The news on the inequality front over the past few years is surprisingly good and Clinton's 1993 tax legislation deserves most of the credit.
From 1977 through the end of the eighties, most of the income growth was concentrated on the best-off families. During the "supply-side" years from 1977 to 1985, the tax system conspired to make things even worse. For instance, the inflation-adjusted pretax income of the richest one percent grew by 5.3% a year from 1977 to 1985, but the after-tax income of this elite group skyrocketed much faster, at an annual rate of 8.3% a year.
The 1986 Tax Reform Act put a damper on this tax-induced inequality, and the strong growth of the second half of the eighties was shared a bit more evenly after taxes than before taxes. The pain from the recession that George Bush suffered during his term was also spread fairly evenly before and after tax.
But during the economic recovery that Clinton has presided over, after-tax incomes actually have grown more progressively than did pretax incomes. Most notably, families in the poorest fifth saw their after-tax income grow almost twice as fast as their pretax income, due to 1993's expansion in the earned income tax credit. Although families at the very top of the income scale still enjoyed the largest pretax income growth, their after-tax income has been essentially flat because of the 1993 increase in the top income tax rate.
What would proposals for a "flat tax" or a national sales tax mean for average families? And what would they do to the deficit?
Scrapping the progressive income tax in favor of a flat tax (that exempts interest, dividends and capital gains from personal income taxes) would truly be the "biggest tax increase in history" at least as far as middle- and low-income families are concerned. Switching to a national sales tax would have similar effects.
The bottom line on any flat tax or sales tax that comes even close to adding up is that taxes on average families would increase by thousands of dollars a year, while taxes on the very best off people would plummet. In fact, that's the case even under the revenue-losing 20% flat tax proposed by Rep. Dick Armey.
To try to cover themselves, many of the flat-tax and sales-tax proponents have proposed ridiculously low tax rates. Armey, for instance, calls for a 17% rate in the third year of his program; some sales tax advocates have suggested a rate as low as 15%. But all of these low-rate plans would cause the deficit to skyrocket. In fact, at 17%, Armey's plan would essentially double the deficit. As the more responsible Bob Dole has noted, "that's not going to happen."
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