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National Perspective | WASHINGTON OUTLOOK

Updated Income Tax Code Needs Some of the Credit for Prosperity

May 08, 2000|RONALD BROWNSTEIN | Ronald Brownstein's column appears in this space every Monday

When Treasury Secretary Lawrence Summers sauntered into the White House press room last week to announce this year's latest estimates of federal revenues, he engaged in what is becoming as much a Washington rite of spring as the flowering of the cherry trees. Just as the Treasury Department now does seemingly every year, Summers announced that government's revenues and surplus would be larger than forecast--allowing Washington to pay down more of the federal debt than expected.

The booming economy gets much of the credit. But another factor hasn't received the attention it deserves: the changes in the income tax code that have stiffened the take on upper-income families, while easing it on those in the middle.

By any measure, the income tax became more progressive in the 1990s. In 1990, under President Bush, Congress raised the top rate on the highest earners from 28% to 31%; then, under President Clinton in 1993, it created new rates of 36% and 39.6%. While those two rates affected only those families earning about $160,000 a year or more, a series of other changes reduced the burden on people at lower incomes. Washington greatly expanded a tax credit for the working poor, cutting taxes for an estimated 15 million low-income families. The $500-per-child tax credit approved in 1997 reduced taxes on middle-income families with children. Together, these changes have shifted the tax code's focus toward the penthouse.

Figures from the nonpartisan Congressional Budget Office show that in 1991 the top 1% of families paid 23% of all federal income taxes. By 1999, that figure had jumped to 29%. The top 5% of families now pay half of all federal income taxes, up from 42% in 1991. By contrast, the share paid by the bottom 60% of families has fallen to just 6%. That's half as much as in 1985.

This shift has proved good news in two distinct respects. First, the income tax burden on middle-income families has actually declined since the late 1980s to the lowest level in decades. Different analysts slice the data in different ways, but all of them tell the same story.

Families at the middle of the income ladder now pay 5.4% of their income in federal income taxes--down from 6.3% in 1991, the CBO calculates. As a share of total income, CBO concluded, federal income taxes are lower today than in 1977 for all but the top fifth of families.

In a recent study, the Tax Foundation, a conservative group, took an even longer view. It calculated that in 1998 the federal income tax burden on a family with median income was down to 8.9%. That was virtually no higher than the 8.7% income tax burden for a median-income family in 1955. The total federal tax burden is greater now, largely because of higher payroll taxes to fund Social Security. But when it comes to the income tax, Dharma and Greg pay no more than Ozzie and Harriet.

Just as important, the code's increased bite on the affluent has been critical to the elimination of the federal budget deficit. It has allowed government to capture a fairer share of the windfall that people at the top have enjoyed. In fact, Allen Schick, a professor of public policy at the University of Maryland, contended in a recent paper that the tax hikes on the burgeoning ranks of upper-income earners have been the single most important factor in moving Washington from huge deficits to ever-growing surpluses.

"The key has been the changes in the tax code interacting with the changes in the economy," Schick says. "The tax code steeply increased taxes on upper-income people, at the same time upper-income people did extremely well during the 1990s. In the 1990s, in a nutshell, we taxed the winners."

CBO numbers underscore his point. Families at the top have significantly increased their share of the total income earned by all Americans in recent years; the top 1% of earners took home 15% of total family income in 1999, up from 12% in 1991. But because of the changes in the tax code, the share of the total income taxes paid by the top 1% increased even more, from 23% to 29%.

So far the shift in the income tax burden has proved a win-win political proposition. As even conservative analysts like Bruce Bartlett, an architect of Bob Dole's 1996 tax cut plan, have noted, the declining income tax burden on middle- and working-class families has diminished their desire for tax cuts. At the same time, families at the top haven't rebelled against the higher tax rates because they have been getting ahead so fast even with them. Upper-income families have particularly enjoyed dizzying increases in their net worth through the rise in the stock market; as Bartlett notes, that wealth isn't taxed, except in the form of capital gains when stock is sold. And capital gains taxes were cut in 1997.

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