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August 6, 1992 HELPING THE MIDDLE CLASS: INCOME GROWTH AND TAX FAIRNESS UNDER REAGAN/BUSH "We must keep opportunity alive in this country. Federal income tax rates are lower, flatter and fairer than they were a decade ago." President George Bush Address to the National Future Farmers of America November 13, 1991 Summary o The Reagan-Bush years brought a record period of peacetime economic growth and prosperity for all Americans, including middle-income Americans. Under Reagan-Bush policies, real family income grew rapidly. The real median income of a family of four increased 8.8% between 1981 and 1990. At the same time, Federal income taxes paid by middle class families were reduced. o Over the last 30 years, Republicans have proven themselves to be the party of tax relief. Even when Democrats claim to be lowering taxes, they actually take an ever larger chunk out of our paychecks. The truth is clear: Democrats tax more, Republicans tax less. o Congressional Democrats in recent years have falsely claimed that incomes have fallen and that the middle class is disappearing. Census Bureau data show that this is simply not the case. o The middle class pays less of the tax burden now than it did in 1980. The rich now shoulder a much larger portion of the tax burden. Income Growth Accelerated in the Republican 1980s o From 1980 to 1990, real per capita income increased 16.3%. Even with the 1990 recession, average family income in every fifth of earners in 1990 was higher than in 1980 (Chart 1). o Per capita income of black Americans increased even faster, rising by over 18% during the decade. The median income of black families grew nearly five times faster in the 1980s (6.4%) than during the 1970s (1.3%) (Chart 2). o Real median income for a family of four increased 9.8% between 1981 and 1990, rising steadily over most of this period. Middle Class Prospered Under Reagan-Bush o Those in the middle fifth of the income distribution had significantly higher real incomes in 1990 than in 1980. o Contrary to the claim of the Democrats, the middle class did not disappear during the 1980s--it got richer. During the 1980s the middle class, broadly defined, moved into a higher income range. As the middle class got richer, the definition of "middle class," by real income ranges, shifted upwards. o Because the middle class did better, the range of their incomes went up. -- In 1980, the middle income quintile of families had real incomes between $27,617 and $39,115. -- By 1990, that had risen to between $29,044 and $42,040. o The middle class also benefited from the fastest growth in wealth during the 1980s. While those with incomes over $50,000 saw their wealth grow 6.6% between 1983 and 1989, families with incomes in lower ranges saw greater growth. -- People with incomes between $10,000 and $19,999 had 19.1% growth, between $20,000 and $29,999 had 28.9% growth, and between $30,000 and $39,999 had 27.7% growth. -- In fact, middle income families outpaced the affluent in wealth growth (Chart 3). Incomes Stalled in the Carter Years o Average family incomes fluctuated in the 1970s and showed no growth from 1977 to 1981 because of the recession in the last year of the Carter Administration. Income Mobility: The Rule, Not the Exception o There are no permanent income classes in the United States. Households frequently move in and out of income classes. Most people earn more as they get older so they tend to move into higher classes. -- More than two-thirds of all taxpayers found themselves in a different fifth of earners (quintile) after a ten year period (1979-1981). -- Over this ten year period more people moved from the lowest fifth of earners into the highest fifth than remained in the lowest fifth. o Contrary to the assertions of the liberal Democrats, there is no permanent group of earners at the top. -- Only 42% of households stayed in the top fifth for all ten years. Less than 20% stayed in the top 1% of earners for all ten years. Reagan-Bush v. Carter: Lowering the Middle Class Tax Burden o Differences in attitudes towards taxation are clear in a comparison of taxation under Presidents Reagan and Bush and under Carter. Tax rates fell and real median incomes rose during the Reagan-Bush years; in contrast, during the Carter years federal income tax rates increased while real median incomes fell. -- Reagan-Bush cut the average income tax rate on middle income families by about one-fifth and slashed the marginal tax rate by 38% from 24 cents on each dollar of earning to only 15 cents. Under Carter, the average income tax rate for middle income families rose 15%, and the marginal rate climbed by 9 percent to 24 cents on the dollar (Chart 4). o History demonstrates that taxes increase during Democratic regimes and decrease in Republican years. -- During the Kennedy-Johnson years, the average Federal income tax rate on middle incomes rose from 7.7% to 9.2%. Furthermore, despite a tax rate reduction in 1964, marginal tax rates were higher in 1969 than they were in 1960. -- Under Carter, the average combined Federal tax rate (including income taxes, Social Security, and Medicare) on middle income families increased from 15% to 18%. -- The Reagan and Bush Administrations reversed the increases of the Democratic years and reduced the average Federal income tax rate on middle income families by one-fifth. o When the Democrats are in power, they raise taxes on everyone, not just on the rich. Sharing the Burden of Paying Federal Taxes o The rich bear the heaviest burden of taxation in this country. The Congressional Budget Office projects that 60% of all federal income taxes in 1992 will be paid by the top fifth of families. Only 20% of Federal income taxes will be paid by the entire bottom three-fifths (Chart 5). o The rich will pay a larger share of Federal taxes in 1992 than in 1980. The share of taxes paid by the top 1% of earners will increase by at least 22% for 1992. The top 5% will see their tax share go up by 16%. It is beyond dispute that the rich pay an increasingly large share of taxes. o Another way to measure the middle class income tax burden is to calculate the share of all Federal taxes paid by middle income families. -- In 1977, middle income families (the middle 60%) paid 42% of all Federal taxes. -- By 1988, middle income families were paying just under 40% of all Federal taxes. Under President Bush, middle income families pay about 39% of all Federal taxes. o In the Reagan-Bush years, the Federal tax system has not placed a larger burden on middle income families. On the contrary, the average tax burden on middle income families has been reduced while the share of taxes paid by the rich has increased.


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