January 21, 2018

Incomes Grew After Past Tax Cuts, but Guess Whose

Incomes Grew After Past Tax Cuts, but Guess Whose

The sliver of America that did get ahead was, you guessed it, the one at the tippy top: the richest Americans, those in the highest 1 percent of the income distribution. Their earnings grew by about 6 percent a year.

Whatever gains that Republican tax cuts have bestowed on the economy in the years since Reagan promised voters a city on a hill, they have all shared the same distributional peculiarities. President George W. Bush passed two rounds of tax cuts, in 2001 and 2003, arguing that the United States had a budget surplus “because taxes are too high and government is charging more than it needs.”

To make his case, in 2001 Mr. Bush deployed the Ramos family of Pennsylvania, which he said would save $2,000 from his first round of cuts. “If we had the money,” Steven Ramos, a school administrator, told somebody on the president’s staff, “it would help us reach our goal of paying off our personal debt in two years’ time.”

And yet, during Mr. Bush’s two terms, the average income of the bottom half of Americans slid from $17,827 to $17,473, accounting for inflation. After factoring in taxes and transfers, that sum did increase — 3.5 percent, or about 0.4 percent a year.

The bottom half of Americans fared better under President Bill Clinton, who actually raised taxes. On average, their incomes rose by a fifth over his two terms, after taxes and transfers, a gain of over 2 percent per year, after accounting for inflation. Their lot also improved during President Barack Obama’s administration, census data shows. (The series from the World Wealth and Income Database ends in 2014.)

Who Gains From Tax Cuts?

Tax cuts have been followed by fast income growth at the very top of the pyramid of prosperity. But among the bottom half of Americans they have delivered little.

Highest marginal income-tax rates

Average pre-tax U.S. incomes

Average pre-tax U.S. incomes

Highest marginal

income-tax rates

Over a 34-year stretch starting in 1980, a period during which the nation’s top income tax rate plunged from 70 percent to as low as 28 percent, settling at just under 40 percent today, the grand Republican promise of faster growth has proved to be, if not necessarily false, at least irrelevant for the very segment of the electorate for which it was directed.

In 2014, the economy was 2.5 times larger than it was in 1980, but the bottom half of the population made only 21 percent more, on average, even after including government benefits. America’s middle — families earning more than the bottom 30 percent but less than the top 30 percent — gained only 50 percent in those 34 years. By contrast, the after-tax incomes of Americans in the top 1 percent — families like President Trump’s or Senator Bob Corker’s — tripled.

That is less surprising when one realizes that for all the stories about harried workers in the Midwest shouldering an unbearable tax burden, tax relief since Reagan’s fateful State of the Union speech has mostly been aimed at benefiting the well-to-do: The average tax rate for Americans in the bottom half of the income pile was higher in 2014 than it was in 1980. The rate at the top declined.

After multiple repetitions, the Republican promise that the road to paradise is paved with tax cuts may have finally lost its power. Only about a third of voters seem to support the current Republican strategy — a much smaller proportion than the one that favored the tax cuts passed in 1981, under Reagan, and 2001, under Mr. Bush.

Still, Republicans are having a hard time letting go of Reagan’s message. Mr. Trump’s Council of Economic Advisers claimed that the corporate tax cuts proposed by the president would give households in the middle of the income scale a boost of $3,000 to $7,000 a year.

Mr. Ryan offered a single mother named Cindy, an assistant manager at a local restaurant who was created by Republican staff members of the House Ways and Means Committee. She makes $30,000 a year, according to Mr. Ryan, and will be mighty pleased with the extra $700 a year she will get from the Republican tax cuts.

The question now is whether the actual harried working-class voters who helped deliver Mr. Trump to office buy the story. The president they voted into power did not campaign on a platform of tax cuts for the rich. His latter-day embrace of Reagan’s tax-cutting agenda might strike them as a betrayal. It has been going on for a very long time.

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