Another Reagan Legacy

When Ronald Reagan took office in 1981, he immediately carried on with Jimmy Carter’s legacy. It was Carter who had deregulated trucking and the airline industry and also eliminated the 70% tax bracket. Reagan initiated huge tax cuts on the wealthiest Americans, and the predictable result was massive deficits. Something had to be done – the Laffer Curve was not working. A measure of fiscal sanity had to be restored. A massive tax hike was in order.

A Democratic congress passed and Reagan signed into law the largest tax increase in history – the Social Security Amendments of 1983. But unlike the initial tax cuts, which went to the wealthiest Americans, the tax hike was aimed squarely at the middle and working classes. By 1988, when Reagan left office, an additional $40 billion in new revenue had been generated for the government. Today, excess revenue generated by the Reagan tax hike is around $2 trillion.

Was this planned? Probably. Ronnie wasn’t a tax cutter – he was a tax shifter – rich to middle and working class.

The payroll tax – the financial engine behind Social Security and Medicare, became a major source of revenue for the Federal Government, collecting far more than was paid out in benefits. In 2004 the federal government raised $802 billion from payroll (Social Security and Medicare) taxes. These taxes were levied exclusively on people making wages of $87,900 and below.

On the other hand, the Federal government raised $801 billion from regular income taxes that year – less than from payroll tax. Most Americans now pay more payroll tax than income tax. Surely that was the intent.

So when you hear stories about how the wealthy are carrying water for the rest of us, how they are paying most federal taxes, be careful. Here’s a typical example – a graph taken from Sugi Sorenson, Defender of Liberty (I could have chosen a hundred sites, but Sugi’s had the best name):

Sugi is careful to say “income” tax, but the presumption in the mind of the reader is that he is talking about all taxes when he is only talking about one tax, and ignoring the largest tax of all, the payroll tax.

You see this story told all over the right wing … it gets repeated again and again. It’s not false, it’s just not true. It’s only part of the story. The other part is the payroll tax. I am yet to find a tax distribution chart that includes the payroll tax. Another day, another story.