Those Progressive '90s

The 1990s saw lots of federal tax legislation enacted. The biggest changes included the modestly progressive tax increases that President George H.W. Bush reluctantly signed in 1990, Bill Clinton's 1993 tax hikes on the rich, and the generally regressive 1997 tax cut deal worked out between Clinton and the Republican Congress. So what did all these tax changes accomplish? The answer may surprise you.

Compared to what would have happened if the 1990 income tax code had simply been adjusted for inflation, federal income taxes are actually lower today for every income group except the top 1 percent. If we add the payroll tax changes in 1990 and 1993, which lifted the wage cap on Medicare taxes, we find that, on average, combined income and payroll taxes are down for every group except the best-off 5 percent.

In other words, despite the lamentable upper-income loopholes adopted in 1997 (in particular for capital gains), federal income and payroll taxes are noticeably more progressive today than they were at the start of the 1990s.

Low- and moderate-income families have benefited from the big increases in the Earned Income Tax Credit in 1990 and 1993. The $500-per-child tax credit adopted in 1997 has helped lots of middle-income families. But the highest earners now face a maximum regular income tax rate of 39.6 percent (except on their capital gains), compared to a maximum rate of only 28 percent in 1990.

This progressive trend is probably one reason most of the public seems so indifferent to GOP calls for big tax cuts. At the same time, it helps explain why Republicans like George W. Bush and congressional leaders are so zealous in targeting their big tax cut proposals toward the well-off people they represent.

Oh, by the way, before you get too concerned that we're overtaxing the well-off these days, remember that their tax increases in the 1990s came on the heels of their big Reagan tax cuts of the early 1980s. Nobody's suggesting that the tax code is more progressive now than it was before Reagan took office.

Regressive Prospects

With the surplus burning a hole in their pockets, congressional Republicans at this writing are ready to send President Clinton a collection of tax cuts, including, among other things, estate tax repeal, tax cuts for upper-income couples, and expanded tax breaks for retirement savings. The measures have a price tag of about $600 billion over the upcoming decade, not counting added interest on the national debt.

About two-thirds of the congressional tax cuts would go to the best-off tenth of all taxpayers. The top 1 percent, who are slated for 40 percent of the tax breaks, would get an average tax reduction of almost $24,000 a year. Of course, Republicans are thinking about the little guy, too. They offer an average tax cut of $79 to the bottom three-fifths.

The good news is that President Clinton promises to veto most of the GOP tax cut measures. The bad news is what may happen next year if someone who agrees with congressional Republicans' approach to tax policy takes over the White House.