Review of the Tax Code and Who Benefited the Most from the Breaks in It

A review of the tax break impacts from 1981 till 2020 and who benefited the most from them. I found it to be interesting and detailed in what was occurring during this time period. As you read it and review the graphs, I believe you will find the majority of the tax breaks were targeting the one percent of the tax paying population. I am sure our new president will carry on with the tradition of favoring the one-percenters.

To Put Trickle-down Economics to Rest, We Need a New Tax Code

as taken from “The Neoliberal Tax Code’s Path of Destruction” Roosevelt Institute

Between 1981 and 2017, trickle-down economics infiltrated the tax code through a series of tax cuts. These were heavily skewed toward corporations and the wealthy. The average tax rate for taxpayers in the top 0.1 percent fell from 42.2 percent in 1980 to 33.2 percent in 2018, compared to a reduction from 29.8 to 25.4 percent for median-income taxpayers and a slight increase from 22.2 to 24.2 percent for those in the bottom 10 percent. These cuts atrophied federal revenue streams.

Following the ERTA, the share of revenue from corporate income taxes fell to a historic low in 1983 (6.2 percent), a reigning record until 2018, after the TCJA slashed the corporate tax rate by 40 percent (Tax Policy Center 2023c). Several significant cuts to the estate tax reduced the number of taxpayers subject to it from approximately 28,000 in 1982 to 2,600 in 2021 (Steele 2022). Beyond severe reductions in tax rates, there was a significant weakening in enforcement that led to a massive increase in tax avoidance.

Detailing the source components of the Tax Rate by terminology to include Income, Capital Gains, Corporate, and Estate taxes.

The average Tax Rate for the Bottom 50% of taxpayers over time (left). The average Tax Rate for the top 400 taxpayers over time (right).

Despite the mounting evidence after each law, the promise of job creation, wage increases, and economic growth failed to materialize, policymakers continued to enact further tax cuts except for one brief experiment by the Clinton administration (below).

Far from trickling down, these tax cuts instead padded the pockets of wealthy shareholder. Such was achieved by directly reducing their tax liability (e.g., capital gains and estate tax cuts) or incentivizing corporate behavior that benefited them (e.g., corporate profit and dividend tax rate cuts).

Time graph detailing the impact of each tax rate decrease and who benefited by it the most. Note from left to right (bottom) the incomes are detailed.

Between 1930 and 1980, the top marginal federal income tax rate averaged 78 percent (Tax Policy Center 2023c). In 1981, ERTA slashed the highest marginal income tax rate from 70 percent to 50 percent and reduced the capital gains tax rate by 40 percent (Joint Committee on Taxation 1981). Individual income tax revenue in 1983 was about $40 billion ($127 billion in today’s dollars) lower than it would have been in the absence of the 1981 cuts (Congressional Budget Office 1986).

From 1951 to 1986, the top corporate tax rate ranged from 46 percent to 52.8 percent (Tax Policy Center 2024). The Tax Reform Act of 1986 (TRA86) reduced the top corporate tax rate from 46 percent to 34 percent and further reduced the top marginal income rate from 50 to 28 percent, the largest single drop in history (Joint Committee on Taxation 1987). By 1990, taxes for the top 1 percent had fallen by more than one-fifth (Congressional Budget Office 2022) and by nearly one-quarter for the richest 400 families over the decade (Saez and Zucman 2019).

When President Clinton took office, he initially took aim at the neoliberal tax regime. In 1993, when he signed the Omnibus Budget Reconciliation Act of 1993 (OBRA), Clinton claimed “after 12 years of trickle-down economics where taxes were lowered on the wealthiest Americans [and] raised on the middle class . . . we now have real fairness in the tax code” (Clinton 1993). OBRA raised the top marginal income tax rate to 39.6 percent and increased the top corporate tax rate to 35 percent. making a dent in it. It was still far from reversing, the massive Reagan-era cuts and applied the Medicare payroll tax to all wages (Joint Committee on Taxation 1993).

Average tax rates on the top 1 percent increased significantly during Clinton’s first term, from 29.6 percent to 34.8 percent (Congressional Budget Office 2022). By 1995, tax rates for the richest 400 families were the highest ever since 1981 (Saez and Zucman 2019). GDP also saw a bump, growing at a 3.9 percent average annual rate during the seven years following tax hikes targeted at corporations and the wealthy, compared to 3.5 percent during the seven years following the ERTA (Tanden 2013).

The rejection of a trickle-down approach to taxation didn’t last long. Four years later, Clinton embraced neoliberalism and signed into law the Taxpayer Relief Act of 1997 (TRA97). which further reversed previous increases in the capital gains tax rate—reverting to ERTA’s 28 percent—and nearly doubled the estate tax exemption (Brumbaugh 1997). By the end of the Clinton administration, average tax rates on the top 1 percent ticked down to 32.2 percent, and income inequality hit a 20-year high (Congressional Budget Office 2022).

Former President Bush doubled down on the trickle-down fallacy. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) cut income tax rates, including reducing the top marginal income rate to 35 percent and reversing the increase to 39.6 percent under President Clinton. It significantly reduced the estate tax (Horton 2017).

The Jobs and Growth Tax Relief and Reconciliation Act of 2003 (JGTRRA) further reduced the capital gains tax rate to 15 percent and established a 15 percent rate for dividends, which were previously taxed as ordinary income (Horton 2017). By 2011, the top 1 percent received 38 percent of the benefits of the Bush-era tax cuts—$700,000 in total over the course of a decade (Fieldhouse and Pollack 2011). These tax cuts raised the income of the top 1 percent of households by 6.7 percent, compared to 2.8 percent for the middle 20 percent and just 1 percent for the bottom 20 percent (Jacoby 2023).

While the American Taxpayer Relief Act of 2012 (ATRA) let the W. Bush-era tax cuts expire for high-income taxpayers, it made permanent the sweeping cuts to the estate tax (Joint Committee on Taxation 2013). TCJA further eroded the estate tax, exempting the first $11 million passed down to each heir from taxes (Joint Committee on Taxation 2017. Between 1993 to 2017, the top corporate tax rate remained at 35 percent until the TCJA slashed it to a flat rate of 21 percent—the lowest it had been since 1939, at the end of the Great Depression. Finally, the TCJA cut the top marginal income tax rate to 37 percent, dramatically increased the exemption for the Alternative Minimum Tax, and created a new deduction for pass-through income.

These massive cuts did wonders for the wealthiest taxpayers. Between 2016 and 2018, the average tax rate for the top 5 percent fell by 9.5 percent, by 19 percent for the top 0.01 percent, and by 25 percent for the richest 400 (Saez and Zucman 2019). Corporate income tax revenue as a share of GDP dropped by more than one-third (Tax Policy Center 2022).

The TCJA did little to spur new business investment, and it had a modest, if any, effect on GDP (Gale and Haldeman 2021). The pass-through income deduction, for which half of benefits go to households earning more than $1 million per year (Joint Committee on Taxation 2018b), provided no boost to economic activity—no wage increases, no new jobs, and no additional). Between 1993 to 2017, the top corporate tax rate remained at 35 percent until the TCJA slashed it to a flat rate of 21 percent—the lowest it had been since 1939, at the end of the Great Depression. Finally, the TCJA cut the top marginal income tax rate to 37 percent, dramatically increased the exemption for the Alternative Minimum Tax, and created a new deduction for pass-through income.

Further research suggests wage increases failed to trickle down. Increases in earnings stemming from the law have been concentrated among executives and companies’ highest-paid workers. Workers in the bottom 90 percent have realized no wage gains (Kennedy et al. 2022). Eighty-one percent of wage gains from the corporate tax rate cut went to the top 10 percent of workers (Kennedy et al. 2022).

Put Trickle Down Economics to Rest Brief, Roosevelt Institute, Elizabeth Pancotti