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Saturday, December 1, 2012

NY Times: Tax Burden Is Lower for Most Americans Than in the 1980s

New York Times, Tax Burden Is Lower for Most Americans Than in the 1980s:

[M]ost Americans in 2010 paid far less in total taxes — federal, state and local — than they would have paid 30 years ago. According to an analysis by The New York Times, the combination of all income taxes, sales taxes and property taxes took a smaller share of their income than it took from households with the same inflation-adjusted income in 1980.

Households earning more than $200,000 benefited from the largest percentage declines in total taxation as a share of income. Middle-income households benefited, too. More than 85% of households with earnings above $25,000 paid less in total taxes than comparable households in 1980.

Lower-income households, however, saved little or nothing. Many pay no federal income taxes, but they do pay a range of other levies, like federal payroll taxes, state sales taxes and local property taxes. Only about half of taxpaying households with incomes below $25,000 paid less in 2010.

The uneven decline is a result of two trends. Congress cut federal taxation at every income level over the last 30 years. State and local taxes, meanwhile, increased for most Americans. Those taxes generally take a larger share of income from those who make less, so the increases offset more and more of the federal savings at lower levels of income.

(Hat Tip: Mike Talbert.)

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The choice of 1980 as a baseline is crucial. In 1980 your adjusted gross income, which this study used, was net of tax shelter losses. The 1986 tax reform eliminated that treatment, boosting the adjusted gross income of anyone who formerly used a tax shelter. Many if not most affluent and rich taxpayers used tax shelters in 1980. Hardly anybody actually paid the top rates.

In other words, many of today's $200k income taxpayer would have been $50k income taxpayers in 1980 due to sheltering. These people pay much, much more due to tax reform. That was its main motivation.

No study which spans 1986 and which fails to account for the abolition of tax shelters (primarily rental property) can yield valid comparisons. As I said, many if not most affluent and rich taxpayers used tax shelters in 1980. Hardly anybody actually paid the top rates.

High-income people reduced their adjusted gross income using tax shelters so heavily that Congress finally purged them in 1986 despite the normal political incentives to hand out tax breaks. That's how widespread it was.

Pretending that today's adjusted gross incomes would have appeared, inflation-adjusted, on 1980 tax returns is either careless or dishonest analysis. You decide which.

Posted by: AMTbuff | Dec 1, 2012 10:12:59 AM

The article's analysis has a second major flaw. It ignores the massive shift of small businesses from C corporations to S corporations and sole proprietorships as a result of lower personal income tax rates.

If we were to return to 180's rates and rules, small business would rush to change to C corporations, removing retained earnings from personal tax returns. Taxpayers would also resume their tax sheltering activity, subtracting depreciation on their rental real estate when computing their adjusted gross income.

In 1980 very few people paid the top rate. Now they do. Because the top rate is much lower. Duh.

Transporting taxpayers' current adjusted gross income to 1980 without accounting for these behavioral and structural changes is obviously incorrect. A tax system is more than just rates.

Posted by: AMTbuff | Dec 1, 2012 10:48:17 AM


I was in public accounting in the 80s and I can guarantee no 200,000 income would be reduced to 50,000. True shelters were used but your statement is extreme. A lot of things were different in the 80's and comparisons to today are difficult without footnoting the differences which I agree should be pointed out in the article. For one thing we need to take into account inflation, today's 200,000 income was 1980's 100,000. In addition, deductions were more numerous. There are many ways today to defer income than in the 80's; deferred compensation is used much more often, stock options, pension and profit sharing plans, carried interest... Today, we use LLCs, and avoid corporations for the double tax. In the 80s Corporations were a standard but I don't see that as a major flaw of the article.

Posted by: Sid | Dec 1, 2012 3:53:14 PM

See Huff, How to Lie With Statistics (W.W. Norton 1954). Evidently the editorial staff at the NYT has not.

Posted by: Jake | Dec 1, 2012 7:03:12 PM

Also, in 1980, we had income averaging. Every once in a while, I still get a client asking me to income average for them. Wish I could.

The Tax Rules for Income Averaging ...elimination of income averaging "added several billions of dollars of revenue [to the Treasury's coffers] that would otherwise have been lost.

Posted by: Woody | Dec 2, 2012 1:34:49 PM

BTW, this is how law professors used to publish their tax research, putting a shame to much of what is turned out today.

RICHARD SCHMALBECK - Professor of Law, Duke University.
Duke Law Journal, 1984


After describing the current provisions of the Internal Revenue Code relating to income averaging, Professor Schmalbeck analyzes those provisions from a policy perspective. He concludes that the conventional horizontal equity arguments advanced in defense of income averaging are insubstantial, and that no other policy justification is of sufficient strength to justify the large revenue loss associated with income averaging. Although outright repeal of the averaging provisions may be the best solution, Professor Schmalbeck also explores several more modest amendments to the averaging provisions.

Posted by: Woody | Dec 2, 2012 1:51:08 PM