Did U.S. Tax Policies Increase Economic Inequality? | WAMU 88.5 - American University Radio

Did U.S. Tax Policies Increase Economic Inequality?

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The Occupy Wall Street movement continues to protest policies that have made the top 1 percent of income earners richer, while about 14 million Americans are out of work.

Meanwhile, the Congressional supercommittee only has one week left to come up with a plan that will cut more than $1 trillion from the deficit. Republicans are opposed to raising revenues by raising taxes, even on the wealthiest Americans, who have seen their taxes dramatically cut over the past 14 years.








Before President George H.W. Bush

Tax cuts, says Dickinson, weren't always the center of Republican policy. From the end of World War II through the Reagan administration, he says, Democrats and Republicans fought over social spending but largely stayed away from taxes.

"Traditionally, Republicans cared deeply about fiscal balance," he says. "So you fought over balance — and taxes were an otherwise uninteresting mechanism to pay the bills. And tax policy wasn't meant to prod and stimulate the economy because prosperity came from the private sector. So the GOP focus on tax policy was not to give the economy a boost, but to find a nondestructive way to raise the revenue that [the government] decided it needed."

The biggest tax cut during that era, says Dickinson, was made by Democratic President John F. Kennedy. Republicans largely opposed it.

"[They] were concerned that this was going to create deficits that were unwieldy," Dickinson explains. "This was consistent with the ideas that Republicans held that their duty in the system was to keep the nation's books in balance."

In the late 1970s, inflation increased wages. Many members of the middle class were pushed into higher tax brackets. President Reagan lowered the tax rate for the wealthiest Americans to just 28 percent in 1986 — but this was largely offset by increasing the amount of money taxed on investments. (This is called a capital gains tax.)

"[In the '80s and early '90s,] people were paying the same amount of tax on income that they got from wages as they got from income that they got from investments," he says. "But starting in 1997, Republicans led by Newt Gingrich dropped that [capital gains rate] to 20 percent. And in 2003, led by Dick Cheney, the Republicans dropped the capital gains rate tax down to 15 percent. And this is why you have this grotesque situation where the richest taxpayers in America are paying a lower effective tax rate than the average wage earner."

What this means is that a person who makes money on investments through the stock market or a hedge fund pays a much lower tax rate on the money earned through those investments than they would pay on a salary.

"The richest 400 taxpayers earn more than two-thirds of their income in capital gains, so that helps explain why their effective tax rate is so low, because the lion's share of their earning is taxed at this ... low rate," says Dickinson.

Where The Current GOP Candidates Stand

Dickinson says many of the GOP presidential candidates, including Rick Perry, Michele Bachmann, Herman Cain and Newt Gingrich, want to eliminate the capital gains taxes.

"That would have the effect of kicking something like 23,000 millionaires off the tax rolls entirely," says Dickinson. "They're people who are just investors. They just make money from money. And under the tax policies proposed by many of the GOP candidates, they would pay nothing in federal income taxes. ... You end up with a situation that is very dangerous to the fiscal order. The Republican philosophy through Reagan was about preserving the fiscal order — about making sure the federal government had enough money to pay its bills."

Though Reagan cut taxes for the wealthy, says Dickinson, he also raised revenue by closing tax loopholes. He also undid a third of the original tax cuts initially implemented by his administration.

"While Reagan was dedicated to cutting taxes for the rich — that is true — he was also mindful of not leaving the country with unsustainable debt," says Dickinson. "Although he did rake up enormous deficits, he was making adjustments during his two terms to raise taxes on things like gasoline. ... Throughout Reagan and the George H.W. Bush presidency, there was a commitment to balance ... and that required raising revenues. There wasn't this allergy to revenue that the current GOP displays."

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