Building an Economy that Works for Everyone

The tricky world of “trickle down”: How middle-class families got stuck with a higher tax tab

Some of you may remember the trickle down economic theory popularized during the Reagan presidency, when the top income tax bracket dropped precipitously from 70% in 1981 to an all time low of 28% between 1988 and 1990. (For the record, during the Clinton administration the rate was raised to 39.6%; under George W. Bush it went down to 35%.)

Turns out, “trickle” is the right word to use, because if you’re like me, you aren’t benefiting from those tax cuts. 71% of the benefits go to the top 1% of tax payers, estimated to save each of them more than $56,000 per year in 2010. “Fine”, you say, “some people got themselves a tax break, good for them.” But the fact is those tax cuts were only possible because of increased taxes on working families.

Here’s how it happened: Early in Reagan’s presidency, for the first time ever, Social Security and Medicare taxes were raised above the level needed to pay benefits to current recipients. The ostensible reason was to build up the “Social Security trust fund” to cover the retirement of the baby boomers. Payroll tax rates increased from 5.08% (paid by workers and matched by employers) to 5.7% in 1984 and 6.2% in 1990. Medicaid rates went from 1.05% in 1980 to 1.3% in 1981 and up to 1.45 % in 1986, which is where they have remained.

But instead of investing the trust fund to make our economy and workforce more productive – for example, in modern transportation infrastructure, new energy efficiencies, and education – the “Social Security surplus” was used to fund tax breaks for the highest of high incomes. Today, a mountain of federal debt and a “great recession” are just two of the sad legacies of the failed “slash tax and borrow” fiscal policies of the Reagan-Bush (and Bush) years.

It’s high time we roll back those tax breaks and bring equity back to our tax system. Economists across the country – in Washington, California, New York, Arizona and Illinois to name a few – are calling for increased taxes to kick-start our economy by making public investments in infrastructure that will long-term economic growth, like education, transportation, energy and health care.

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