The scene has become depressingly familiar. A governor — or a mayor or a county executive — steps to the podium and somberly intones the necessity of making “hard choices” and “living within our means.” The elected leader then proceeds to announce prodigious budget cuts that will overcrowd classrooms, furlough public employees, and deny medications to poor families.
Some observers blame these painful podium processions on the Great Recession and the resulting drop-off in income that can be taxed. Others blame former President George W. Bush. His administration’s massive 2001 and 2003 tax cuts left the federal budget deeply in the red — and state and local governments on their own, overwhelmed by federal mandates for everything from Medicaid to special ed.
The recession and the second Bush administration no doubt contributed — and significantly so — to the fiscal crisis we face today. But the roots of today’s crisis go back farther. Indeed, by George W. Bush’s inauguration in 2001, the prime damage had already been done. By 2001, the United States had already stopped taxing the rich at the levels that had promoted middle-class prosperity in the mid 20th century.
Middle-class Americans entered the 21st century paying a higher share of their incomes in federal taxes than they paid midway through the 20th century. Wealthy Americans entered the new century paying less. Far less. Over the last half century, America’s wealthiest taxpayers have seen their tax outlays, as a share of income, drop enormously, by as much as two-thirds for the highest-income grouping that the IRS tracks.
This massive giveaway to America’s financially favored has been a bipartisan effort. Republicans have claimed the most credit for the “tax cuts” that have turned the U.S. tax system upside down over recent decades. But votes by Democratic lawmakers have, at every critical juncture, eased the way.
The tax shift we have witnessed since the 1950s has been enormous. From 1950 through 1963, the federal tax rate on ordinary personal income over $400,000 never dropped below 91 percent. Between 1936 and 1980, that same top rate never dropped below 70 percent.
But today, the top personal income tax rate, after the 2001 tax cut, is 35 percent (If allowed to expire at the end of 2010, this rate will return to the 39.6 percent level in place during the Clinton years).
These lower rates on high incomes actually understate the full extent of tax benefits for America’s wealthiest households. The tax rate on capital gains, the income stream that flows most robustly to those in the highest income brackets, dropped to 15 percent in 2003, down from as high as 39.875 percent in 1977.