Taxing the Rich or the Poor?

Supply-siders say the wealthy carry more of the load than before

Democratic presidential candidates have repeatedly charged that Reaganomics is a windfall for the wealthy. Jesse Jackson called the President's program a "reverse Robin Hood process, taking from the poor and giving to the rich." Walter Mondale said that the Reagan Administration was "of the rich, by the rich and for the rich." The Democrats received some ammunition this month from the nonpartisan Congressional Budget Office in a report that compared the size of tax cuts gained by different income groups. From 1983 through 1985, the CBO estimated, the 1.4 million households with incomes of $80,000 or more will receive income tax reductions totaling $35.4 billion, while the more than 40 million households that earn $20,000 or less will get cuts worth only $23.4 billion.

The figures have spawned protests from supporters of the Reagan tax cuts, including such leading supply-side theorists as Paul Craig Roberts, an economics professor at Georgetown University, and George Gilder, author of Wealth and Poverty and program director of the Manhattan Institute for Policy Research. They argue that the CBO figures are merely projections based on standard economic models and do not take into account the impact that tax cuts will have on the investment strategies of the wealthy. With tax rates reduced, the supply-siders say, the rich will move away from tax shelters and channel more of their money into conventional investments. As a result, the taxable income of the wealthy should rise, and they may wind up paying more to Uncle Sam than they did before tax rates were slashed. Says Gilder: "This is the most confident short-term prediction of supply-side economics."

Supply-siders point out that the amount of tax paid by the rich jumped after Presidents Harding and Coolidge cut tax rates in the 1920s and after Kennedy and Johnson did so in the early 1960s. Between 1963 and 1965 the maximum tax rate dropped from 91% to 70%, but revenues from households with incomes of $100,000 or more rose from $2.5 billion to $3.8 billion. The percentage of taxes paid by the 5% of taxpayers with the highest incomes increased from 35.6% to 38.5%. Observes Roberts: "This has always happened in our history."

It may already be happening under Reagan. The Wall Street Journal, which has long been an advocate of supply-side economics, published on its editorial page a table showing how the share of taxes paid by different income groups shifted between 1981 and 1982, the first full year following the reduction in the top tax rate on investment income from 70% to 50%. Compiled from U.S. Treasury statistics, the table revealed that the percentage of income tax collected from taxpayers earning $50,000 or more rose from 32.9% to 35.4%. At the same time, the share paid by those making $20,000 or less fell from 17.1% to 15.5%.