Did the rich get richer under Reagan?

Politicians opposed to supply-side economics have disparaged the Economic Recovery Tax Act of 1981, introduced by then-President Ronald Reagan, as a "tax cut for the rich." In an except from his 1990 book, "The Growth Experiment: How the New Tax Policy Is Transforming the U.S. Economy," Lawrence B. Lindsey debunks the arguments of ERTA's critics.

We often hear that "under Ronald Reagan the rich got richer and the poor got poorer," and that the 1981 tax cuts were a big windfall for the rich and only for the rich. it would seem to be common knowledge. But what everyone knows isn't always true, and in this bit of common knowledge there is no more than a tiny kernel of truth.

During the early part of Reagan's first term, the rich did get richer while most of the rest of the country stayed even. Some lost ground. The causes were not the tax cuts but record high interest rates and the back-to-back recessions of 1980-82. When interest rates go up, lenders get richer and borrowers get poorer. Since the lenders tend to have more money than the borrowers in the first place, high interest rates do make the rich richer. Recessions reinforce this process because recessions are costliest to middle-and working-class people who lose their jobs, while the rich rarely become unemployed.

Common knowledge stumbles at this point because rising interest rates and higher unemployment began well before Reagan became president. For example, a common bit of evidence used by Reagan critics is that the poverty rate rose after the tax cuts. Actually, the poverty rate bottomed out at 11.4 percent in 1978. It hit 13 percent in 1980 and 14 percent in 1981, the year Reagan took office but before his economic program was in place. The poverty rate peaked at 15.2 percent in 1983, by which time the tax cut was still only three-quarters in place. In short, two-thirds of the rise in the poverty rate occurred before Reagan's tax and budget policies could take hold, and all the rise occurred before ERTA [the Economic Recovery Tax Act of 1981] was fully in place. By 1985 the poverty rate was back down to the level it was at when Reagan took office. It dropped even further during his last three years in office. Thus, though the poverty rate rose in three of [Jimmy] Carter's four years as president, it fell in six of Reagan's eight years.

Consider the "rich got richer" critique.

When interest income rises as a share of national income the rich get richer. This is because the rich derive more of their income from investments than most people. Interest income did increase its share of national income during Reagan's first term. Again, however, the trend had started under Carter. In 1976, the year before Jimmy Carter took office, interest income was 9.2 percent of personal income. By 1981, when Ronald Reagan entered the White House, it was up to 13.3 percent. The interest share of personal income peaked in 1985 at 14.4 percent of income. Thus three-quarters of this windfall to the rich occurred before Reagan took office. Like the poverty rate, interest income as a share of personal income fell in the latter half of the Reagan presidency.

Who got richer under Reagan? Taking into consideration data from both Reagan terms, the answer is that, on average everyone did. The real income of the median family rose over $3,000 under Reagan, after falling that same amount between 1973 and 1981 (the largest such retreat since the Great Depression). Continuing the trend of the late 1970s, families above the median did best early in the administration, with everyone else catching up later as the economic recovery continued apace. This situation had more to do with macroeconomic trends than with the direct effect of the tax cuts however.

The phrase "tax cuts for the rich" has become a staple of the rhetoric of anti-Reagan politicians. Even the most cursory look at the evidence, however, shows ERTA raised the share of the tax burden borne by the rich. The top 0.1 percent of all taxpayers (roughly speaking those making over $200,000 a year) saw their share of income tax payments rise from 7 percent in 1981 to 14 percent in 1986. The share of taxes borne by the top 2 percent of taxpayers (roughly those making over $60,000) rose from 26 percent in 1981 to 34 percent in 1986. Taxpayers on the bottom half of the income scale saw their share of tax payments fall from 7 percent at the start of the decade to only 6 percent by 1986. The great American middle class, people earning between $20,000 and $60,000 in the early 1980s saw their tax share fall from 67 percent to 60 percent between 1981 and 1986. They received the bulk of the Reagan tax cuts. If the rich ended up paying a bigger share of taxes, everyone else must have taken a bigger cut than the rich.