FACULTY OF ECONOMICS AND ADMINISTRATION
Tax reforms in the USA from Reagan to Trump: main outcomes and possible impact on inequality
Diploma Thesis
ANASTASIIA GONCHAROVA
Supervisor: doc. Ing. Robert Jahoda, Ph.D.
Public Finance and Economics
Brno 2021 TAX REFORMS IN THE USA FROM REAGAN TO TRUMP: MAIN OUTCOMES AND POSSIBLE IMPACT ON INEQUALITY
2 TAX REFORMS IN THE USA FROM REAGAN TO TRUMP: MAIN OUTCOMES AND POSSIBLE IMPACT ON INEQUALITY
Master's thesis description Academic year: 2020/2021
Student: Anastasiia Goncharova Programme: Public Finance and Economics Tax reforms in the USA from Reagan to Trump: main Title of the thesis/dissertation: outcomes
and possible impact on inequality Tax reforms in the USA from Reagan to Trump: main Title of the thesis in English: outcomes and possible impact on inequality Aim: The objective of this thesis is to estimate the outcomes of tax reforms in the United States from Reagan’s to Trump’s presidency and investigate the relationship between tax changes and inequality in the society. It requires a rigorous analysis of the objectives and results of previous tax reforms. The study adopts the existing survey methodology in modern literature and develops an Thesis objective, procedure and approach to establish perspectives of the latest tax reform methods used: and its impact on inequality. Suggested structure: 1) Description of the US tax system and main previous tax reforms 2) Literature review on the evaluation of the tax reforms 3) Det il analysis of the two major reforms 4) Evaluation of the Trumps reform by adopting an approach to studying the past tax policies 5) Conclusion and recommendations Extent of graphics-related work: According to thesis supervisor’s instructions Extent of thesis without 60 – 80 pages supplements: TAX REFORMS IN THE USA FROM REAGAN TO TRUMP: MAIN OUTCOMES AND POSSIBLE IMPACT ON INEQUALITY
Contemporary U.S. tax policy. Edited by C. Eugene Steuerle. 2nd ed. Washington, D.C.: Urban Institute Press, 2008. xiii, 344. ISBN 9780877668459. SAEZ, Emmanuel and Gabriel ZUCMAN. The triumph of inj- ustice : how the rich dodge taxes and how to make them pay. First edition. New York: W.W. Norton & Company, 2019. xvi, 232. ISBN 9781324002727. Literature: ATKINSON, Anthony, Thomas PIKETTY and Emmanuel SAEZ. Top Incomes in the Long Run of History. Journal of Eco- nomic literature. 2011, roč. 1, s. 3-71. World inequality report 2018. Edited by Facundo Alveredo - Lucas Chancel - Thomas Piketty - Emmanuel Saez - Ga. Cambridge, Massachusetts: The Belknap press of Harvard University press, 2018. 332 stran. ISBN 9780674984554. Thesis supervisor: doc. Ing. Robert Jahoda, Ph.D. Thesis supervisor’s department: Department of Public Economics Thesis assignment date: 2020/04/23 In Brno, date: 2021/05/17
4 TAX REFORMS IN THE USA FROM REAGAN TO TRUMP: MAIN OUTCOMES AND POSSIBLE IMPACT ON INEQUALITY
Bibliographic record
Author: Anastasiia Goncharova Faculty of Economics and Administration Masaryk University Department of Public Economics Title of Thesis: Tax reforms in the USA from Reagan to Trump: main outcomes and possible impact on inequality Degree Programme: Master’s degree Field of Study: Public finance and economics Supervisor: doc. Ing. Robert Jahoda, Ph.D. Year: 2021 Number of Pages: 95 Keywords: Tax Reforms, Public Policy, Taxation, Inequality, Reagan, Trump, Clinton
TAX REFORMS IN THE USA FROM REAGAN TO TRUMP: MAIN OUTCOMES AND POSSIBLE IMPACT ON INEQUALITY
Abstract
This paper aims to provide an overview of the significant tax changes that have been implemented in the United States over the past forty years, to examine the results they have had on the economy in general and on the population in particular, and to discover the impact on inequality. The first chapter presents a background of taxation in the United States, an overview of tax systems, including their purposes, categorization, and relationship to inequality. The second section examines the three most significant tax reforms from Reagan to the Trump administration and a summary of the results and proposals. The findings contribute to existing methods for evaluation of economic outcomes and income inequality by broadening the range of the questions examined to an extent of three most contentious reforms in the United States. TAX REFORMS IN THE USA FROM REAGAN TO TRUMP: MAIN OUTCOMES AND POSSIBLE IMPACT ON INEQUALITY
Declaration
I certify that I have written the Master’s Thesis “Tax reforms in the USA from Reagan to Trump: main outcomes and possible impact on inequality“ by myself under the supervi- sion of doc. Ing. Robert Jahoda, Ph.D. and I have listed all the literature and other sources in accordance with legal regulations, Masaryk University internal regulations, and the in- ternal procedural deeds of Masaryk University and the Faculty of Economics and Admin- istration.
Brno, ...... Anastasiia Goncharova
8 TABLE OF CONTENT
Table of Content
Introduction 11
Chapter 1: Background of taxation: tax theory and tax system in the United States 13 1.1. Functions of taxation ...... 13 1.2. Principles of taxation ...... 17 1.3. Purposes of tax reforms ...... 20 1.4. The United States tax systems overview ...... 21 1.4.1. Levels and types of taxation in the United States ...... 21 1.4.2. Three major types of taxes in the United States ...... 22 1.4.3. Regressive, Proportional and Progressive taxes ...... 23 1.4.4. Tax progressivity and inequality ...... 24 1.4.5. The history of the U.S. taxation ...... 30 1.5. Literature review ...... 33 1.5.1. Economic Recovery Tax Act of 1981 and Tax Reform Act of 1986 ..... 33 1.5.2. Omnibus Budget Reconciliation Act of 1993 ...... 35 1.5.3. Tax Cuts and Jobs Act 2017 ...... 36
Chapter 2: Outcomes and impact on inequality of the major tax reforms in the United States 40 2.1. Methodology ...... 40 2.2. Federal Revenues analysis ...... 44 2.3. Government Spending Analysis ...... 48 2.4. Tax Rates ...... 56 2.4.1. Tax rates: Reagan ...... 57 2.4.2. Tax rates: Clinton ...... 63 2.4.3. Tax rates: Trump ...... 67 2.5. Recommendations ...... 73
Conclusion 75
9 TABLE OF CONTENT
References 79
Appendix A 83
Appendix B 87
Appendix C 91
List of Figures 94
List of Tables 95
10 INTRODUCTION
Introduction
Taxation has always been one of the most disputable and widely discussed topics throughout history. It is easy to understand why it continues to attract widespread attention nowadays as well. Taxes are crucial to the functioning of the states and directly affect the daily lives of all citizens. For the governments they serve as a source of revenue to pay for the public services, such as healthcare and education, defence, roads, legal protection through the courts, welfare assistance to the vulnerable groups of society. For individuals the imposition of taxes influences the distribution of personal income, changes the division of wealth across different groups and may impact their activities in various ways to reduce the tax burden. Taxation plays a very important role in politics and public discourse. Politicians implement risky tax reforms and then have to deal with the consequences if they are elected. Businesses advocate for tax breaks, claiming that doing so would result in more employment and growth. The way how the states apply taxation defines their relationship with the citizens and affects the economy overall, especially when it comes to shifting between tax bases such as income or spending. The decisions made by policymakers may become favourable for one group and particularly burdensome for another. The extent to which public policies should redistribute the income between the poor and rich and fairness of such policies is a matter of moral judge and varies between the modern states significantly. In the tax systems of most advanced countries like the United States, the emphasis is done on progressivity of taxation which aims to reduce income inequality between the households. However, many researchers and economists argue about the fairness of the tax policies in the United States. The failure to achieve consensus on the preferrable tax policy might be explained by dramatically increased research approaches to evaluation of tax systems. Considering the differences between techniques on evaluation of tax policies in the United States, this thesis will focus on theoretical approaches used by contemporary researches, who apply widely used indicators and models in their surveys. In light of the stated above, the aim of this thesis is to estimate the outcomes of tax reforms in the United States from Reagan’s to
11 INTRODUCTION
Trump’s presidency and investigate the relationship between tax changes and inequality in the society. The analysis will be based on the example of major tax reforms conducted in the United States for the last four decades from Reagan’s to Trump’s presidency. The study will build up a detailed picture of the impact of tax changes on the economy overall, and particularly on households, address the issues of tax burden and inequality, and incorporate the researcher’s own approach on evaluation of the implications of the selected tax reforms at macro and micro level. The structure of this thesis consists of three chapters: the first chapter provides a general background of tax systems including functions of taxation, classification of taxes, connection with inequality. It will also provide a comprehensive description and a brief overview of the history of the United States tax systems and tax reforms. The second chapter studies the economic outcomes of the three major tax reforms for the last forty years, identifies their influence on inequality. The study supports and complements some of the ideas of contemporary researchers in respect to the changes in taxation in the United States, which are described in the literature review section of this thesis. The analysis uses statistics published on the U.S. government websites and independent analytical agencies and includes inter alia the most recent data on the tax reform of 2017. This thesis contributes to the existing approaches on evaluation of economic outcomes and income inequality by expanding the scope of studied issues to an extent of three largest and most debated reforms in the United States.
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Chapter 1: Background of taxation: tax theory and tax system in the United States
1.1. Functions of taxation
The essence of taxes is manifested through their functions. However, there is no consensus among tax economists on the number of these functions. Currently, this issue is controversial. While the fiscal function of raising revenues for the state budget remains commonly accepted by majority of theorists, the rest might be not recognized in the works of the leading tax economists. This might be explained by the fact that the number of tax functions applied depends on the tax policy adopted by a particular state. This section will provide economic views which summarize the most spread approaches on functions of taxation in the modern states. In the Russian literature most of the time authors adhere to the views of economists who recognize the existence of four functions as shown in Figure 1, such as fiscal, distributive, reg- ulatory and controlling (Gudkov, 2017). The fiscal function is the oldest and the main one, since taxes are the predominant component of state budget revenues. The implementation of this function is carried out through tax control and tax sanctions, which ensure maximum collection of taxes and prevent tax evasion. Through the fiscal function the government raises revenue for financing public goods and services such as roads, public transportation, legal systems, education, health care, national defence, scientific research, culture (Lazurina, 2014). All other functions of taxation are derived from the fiscal one. The regulatory function of taxation is aimed at solving, through tax mechanisms, certain tasks of the state's economic policy. The governments can redirect private sector activities in the directions favorable to the state. Within the framework of the regulatory function of taxation, three subfunctions are distinguished: stimulating, discouraging and reproducing.
13 CHAPTER 1: BACKGROUND OF TAXATION: TAX THEORY AND TAX SYSTEM IN THE UNITED STATES
Figure 1. Tax functions from the Russian economists’ perspective
Source : Gudkov (2017) The stimulating subfunction of taxation is aimed at supporting the development of certain economic processes. It is implemented through a system of tax allowances, deductions and exemptions. Examples include exеmptiоn of charitаble orgаnizations from property tаxes and incоme tаxes, veterans, and cеrtain cross-bоrder or multi-jurisdiсtionаl scenarios. The discour- aging subfunction of taxation is aimed at establishing obstacles through the tax burden for the development of any economic processes. This subfunction is performed by implementation of tax schemes reducing the consumption of the respective goods. For instance, in the areas of energy and climate change imposing a tax on the environmentally harmful activities provides
14 CHAPTER 1: BACKGROUND OF TAXATION: TAX THEORY AND TAX SYSTEM IN THE UNITED STATES incentives for shifting towards cleaner and more sustainable alternatives (Kosonen, 2009). The reproducing subfunction is designed to accumulate funds for the recovery of the resources used. The controlling function of taxation is based on the theory that through taxation, the state con- trols the economic activity of legal entities and individuals. Along with the fiscal function it ensures the implementation of economic and social policies by the state by controlling the ratio of tax revenue to GDP, tax control methods, liability for tax irregularities. Through this function the government controls the sources of revenues and the directions of spending. The American economists widely recognize the fiscal function of taxation, however some of them advocate also for the more controversial one, a fair redistribution of tax revenue. In the paper “Voluntary Exchange Theory of Public Economy” Musgrave (1939) suggests the three functions of the government activity from which the role of taxation stems: macroeconomic stabilization, income redistribution and resource allocation. According to Samuelson (1948), among the three main sources of financing government expenditures, namely, taxes, interest- bearing loans and issue of currency, only taxes are considered as the most reliable method to secure an equitable distribution of the government expenditures. Samuelson argues that in a full- employment economy any additional government expenditure should be financed by taxes. The main goals of taxation, as he claims further, are spreading the real costs of governmental activi- ties among individuals in a fair and equitable manner, and prevention of inflation. He considers a progressive tax system as one of the potential ways to achieve the equity in income tax redis- tribution. The Tax Foundation (2021) defines the progressive tax system as a system that applies higher tax rates to higher levels of income. The implementation of a progressive income tax system, however, eventually increases the complexity of tax legislation and, moreover, gives rise to a subjective sense of higher tax burden, one of the most important reasons for tax non- compliance and the rise of the shаdow eсonоmy (Schneider, 2005). In contrast, Okun (1975) concluded that a progressive tax system could not be effective due to the number of reasons. First, the redistributive mechanism causes the losses related to the ad- ministrative costs of taxing and transferring: “The money must be carried from the rich to the
15 CHAPTER 1: BACKGROUND OF TAXATION: TAX THEORY AND TAX SYSTEM IN THE UNITED STATES poor in a leaky bucket. Some of it will simply disappear in transit, so the poor will not receive all the money that is taken from the rich” (Okun, 1975 p. 91). Second, the progressive income taxation undermines the incentives to work especially among the high-income groups. Some empirical findings support this conclusion. Thus, Scully’s (2002) survey proves the existence of the trade-off between equity and economic growth. The economic growth increases income in- equality through shifting the share of the income to the highest quintiles at the expense of the other income groups. For instance, the provision of public goods as part of the fiscal function is widely discussed by the theorists in the tax competition literature (Jha and Gozgor, 2019). According to their ap- proach, the public goods that the government provides using the tax revenues are undersupplied when using distorting taxes. The key feature of the tax competition theory is that governments in a context of globalization tend to compete for various economic assets through tax reductions. However, the economists have sharply contrasting views on whether the tax competition is good or bad. The most influential theorists in the tax competition literature are Zodrow and Mieszkow- ski, Edwards and Keen. The basic mechanisms of tax competition are described by Zodrow and Mieszkowski (1986). They study the effects of capital mobility on income taxation through the simplified model con- sisting of two countries. Tax policies of these countries are interdependent. If the country A has higher taxes than country B, the larger share of capital will move to the country B, and vice versa, if A has lower taxes than B, it attracts more capital, since the businesses tend to seek for a lower tax rate for generating more profit. Thus, the economists assume that the capital is per- fectly mobile. Since taxation of each country tries to attract more tax base, in equilibrium tax rates are set at the level lower than it would be in a non-competitive environment, thus leading to a low provision of public goods financed from tax revenues. The academic interest to the concept of tax competition raised in the last three dеcades due to the impact of globalization on the economies. The cross-border mobility allowed taxpayers to
16 CHAPTER 1: BACKGROUND OF TAXATION: TAX THEORY AND TAX SYSTEM IN THE UNITED STATES move around the world; trade libеralization, integration of the markets and transport technolo- gies eased the access to the jobs abroad and rеduced the transaction costs of moving goods and services globally. Edwards and Keen (1996) believed that this development would force national tax authorities to compеte for the taxable assets rather than impose the taxes. In particular, the states stand in competition with each other to attract mobile tax bases from neighbouring juris- dictions. For the last three decades due to an economic integration over the course of globalisa- tion, transaction costs of relocating goods, services, capital and jobs cross-nationally have been reduced (Gräbner et al., 2020). More governments are engaged in cooperative strategic interac- tions in corporate tax policies. Hence, the latest changes in tax policies especially in regards to corporate income tax cuts realised by particular states through tax reforms are of particular in- terest for economists today. To sum up, it can be concluded that different states define the role of taxes from the variety of above-mentioned functions based on the objectives they follow. Given the number of issues the governments may face from decrease in revenues, raise of debt or income inequality, the politi- cians form the tax system assuming several tax policy considerations. These include the princi- ples of taxation which will be reviewed further in this chapter.
1.2. Principles of taxation
When it comes to tax policy, the basic principles of public finance should be taken into account. Despite the seemingly random application of different tax regulations in various fields of human activities, tax policies follow the certain principles of policymaking (Steuerle, 1946). The basic principles that can serve as a framework for the tax policy are: • horizontal and vertical equity, • efficiency, • simplicity • revenue raising (Steuerle, 1946).
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The last principle is fundamental from public finance perspective, the others deal more with social justice and equality criteria. The equity principles are the fundamental beliefs on how taxes should be levied to provide fairness in taxation. They are conditionally divided into two groups, horizontal and vertical equity. Horizontal principle states that people with equal ability to pay should pay equal taxes “as they have the same ability to bear the tax burden” (OECD). The vertical equity or the ‘ability- to-pay’ principle is a universally accepted principle of fair taxation, underlying the idea of the tax progressivity. According to it, “taxpayers with the same total income may not have the same ability to pay” (U.S Department of the Treasury, 2010). Consequently, those with higher ability to pay should contribute more in taxes. Although both of these principles constitute fair approach to taxation, in fact there is no universal agreement on what should be defined as an equality. It can be either equality of income, or equality of access to economic benefits, or equal rights and opportunities. Traditionally theorists have considered equity as a standard rule of tax policy, however, without a principle of efficiency there is no sense to implement a tax system. Efficiency can be discussed both from the state economy and social equity perspectives. Economic efficiency is not necessarily equivalent to fairness, as its ultimate goal is to maximize the benefits while minimizing the costs or tax liability. It is closely tied to a Pareto principle, when efficiency cannot be achieved by making someone better off without making someone else worse off. In theory, the ideal tax system would make everyone better off without losses to the others, albeit in a real world it happens that the tax system is considered to be efficient even if some individuals lose in favor of the overall gains in economic outcomes. Nevertheless, the tax system cannot be defined as efficient if it is distortive. The distortion may be a consequence of an explicitly unfair taxation and is applicable to a Pareto principle, which does not take into consideration a social justice (Lena Hiort af Ornäs Leijon, 2015). This is the point where the principle of efficiency should correlate to the principle of equity in taxation. If the principle of equity will not be followed, then the distortion in economic behavior will arise. Generally speaking, the biasedness
18 CHAPTER 1: BACKGROUND OF TAXATION: TAX THEORY AND TAX SYSTEM IN THE UNITED STATES in behavior makes individuals to “avoid the taxed activity” (Steuerle, 1946, p. 12) and thus, results in efficiency loss. For instance, if taxes discourage people from working or give them incentives to misstate their income, or reduce tax liability and evade paying taxes, it will lead to significant losses in the national outcome. Thus, the efficiency principal is one of the most difficult principles to follow in taxation, since it should be balanced with the fairness and equity approach. A simplicity criterion requires special attention, as it is closely related to the transparency basis. The simpler and more transparent the tax system, the easier it is for taxpayers to understand and comply with. Simplicity is important not only for taxpayers, but for tax administrators as well. If the government implements sophisticated and complex rules to follow, which are time- consuming and cost-inefficient, it will result in multiple errors and legislation issues. The Association of Chartered Certified Accountants emphasized in its recommendations that “understanding and complying with tax legislation and requirements should be as simple and straightforward as possible” (ACCA, 2013). The complexity may not only lead to the occurrence of errors, but to a deliberate avoidance of paying taxes and violation of the rules by taxpayers. For tax authorities the simplicity is of no less importance, as it helps them to operate effectively and fast. The last but not least principle underlying taxation is the principle of revenue. The primary goal of raising revenues is the ability of the state to pay for the needs of society. According to the U.S. Tax Policy Center, “about 50 percent of federal revenue comes from individual income taxes, 7 percent from corporate income taxes, and another 36 percent from payroll taxes that fund social insurance programs. The rest comes from a mix of sources” (TPC, 2020). All of the above principles underlie the effectiveness of the tax systems in different states. However, the objectives of each tax system can vary based on the focus of the existing policy, which may put the emphasis either on efficient revenue collection, or on elimination of tax avoidance and tax evasion, or reduction of costs of compliance, administration and enforcement of taxes. The shift of objectives in taxation occurs through the implementation of tax reforms.
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1.3. Purposes of tax reforms
Tax reforms usually serve as a response to a particular tax policy which was imbalanced or biased in terms of social equality or economic outcomes. The fundamental tax reforms are usually aimed at improvement of equality following the principles of horizontal and vertical equity mentioned above. Tax reforms can increase the efficiency and fairness of tax collection, allowing for the funding of public goods and services. They might be aimed at increasing revenue stability and foster future independence from foreign sources. Through redistribution and behavior change, tax reforms can increase economic development and resolve issues of inequality. In practice, however, tax reforms serve as an instrument to benefit particular groups by unequal redistribution of income and tax burden (Brys, 2011). Tax reforms by default assume changing the structure of taxes in the existing tax system to improve its functioning (Rao, 2014). The proposed changes should consider the elements and properties of the tax system in a given country. Before any steps to implementation are made, there should be analyzed the existing structure of taxation, its complexity, types of taxes, role of the government and local authorities in taxation, outcomes from previous tax reforms. This will allow to set the vector of the future tax policy. In respect to the United States there have been many movements to reform the system of taxation throughout its history. Different political parties put forward various proposals and suggestions on how to simplify the american tax system, reduce inequality, stimulate economic growth. This paper will further examine the history of the United States taxation, its major elements and tax reforms from Reagan’s to Trump’s presidency, analyze the trends of tax regimes and overall success of the reforms. The brief overview of tax progressivity and inequality in selected countries will allow to understand how the United States taxes compare internationally. There will be summarized different views of researchers and economists on evaluation of tax systems and outcomes for different groups for the further detailed analysis of selected reforms.
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1.4. The United States tax systems overview
The US tax system is one of the most advanced tax systems in the world. In the United States, taxes are the main source of financial revenues to the federal budget and, at the same time, the most important channel for the redistribution of national income controlled by the federal government (PGPF, n.d.).
1.4.1. Levels and types of taxation in the United States The United States, as a federal state, has three levels of financial structure: federal budget, state budgets, and local government budgets (IRS, n.d.). The composition of each level in the US tax system can be represented by the following taxes (Table 1):
Table 1. Composition and structure of the US tax system
Federal taxes State taxes Local taxes • Personal Income Tax • Personal Income Tax • Personal Income Tax • Corporate Income Tax • Corporate Income Tax • Corporate Income Tax • Payroll Tax (Social • Payroll Tax (Social • Property Tax Security Contributions, Security Contributions, • Sales Taxes (Taxes on Medicare, Medicare, Goods and Services Unemployment Unemployment (GST)) Insurance) Insurance) • Estate and gift taxes • Excise Taxes • Sales Taxes (Taxes on Environmental Tax • Customs duties (tariffs) Goods and Services Estate and gift taxes (GST)) • Excise Taxes Estate and gift taxes Source: author’s compilation based on the information from IRS (2021)
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Each of the jurisdictions, federal, state and local imposes taxes on the same income, property or activity. The body that administers federal income and payroll taxes in the United States is the Internal Revenue Service (IRS), the largest division of the US Treasury Department. The administration and enforcement of the Internal Revenue Code associated with collection of exсise taxes on alсohol, tobaссo, firearms is realized through the Alсohol and Tobaссo Tax and Trade Bureau (TTB, n.d.). Сustoms duties are administered by the U.S. Сustoms and Border Proteсtion (СBP, n.d.). On state level the United States administer taxes through the states tax administration also referred to as the Department of Revenue or Department of taxation, which are subject to the state’s law and regulations. On local level there are tax collectors whose offices are located at the relevant jurisdiction facilities.
1.4.2. Three major types of taxes in the United States According to the Tax Foundation’s guide on taxation there are three basic types of taxes in the United States: taxes on what you earn, taxes on what you buy, and taxes on what you own (Tax Foundation, 2021). The breakdown of taxes by types is shown in the Table 2. Saez and Zucman (2019) however group the above mentioned taxes into four categories: individual income taxes, payroll taxes, capital taxes, and consumption taxes. It does not matter how these taxes are composed into groups, it is more important which of them incur an additional burden on taxpayers. Thus, the burden of corporate income tax falls not only on the business, but also on employees and consumers due to the lower wages and higher prices. The same applies to the payroll taxes which hit the poor in the form of lower wages. The lower income groups are also more sensitive to value-added tax, as they spend a larger proportion of their income on consumption of a good. Tangible personal property taxes and gross receipt taxes place a burden on the companies and their assets, discouraging new investment and lowering economic growth (Tax Foundation, 2021).
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Table 2. The three basic types of taxes in the United States
Taxes on what you earn Taxes on what you buy Taxes on what you own Sales Taxes Property Taxes Personal Income Tax levied on retail sales of Levied on immovable property levied on wages, salaries, goods and services like land and buildings investments
Gross Receipts Taxes Tangible Personal Property (TTP) Corporate Income Tax Taxes applied to a company’s Levied on business equipment, levied on business profits gross sales regardless of machinery, inventory, furniture,
profitability and automobiles
Value-Added Taxes Payroll Taxes Estate and Inheritance Taxes a consumption tax levied on wages and assessed on the value imposed on the value of an salaries added in each production individual’s property at the time stage of a good or service of their death
Wealth Taxes Capital Gains Taxes Excise Tax imposed annually on an taxes on profit from sold imposed on a specific good individual’s net wealth above a assets or activity certain threshold
Source: Tax Foundation (2021)
1.4.3. Regressive, Proportional and Progressive taxes By their impact on different income categories of taxpayers, the U.S. taxes can be classified into three main categories: regressive, proportional and progressive. Consequently, regressive system hits most of all the low-income earners, whereas the progressive system is aimed at imposing higher taxes for rich. Under regressive tax system low-income individuals pay a higher amount of taxes in comparison to the wealthy. This happens when the tax is assessed as the percentage of the good’s value which the taxpayer purchases or owns and is not related to an individual’s income level. The
23 CHAPTER 1: BACKGROUND OF TAXATION: TAX THEORY AND TAX SYSTEM IN THE UNITED STATES regressive taxes include consumption taxes or taxes on what you buy and own according to Tax Foundation classification mentioned above. In a proportional or flat tax system, everybody pays the same tax rate, regardless of their income or wealth. The aim of this system is to achieve parity between marginal and average tax rates. The example of proportional tax system is a social security contribution paid as the same percentage of all income categories of taxpayers but only in case when there is no ceiling above which this social security tax is not applied. Otherwise such tax system is considered regressive. Under progressive tax system higher tax rates are applied to high-income groups than to low- income and thus, the larger percentage of income is taken from wealthier individuals. This type of system is designed to disproportionately affect higher-income people over lower- and middle- income people, reflecting the assumption that they can afford to pay more. The example is a federal income tax of the U.S. which implies different marginal tax rates for different tax brackets. Overall, the U.S tax system is considered progressive, however it requires a more detailed analysis of the tax burden distribution in order to fairly assess the impact of the latest tax reform introduced by Trump. Prior to examination of the major tax reforms carried out in the United States, it is necessary to find out how progressivity in taxation influences inequality. Thus, next section will focus on comparison of the progressive U.S. tax system with different tax policies from other countries.
1.4.4. Tax progressivity and inequality Tax progressivity is a central question of any tax policy, since it affects the decisions made by politicians in regard to tax reforms. In other words, it should be clear which groups of the population carry the highest burden of tax and how redistributive these taxes are. This question is closely related to the aforementioned principles of taxation, namely revenue and ability-to- pay principles. As was stated before, there is no clear criteria of fairness in tax redistribution, since it often works in favor of one social group by making the other groups worse off according to Pareto principle. However, the basic approach to evaluating progressivity of taxation is based
24 CHAPTER 1: BACKGROUND OF TAXATION: TAX THEORY AND TAX SYSTEM IN THE UNITED STATES on finding the balance between potential social benefits and economic costs caused by tax incompliance due to the high marginal tax rates (Slemrod, 1996). The study conducted by the Canadian Centre for policy alternatives on the social benefits and economic costs of taxation reveals interesting correlation between high taxes and achievement of social and economic objectives. In this study, the authors examined the key indicators of country’s social progress in high-tax and low-tax countries. Among social indicators, they highlighted rates of poverty, protection of vulnerable groups, income distribution, gender equality, economic security, health and educational outcomes. In terms of economic indicators, they examined Gross domestic product rates (GDP), labor costs, unemployment rates, household savings, rates of inflation, national debt level (Brooks & Hwong, 2006). For the high-tax countries the authors chose Nordic countries, and for the low-tax – Anglo- American (Table 1). Mainly the results of the survey were illustrated on the examples of Finland and the United States. The overall outcomes of social progress are significantly higher in Nordic countries with the highest tax rates. With respect to the economic outcomes it is noticeable that most of the long-run static indicators are better in the Nordic countries (e.g., GDP per capita, labor costs, rate of inflation, savings), but the dynamic indicators showing economic growth are higher in Anglo-American countries (e.g., rate of growth in GDP per capita, rate of growth in multi-factor productivity, growth in employment). Despite the fact that economic growth is higher in low-tax countries including the United States, the study reveals that majority of social indicators in the USA are at the bottom level in comparison with other industrialized countries. Living standards are outrageously unfair. In the United States, taxation is allocated more unequally than in any other developed state. The wealthiest 1 percent of Americans kept more of the nation's income in 2004 than the bottom 90 percent (34.7 percent versus 29.9 percent). The percentage of the population living below the poverty line is extremely high in comparison to the selected OECD countries. The latest OECD statistics revealed that in 2017 this indicator amounted to 17% in the United States, while other
25 CHAPTER 1: BACKGROUND OF TAXATION: TAX THEORY AND TAX SYSTEM IN THE UNITED STATES high-income OECD countries had 7% on average (Figure 2). In 2017 the threshold for high- income countries was $12,056 GNI per capita. The number of child poverty among the social indicators is of particular concern. The latest available data (2017 for the USA, 2016-2018 for other countries) revealed that 21.2% of children are living in poverty in the United States. In comparison, Nordic countries do not exceed the level of 9% (Figure 3).
Figure 2. Poverty rate (relative threshold) in Selected OECD Countries, 2017
Source: OECD (2017)
As to the protection of the most vulnerable groups of population, like elderly, children and people with disabilities, the United States are also far from the high standards of Finland with their high taxes. The ratio of the net pension entitlement to the net pre-retirement earning (at 100% APW, men) is a good measure of how well the pension system works (OECD, 2019).
26 CHAPTER 1: BACKGROUND OF TAXATION: TAX THEORY AND TAX SYSTEM IN THE UNITED STATES
Figure 3. Child Poverty rate among Selected Countries. Poverty data sourced from 2016, 2017, 2018.
Source OECD (2021)
For instance, the rate of pension replacement is just 49% in comparison to 71% in Denmark. It is well illustrated in Figure 4. The distribution of the economic resources in the United States is the most unequal than in other industrialized countries. Such distortion of allocation of the economic resources has an adverse impact on the economic growth and leads to worse social protection and worse health care. As shown by the study, in 2005 the richest 10% of households received 16 times as much of the national income as the poorest 10%. Such indicators as life expectancy, infant mortality and access to healthcare are significantly worse than in other countries from the pool, even though the U.S. “spends over twice as much of its GDP on health care than Finland (15% versus 7.4%)” (Brooks & Hwong, 2006, p.10). Inequality might be also mеasured as the degree of dispersion of the wealth distributiоn. Economists usually capture these deviations by the Lorenz curve, and its assоciated statistic, the
27 CHAPTER 1: BACKGROUND OF TAXATION: TAX THEORY AND TAX SYSTEM IN THE UNITED STATES
Gini cоefficiеnt. By definition ‘the Gini coefficient is based on the comparison of cumulative proportions of the population against cumulative proportions of income they receive, and it ranges between 0 in the case of perfect equality and 1 in the case of perfect inequality (OECD, 2021).
Figure 4. Net Pension Replacement Rate among Selected Countries in 2018
Source OECD (2021)
Income inequality varied significantly across the OECD countries as data of 2014 (or nearest year available) shows (Figure 5). The Gini coefficient is lower in Nordic countries and ranges from 0.25 in Denmark, Finland, Norway to 0.28 in Sweden. Thus, Nordic countries have the lowest inequality levels of disposable income while inequality is high in the United Kingdom (0.36) and the United States (0.40). The gap between the average income of the richest and the poorest 10% of the population was ranging from 5.3 to 1 in Denmark and Finland to twice higher in the United Kingdom (10.6 to 1) and more than three times larger (18.8 to 1) in the United States. Thus, the analysis shows that income inequality in Anglo-American countries is at least twice higher than in Nordic countries where the taxes are higher.
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Figure 5. Gini coefficient of household disposable income and gap between richest and poorest 10%, in 2014 (or nearest year)
Source: OECD (2021) As was previously mentioned in respect to the economic indicators, Anglo-American countries with the lower tax rates demonstrate higher growth of GDP (Figure 6), higher employment and productivity and lower rates of the national debt. Especially remarkable is the economic growth of Ireland. The key reason for the particularly high Irish GDP growth rates lies in the fact that a number of major multinational companies have moved their businesses and intellectual property to Ireland due to low corporate income tax rates in recent years. However, in case of the United States these indicators do not contribute much to the social welfare of the majority of population.
However, the authors of the survey claim that there is no explicit correlation between the GDP indicators and tax rates. The better interdependence can be shown between the inflation rate and tax level. The increase in income tax rate does not cause the inflation, contrary it would result in a lower rate of inflation. Higher income tax would reduce disposable income and thus, spending as well, which would in turn decrease an aggregate demand and lead to a lower inflation rate (Pettinger, 2018). In case of the United States and Finland the lower tax rate
29 CHAPTER 1: BACKGROUND OF TAXATION: TAX THEORY AND TAX SYSTEM IN THE UNITED STATES correlates with higher inflation, 3.3% in the United States in 2003-2004, and only 0.4% in Finland.
Figure 6. Average GDP growth rate, 2014 – 2019 in Selected OECD Countries
Source: OECD (2021)
Overall, referring to the study results, it can be stated that on the majority of social and economic indicators, high-tax countries have better ranks than low-tax countries. In the United States despite the generally high index of GDP per capita and faster economic growth for the given period, the allocation of the taxes and economic benefits is extremely unequal. Although the researchers found out that higher taxes stabilize the economy through higher levels of government spending, in case of the United States the increase in tax rates will fall on the shoulders of the poor due to unequal tax burden allocation.
1.4.5. The history of the U.S. taxation In different times American tax system undergone drastic changes in attempt to find the best option for particular groups of society. The history of the United States taxation can be conditionally divided into two periods: before introduction of the federal income tax and after.
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Although some commentators evaluate American tax system as highly efficient throughout all times, as it tended to tax the rich, it was not always the case, especially before the Civil War. Up to 1861 the American fiscal state had three main sources of revenue: international trade revenues from the customs duties paid by the merchants and ship-owners; revenues generated from land sales; and revenues from fiscal activity of state and local governments (Brownlee, 2016). However, the tax systems existing in colonies were not effective or even fair in comparison to today’s standards, as they had serious limitations. There were variations in tax policies among different states; it was especially noticeable between North and South taxation. Thus, in the Northern colonies tax system was far more progressive than in the South, where slaveholders owned a large domain of property and advocated against property taxes. These southern colonies relied only on regressive consumption taxes, which disproportionately hit the poor, since the poll taxes and import duties affected their income much more than those of rich (Saez & Zucman, 2019). The Civil War lasted from 1861 to 1865 transformed the federal government and the revenue systems in the United States. The war required an enormous quantity of capital and the old tax system was no longer capable to collect the revenue. Instead, the state had to rely on the debt to fund the war, which eventually led to inflation boost due to the increased issuance of bonds (Brownlee, 2016). Weakening of the revenue system reiterated the need for a tax reform, which led to the creation of the first income tax in 1862 in the United States. In the same year, the Revenue Act created the Office of Internal Revenue, which is now called Internal Revenue Service (IRS) that took over the responsibility of raising taxes from individual states. The first federal income tax was not very large and imposed a 3% rate on income above $600, which was equal to four times the average income in the country, and a 5% rate on income above $5,000. Later on, the Act of 1864 increased the first rate from 3% to 5%, the second - up to 7.5% and levied 10% on income exceeding $10,000, which nowadays would be equal to more than $3 million (IRS, n.d.).
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Along with the introduction of the progressive income tax, there still remained excise taxes on many goods and activities, such as luxury goods, alcohol, manufacturing goods, newspaper advertisements, playing cards, etc. The burden of these taxes adversely affected the poor and caused the growth of inequality. The top 10% of households owned over 71% of the overall nation’s wealth. Additionally, it was further declared by the Supreme Court that the federal income tax did not comply with the Constitution according to which the tax had to be apportioned among states according to the population of each state. As a result, the justices recognized the income tax unconstitutional and repealed it (Saez & Zucman, 2019). After amendments to the Constitution in 1913, the Congress received the right to collect taxes on incomes without apportionment among the states and the federal income tax was enacted. Later on, the United States evolved the progressive taxation drastically and became the pioneers of the key fiscal innovations of the twentieth century: the introduction of a highly progressive tax on property and confiscation of excessive incomes (Saez & Zucman, 2019). In 1935 the President Franklin D. Roosevelt signed into law the Revenue Act of 1935, which raised the top marginal income tax rate to 75%, up to 77% in 1936 and to a striking 94% by 1944 upon amendments to the law (Magness, 2018). In one of his speeches, Roosevelt emphasized that along with the progressive income tax, he also believed in a more effective and easy to collect tax – “a graduated inheritance tax on big fortunes, properly safeguarded against evasion, and increasing rapidly in amount with the size of the estate” (Folsom, 2010). Thus, by 1935 the federal estate tax amounted to 70% applying to the top fortunes. This quasi-confiscatory tax policy in U.S. history carried by Franklin Delano Roosevelt’s (FDR) aimed to reduce inequality rather than collect revenue. The top marginal income tax rate remained at a high level averaged 81% over a long period from 1944 till Ronald Reagan’s presidency in 1981 (Saez & Zucman, 2019).
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1.5. Literature review
This section will focus on the views of contemporary economists and researchers on the major outcomes of the reforms conducted during the last four decades. In particular, the focus will be on economic consequences and impact on inequality after the Trump’s Tax Cut and Jobs Act of 2017 as the biggest overhaul in taxation since Reagan’s tax policy.
1.5.1. Economic Recovery Tax Act of 1981 and Tax Reform Act of 1986 The Reagan administration’s approach to the goals of the 1981 tax reform, called the Economic Recovery Tax Act of 1981, was predominantly political and ideological in nature and proceeded from the notion that ‘American capitalism, freed from the burden of taxes and regulation, would surge ahead’ (Hogan, 2010, p.113). In fact, the 1981 tax reform was built on two pillars - a sharp reduction in personal income taxes and a reduction in corporate taxation. Income taxes on average declined gradually for the main categories of taxpayers during 1982-1985. However, the most important innovation of the tax reform was that the maximum income tax rate was reduced from 70% to 50%. Combined with the reduction in the number of taxable income intervals from 16 to 13, this line of tax reform in 1981 was clearly aimed at strengthening the position of the wealthiest American society in the distribution of national income. Tax Reform Act of 1986 signed into law during Reagan’s second presidential term was aimed at simplification of the tax code, broadening the tax base, and elimination of tax shelters. The law reduced federal income tax rates, shortened the number of tax brackets and lowered the highest marginal individual income tax rate from 50% to 28%. The act further increased the earned income tax credit, standard deduction, and personal exemption, eliminating nearly six million low-income Americans from the tax bracket (Auerbach 1996). Auerbach (1996) provided a rigorous analysis of Reagan’s tax reform of 1986, however he is quite sceptical to the estimates recognized by most researchers. He evaluated the reform based on the objectives it followed – improving equity, efficiency, and simplicity. Thus, the overall
33 CHAPTER 1: BACKGROUND OF TAXATION: TAX THEORY AND TAX SYSTEM IN THE UNITED STATES efficiency effects of changes in marginal tax rates on labour supply and saving were weak, according to both theoretical estimates and estimated behavioural responses. Even though the magnitude of the improvements was not high, Auerbach states that the reform improved the efficiency of the tax system. The equity goal placed on agenda, was aimed to keep the same level of income tax burden but distribute it between the income classes. Auerbach argues that although majority of the researchers come to the same conclusion that the Tax Reform Act 1986 was more progressive than the government suggested it to be, these results do not take into account the behavioural response of taxpayers. In case of horizontal equity, Auerbach claims that there is no agreed-upon metric and thus there were no precise estimates proving the improvements in horizontal equity. In regard to the simplicity, the author believes that the improvements on personal side were offset by the increased complexity on the corporate side. Stiglitz (2017) believes that the Reaganomics was not successful and did not solve the issues the American economy faced in 80s. The problems with inequality, slow economic growth and low productivity Reagan intended to solve through tax cuts and deregulation in order to give incentives to investors and free the economy. In fact, as Stiglitz claims, the growth slowed, tax revenues decreased, and low-income groups suffered. Thus, the only winners who benefited from the lowering taxes were wealthy and businesses. Stiglitz (2010) blames financial system deregulation, driven by Alan Greenspan, appointed by Ronald Reagan in 1987. Markets and financial institutions, according to Stiglitz, are to blame for the crisis. Businesses lobby governments by offering massive payouts and bonuses, as he points out. Another opponent of Reaganomics Ackerman (1982) states that Reagan’s assumption that the economy suffers from the government intervention and thus must be freed by limiting politicians access to revenues was completely wrong. He claims that Reaganomics offered only a partial solution to the causes of stagnation and led to a biased cure. Looney (2001) summarises the views of both advocates and opponents of Reagan’s tax reforms. Thus, he states that Reaganomics was always largely supported by Republicans. They describe the 1980s as prosperous years for the U.S. economy which provided conquering of inflation,
34 CHAPTER 1: BACKGROUND OF TAXATION: TAX THEORY AND TAX SYSTEM IN THE UNITED STATES growth of employment, and economic recovery. Democrats see Ronald Reagan's presidency as a time marked by record budget deficits, economic recession, and widening income disparities between the rich and the poor. Looney states that Reaganomics is characterised by the mix of contradictory effects such as: decreasing inflation (to 4% by 1983) and raising deficit (from $74 billion in 1980 to $155 billion in 1988); lower taxes and increased government spending, lower employment (nearly 11% by 1982) and large trade deficits (from $15 billion in 1980 to $129 billion in 1988); recession and a peaceful rеcovery.
1.5.2. Omnibus Budget Reconciliation Act of 1993 Bill Clinton signed OBRA 93 into law on August 10, 1993, increasing the earned income tax credit for low-income families while raising tax rates for high-income families. OBRA 93, also known as the Deficit Reduction Act of 1993, was enacted to reduce the national deficit. The biggest tax rise for higher-income taxpayers was a 3 percent increase in the statutory tax rate – from 36% to 39.6% income tax for high-income individuals in the top 1.2% of income groups. Stiglitz (2003), who helped shape President Clinton's economic agenda, reviews the new economy based on information technology and knowledge, as well as the factors that led to its crisis. He is confident in the correctness of the tasks set by the Clinton administration, but emphasizes that many mistakes were made in the process of their implementation. Nevertheless, Stiglitz does not understate the president's merits, including elimination of the deficit, reduction in unemployment, increase in social spending and reforming of social security system. Among the problems requiring further solution, the author calls the imbalance of the economy, which led to a decrease in employment of the population in industry; reduction in savings of Americans and insufficient funding for education, although the author emphasizes that since 1998, the priority of Clinton's social policy has been investment in human capital: health care, education. McDonnell and Weatherford (1996) believe that the Clinton presidency is especially difficult to evaluate since it is full of economic paradoxes. The authors note that economic decisions were not an easy task for Clinton mainly because they were aggressively opposed by Republicans who did not want to accept the new initiatives and substantial changes in the state’s role in the
35 CHAPTER 1: BACKGROUND OF TAXATION: TAX THEORY AND TAX SYSTEM IN THE UNITED STATES economy. Clinton proposed a plan to reduce the deficit primarily providing for cuts in the defense budget and by increasing taxes for the most wealthy Americans by record 3 percentage points (from 36% to 39.6%) and met stiff opposition from Republicans arguing against raising taxes. However, authors emphasize the success of the all major economic decision made by Clinton. Thus, his decision not to propose a middle-class tax reform was perhaps the most revealing trade-off. By doing so, he was able to cut the debt by a much greater sum, and he was able to provide at least modest support for other measures that were crucial to his agenda of long-term economic growth investments.
1.5.3. Tax Cuts and Jobs Act 2017 On December 22, 2017 President Trump signed into law the Tax Cuts and Jobs Act (TCJA), the largest overhaul of the tax code since 1986. This large-scale federal tax reform became the most important part of Trump’s administration program. The tax reform affected the individual income tax, tax on corporate profit and some other taxes and payments. The main objectives of his tax plan were stimulation of economic growth, investment and job creation within the country, growth of economic activity and income of the households. Saez & Zucman (2019) highlighted the impact of tax reforms on income inequality in their book “The triumph of injustice”. The book focuses mostly on Trump’s tax cuts, which enabled the very affluent to be largely relieved from taxpayers responsibilities: for the first time in modern history according to the authors, capital income was taxed less than labour income, resulting in rich Americans paying a lower tax rate than working class. Saez & Zucman calculate effective tax rates for taxpayers within the income distribution in their study, considering taxes collected at the federal, state, and local levels as a percentage of national income. This allows the researchers to look at growth rates across income distributions. Thus, they conclude that “all the groups combined pay on average 28% of their income in taxes” (Saez & Zucman, 2019, p.14), which gives them the base to consider the income tax flat. However, this calculation does not include the income of the lowest income group. According to Saez & Zucman these people pay are largely affected by consumption taxes which eliminates their
36 CHAPTER 1: BACKGROUND OF TAXATION: TAX THEORY AND TAX SYSTEM IN THE UNITED STATES income. Further they claim that for the richest 400 households it is even regressive, since their effective tax rate fell to 23% in 2018 (Saez & Zucman, 2019, p.14). The authors believe that the decline in capital taxation is the engine of income inequality, since the wealthiest who “derive more than half of their income from capital, the top 0.1% more than two-thirds” can accumulate more with the lower tax rate (Saez & Zucman, 2019, p.97). The authors advocate for a more egalitarian reform of the American tax code, including higher tax rates for high-income earners and a wealth tax on those with assets worth more than $50 million. Summers (2018) presents a first year evaluation of Trump’s presidency. Although at the moment there was little evidence on the efficiency of the economic performance, she questions the positive forecasts on the economic growth provided by the economists prior to the beginning of Trump’s administration. Firstly, she compares the U.S. economic and financial performance with the foreign economies and concludes that the conducted policy does not contribute to the economic growth as was put on the agenda by Trump. She recognizes that indeed the boost in economic growth happened in his first year of presidency, however she explains the higher than expected rate of growth - by 0.6 percentage points against the estimates provided one year prior to election – by the global economic growth of the major countries that happened in 2017. Summers claims that the regression models used for forecasting the economic growth normally admit the interval of the error in predictions which is statistically not significant. Thus, she concludes that the economic policy was not a basis for that percentage of the increase in economic growth. Summers further criticizes the estimates of the economic growth forecast published by the Treasury (2017), stating that GDP growth will increase by 0.7 percentage points (from 2.2% a year to 2.9%) as well as the positive forecast presented by Barro (2017) and his estimate of 0.3 percentage points increase in growth rate. According to her statement, these estimates are based solely on reductions in corporate tax rates and did not take into account the fact that the effective tax rate on the corporate investment was already low, thus, further reductions in corporate taxes
37 CHAPTER 1: BACKGROUND OF TAXATION: TAX THEORY AND TAX SYSTEM IN THE UNITED STATES were not a single reason of the boost in economic growth. She claims that the stimulation of investments which took place after the reform cannot be analysed in isolation from such factors as the expense of consumption, investment in noncorporate sector or greater indebtedness, otherwise the economic growth would be overestimated. Finally, she states that the advantage of a new tax bill provision on the principle of territorial taxation, which means the corporations will be exempted from the tax on profits earned overseas, is controversial. Originally it is aimed to stimulate the U.S. companies to return their businesses back to the United States. However, as the author notes, it can encourage overseas investment on one hand. On the other hand, the current law implies that the firms do not pay taxes on profits earned abroad until they are repatriated. However, Summers believes that the increase in investment will not happen since the companies with high liquidity abroad have also high domestic liquidity which they do not turn into investments. In historical context Summers compares Trump’s Tax Cuts and Jobs Act with the 1986 Tax Reform Act introduced by Ronald Reagan. Thus, according to author’s statement Regan’s tax reform was based on the three principles: (1) revenue neutrality, (2) distributional neutrality, and (3) simplicity and reduction in tax sheltering opportunities. These principles allowed the reform to become one of the most successful in the United States. Summers claims that neither of these principles was however the case of Tax Cuts and Jobs Act. Bhattarai et al. (2018) on contrary, present positive outcomes of Trump’s tax reforms in the short run as well as in the long run. They estimate the efficiency, equity and revenue effects of the reform. Their approach is based on the micro-macro model, which collects the data from public services on the amount of tax returns, households data and combines it with the data from population surveys, which helps to simulate the economic growth, employment, income and sectoral effects of the reforms. Thus, according to the results of the survey, after the tax cuts the incentives to invest should increase, which in turn will hike the capital stock and cause a growth of GDP by about 1.4% in the first year and up to 3.2% by 2026. They also forecast that the fall in revenue will be compensated by faster economic growth.
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Further in their analysis Bhattarai et al. show the effects the reform implies at the micro level. Thus, the reduction in taxes will significantly reduce the tax burden of all households. However, the authors claim that 70% of reduced tax burden will fall on the wealthy, and thus they will save about 31% in taxes, whereas only 1.8% of the tax cuts will go to the poorest income group. The middle class would see a reduction of 13% which, as authors claim, does not constitute a tax relief announced by Trump in his proposals (Trump, 2016). Finally, Bhattarai et al. claim that the Federal tax revenue will show a fall of about $8 trillion over the decade 2017-2026 or a reduction by 22% to the baseline of the model. This in turn, will cause the growth of the Federal debt. The authors forecast the level of debt will amount up to 110% of GDP against 86% projected by the Congressional Budget Office. Thus, Bhattarai et al. believe that there is a high inconsistency in Trump’s promises and the real economic outcomes. The authors believe that the tax relief, simplification of the tax code and economic growth will go along with the increase in the budget deficit or adverse effects of reductions in government spending. Han (2021) compares the Trump’s Tax Cuts 2017 with the Reagan-era tax bills. He states that Reagan managed to decrease individual tax rates together with corporate tax rates by consistently phasing-in the tax cuts in 1981 and 1986 and keep the reform revenue neutral by broadening the tax base. That occurred due to elimination of the tax loopholes for the high-income groups and corporations. On contrary, Trump’s tax cuts caused the fall in the federal revenue in the first year of his presidency. The author casts doubt on the necessity of such large-scale tax cut taking into account the growing Federal debt and the economy close to full employment.
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Chapter 2: Outcomes and impact on inequality of the major tax reforms in the United States
This chapter provides a rigorous analysis of the three tax reforms for the last forty years in the United States. Following the existing approach on evaluation of fundamental tax reforms, we need to analyse the impact they had on micro and macro level.
2.1. Methodology
Fiscal decisions in the United States involve executive and legislative mechanisms of various levels of government. Thus, there is no central decision-making body in terms of fiscal policy. Since the federal government receives about two-thirds of total state revenue, with the rest part allocated between states and local authorities, it can be considered as a central player in the fiscal policy analysis. Additionally, taking into account the complexity of the U.S. tax system, it would be feasible to make analysis of indicators at the federal level, thus, excluding state and local taxes and budgets. In order to analyse the economic outcomes of tax reforms, the set of indicators will be used. The choice of indicators is based on the theoretical approach used by economists in their recent researches. Conditionally these indicators can be divided into the following groups (Table 3). Thus, Saez and Zucman (2019) in their study of income inequality focus on average affective tax rates across the income distribution. They use both cumulative federal taxes for all income groups and breakdown by types of taxes, however they select either bottom income earners or top 1% of income groups, ignoring the rest of the households. This study will eliminate this gap and complement it with the comparison between the indicators at the beginning of each presidency and at the end to compare the results in timiline. Additionally it will focus more on savings at each income group level after implementation of the particular reform, which will support or reject the ideas stated by the researchers from the literature review section.
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The set of macroeconomic indicators is a common used practice in every study on tax policy changes. This study approach is adopted from the methodology used by independent analytical agencies such as Tax Policy Center (TPC, n.d.) and Tax Foundation (Tax Foundation, n.d.).
Table 3. Economic indicators used for the analysis of reforms
Absolute (USD) Ratios (in percentage) • Federal revenues (by type and total • Revenues (receipts) -to-GDP amount) • Spending (outlays)-to-GDP • Federal Government Spending (by • Types of taxes-to-total taxes type and total amount) • Savings of Households • Deficits/Surpluses • Tax rates (by type of taxes) Source: Author’s own compilation
Absolute indicators (USD) - include data on the amount of federal revenues (receipts) collected over the given period of time, government spending (outlays), the amount of budget deficit or surplus: Federal Revenues - are funds collected by the federal government through individual, corporate, social insurance (payroll), and other taxes and fees the taxpayers pay in the United States each Fiscal Year (USAspending, n.d.). Federal Government Spending - is the spending of the federal government of the United States on the acquisition of goods, provision of public services such as healthcare, education, national defense, social protection, transportation. It consists of mandatory spending, discretionary spending, and interest on government debt (USAspending, n.d.). Mandatory spending - includes social security, healthcare insurance payments (Medicare for the elderly and Medicaid for low-income groups), income security (aimed at providing disability assistance, tax credits), veterans benefits (income security and healthcare assistance for veterans), education, training, employment, social service and other. Mandatory spending covers
41 CHAPTER 2: OUTCOMES AND IMPACT ON INEQUALITY OF THE MAJOR TAX REFORMS IN THE UNITED STATES the expenses controlled by laws and must be paid at whatever level is needed to cover the costs (USAGov, 2021). Discretionary spending - includes programs that are determined on an annual basis by Congress and the President. Discretionary spending covers national defence and non-defense spending such as education, training, employment, social services, transportation, veteran services, income security, health and other (USAGov, 2021). Interest on the government debt (net interest) - is the amount spent by the Government to service the debt. The debt occurs when the government borrows money from individuals, businesses, or foreign entities to cover the deficit which stems from the excess of government spending over revenues (USAGov, 2021). Deficit - is the amount by which spending exceeds revenues in a given year. Surplus - occurs when the government collects more money than it spends in a given year. Average tax rate - is the total tax amount, divided by the total tax base. Marginal rate of tax - is the additional tax paid on additional income. It is the extra tax that is paid when the taxpayer earns an extra pound, dollar, or euro of income.
Ratios (in percentage) - are necessary for simplification of comparison of the outcomes as well as for analyzing the size of the output. They include ratios of revenues to gross domestic product (GDP), spending to GDP, the amount of taxes by types as percentage of the total amount, savings of households as a ratio of the difference between the amount of tax paid after the implementation of tax reform and before to the base year amount: Revenues-to-GDP - is the ratio of federal revenues to the Gross Domestic Product which serves as a measure of a state’s revenue to the size of the economy. It allows to evaluate how well the government directs its resources through taxation. The higher the ratio, the more funds a country is able to spend on public goods and services to improve the life of people. The average revenues-to-GDP ratio among developed countries was equal to 33.8% in 2019 (OECD, 2021).
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Spending-to-GDP - is used for indication of the size of government across countries. It varies largely across the countries due to various states approaches to providing public goods and services, but on average in OECD countries it reached 41% in 2019 (OECD, 2021). There is no consensus on the optimal level of government spending. The policymakers are divided into those who think the higher spending provides economic growth and those who think the higher spending leads to a budget deficit and crisis. Types of taxes-to-total taxes - shows the share of each selected tax to the total amount of revenues collected through taxes. This indicator helps to analyze which tax brings more revenues and shows the composition of direct and indirect taxes in the total amount. Such analysis is useful to reveal on which categories of taxpayers the higher burden of taxes falls. Thus, the higher share of income taxes shows that the state controls the volume of tax burden through direct taxation. The increase in share of indirect taxes such as excise and sales taxes indicates that the most burden of taxation falls on poor and working class (OECD, 2006). Savings of Households - is the difference between taxes paid in a year after the reform to taxes paid before the reform. It can be calculated as an absolute indicator and as a percentage to the base year amount. The level of savings for different income groups of households is a good indicator of the tax burden shift. The higher ratio of savings means higher benefits for a particular income group.
Fiscal Year - is the accounting period which federal governments use for financial reporting and budgeting. Current dollars - is a value of dollar received or spend in a given year. Constant dollars – is the adjusted value of dollars used to compare the value from one period to another. Majority of abosolute indicators will be presented in constant (financial year 2012) dollars to accurately compare indicators over time. The latest available data on federal revenues is available as of 2019.
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The data is collected from the United States government websites: • The White House • Internal Revenue Service (IRS) • Bureau of Labor Statistics • Bureau of Economic Analysis • Alcohol and Tobacco Tax and Trade Bureau (TTB) • U.S. Customs and Border Protection (CBP) • Congressional Research Service (CRS) • Congressional Budget Office • Census Bureau • U.S. Department of the Treasury
2.2. Federal Revenues analysis
As was mentioned in the methodology the revenue analysis helps to understand where the revenues come from, how they are spent and what impact they have on the federal budget.
Reagan: Federal Revenues The analysis of the revenue collected during the Reagan’s presidency shows a decrease in the first term of administration from $1,453.8 billion (in constant FY2012 dollars) in 1981 to $1,289.6 billion in 1983, and a stable growth starting from 1984 till the end of his second term in 1988, from $1,365.7 billion to $1,654.1 accordingly (Figure 7). However, in terms of ratio to GDP it shows a negative trend and equals to 19.1 percent of GDP in 1981, 16.9 percent in 1983, and 17.7 percent in 1988 (Figure 8). Considering the growth of revenues in nominal terms from 1984 the decline in ratio to GDP means that revenues rose less than GDP.
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Clinton: Federal Revenues The Clinton’s administration resulted in a stable growth from the beginning of administration in 1993 till 2000, and the federal revenue raised both in absolute amounts and as a percentage of GDP from $1,753.8 billion to $2,691.3 billion (Figure 7) – equal to 17% and 20% of GDP accordingly (Figure 8).
Figure 7. Federal Receipts in billions of constant (Financial Year 2012) U.S. dollars, 1981-1988, 1993-2000, 2017-2019
Source: Author’s own calculations based on data from The White House (n.d.)
It is good to mention here that Clinton was a Democrat leader and his approach to economy was completely different from the typical Republican policy. Thus, instead of promoting tax cuts as the main instrument of Republicans for achieving the boost in economic growth, Clinton focused on reducing the deficit by raising taxes for high-income groups and reducing government spending. These measures helped to balance the budget and provided the GDP steady growth for a long period of time and, as a result, the total federal revenues increased in real and nominal terms.
45 CHAPTER 2: OUTCOMES AND IMPACT ON INEQUALITY OF THE MAJOR TAX REFORMS IN THE UNITED STATES
Trump: Federal Revenues The Federal government during President Trump’s administration collected revenues of $3,129.4 billion in 2017 (Figure 7) – equal to 17.2% of GDP (Figure 8) and $3,141.0 billion in 2019 – equal to 16.3% of GDP, which is the highest level in absolute amounts in comparison to Reagan and Clinton’s annual values, however showing a decreasing trend in terms of ratio to GDP.
Figure 8. Federal Receipts as a percentage of Gross Domestic Product, 1981-1988, 1993-2000, 2017-2019
Source: Author’s own calculations based on data from The White House (n.d.)
The comparison of all three tax policies shows that the most robust growth in revenues both in absolute terms and as a share of GDP showed Clinton’s tax policy. The average annual ratio of federal receipts to GDP of 19% together with total generated revenue of $17 trillion during the two terms of his presidency exceeded Reagan’s output with 18% share of GDP and $11.7 trillion and Trump’s 17% and $9.3 trillion in constant FY2012 dollars. The annual growth amounted to 6% on average with Clinton, was negative in the first term of Reagan’s presidency but then raised up to 5% on average and was zero with Trump.
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Overall, during the two presidential terms Clinton’s administration collected the revenues in the total amount of $17.4 trillion in 2012 dollars which is significantly higher than the revenues collected during Reagan’s term, and higher but not in the short-run than Trump’s federal revenues.
The composition of federal revenues For the last several decades the individual income tax has remained the largest source of federal revenues and amounts to 50% of all federal receipts. The second largest revenue source is represented by payroll taxes or social security contributions, ranging from 30% (in 1981) to 42% (in 2009), followed by the corporate income tax – ranging from 6% (in 2018) to 14% (in 2007) of the total revenue, excise and other taxes totalling 4-5% on average. The composition of the federal receipts from 1981 to 2019 is shown in the Figure 9 below.
Figure 9. Composition of the Federal Receipts as a percentage of total, 1981-2019
Source: The White House (n.d.)
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Since the income and payroll taxes are direct and their amount depends on the ability of the taxpayer to pay, in other words who earns more pays more, these taxes are the most popular instruments in fiscal policy of the state. As shown in the Figure 9 the share of income and payroll taxes in total revenues has been fluctuating a lot throughout the decades based on the changes in tax policies. Thus, during the Reagan era from 1981 till 1988 the share of payroll taxes in the total amount increased, while the share of individual and corporate income taxes decreased, which is explained by Reagan’s tax cut reforms in respect to income taxes. In contrast, Clinton increased income taxes for the wealthiest and decreased for low-income households and small businesses, which resulted in the explicit growth of the individual income tax share from 1993 till 2000. Trump’s Tax Cuts and Jobs Act of 2017 has served as a tax relief for the richest people and businesses and significantly lowered the share of corporate income tax in total federal revenues starting from 2017. Although federal revenues provide information on the total amount of receipts and their sources, they should not be viewed in isolation. The way how the state allocates collected revenues is the most important factor in economic policy and one of the functions of taxation as was stated in the Chapter 1.
2.3. Government Spending Analysis
Government spending is the important economic policy tool used by the government to stabilize the economy, provide public goods and services such as education, healthcare, social protection to population, allocate revenues. The allocation of government spending varies in response to the policy changes. The United States federal government spending can be split into three categories: mandatory spending (based on the law), discretionary spending (set by the Congress), and interest on the debt which the government owes on all past borrowing (USAGov, 2021).
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Reagan: Government Spending The amount and shares of government spending by components has changed over time. Thus, during Reagan’s presidency the discretionary spending prevailed over mandatory and ranged between 47% and 50% of total spending or between $797.8 billion and $817.3 billion in absolute terms, whereas mandatory spending did not exceed 42% of total spending overall reaching as high as $734.2 billion in 1983. The amount of net interest was increasing from 9% to 12% during the first term and stayed fixed at the level of 13% during the second term of the presidency ranging between $150.8 billion in 1981 and $258.3 billion in 1988 (Figure 10).
Figure 10. Government Spending by categories during Reagan's presidency in billions of constant (Financial Year 2012) U.S. dollars and as a percentage of total, 1981-1988
Source: Author’s own calculations based on data from The White House n.d.)
The composition of mandatory spending at the end of the Reagan’s presidency in 1988 shows that the largest share of mandatory spending belongs to the social security (49.6%), next goes
49 CHAPTER 2: OUTCOMES AND IMPACT ON INEQUALITY OF THE MAJOR TAX REFORMS IN THE UNITED STATES income security such as unemployment compensation, nutrition assistance programs and supplemental security income - 24.9% of total mandatory spending, Medicare is set at 17.1%, Medicaid has 7%, veterans benefits and education and training costs are offset by certain fees and payments (CRS, 2017), which is shown as a negative amount in the Figure 11. Federal discretionary spending is allocated between national defense, the largest program totalling $566.7 billion which is equal to 61.5% of total discretionary spending, and domestic programs like education, training, employment and social services, transportation, income security, health, veterans benefits and others (Figure 12). To sum up the Reagan’s spending policy, it should be mentioned here that the share of mandatory spending in total outlays decreased in comparison to the previous decade, from 41% in 1978 (Appendix A) to 39% in 1988. This constraint was a result of the growing budget deficit (Figure 15), drastic increase in defence expenditures from 47% of total discretionary spending in 1978 (Appendix A) to 61.5% in 1988 (Figure 12) which was reflected in the Congressional Research Service report (2017). Figure 11. Composition of Federal Mandatory Spending at the end of each presidency as a percentage of total, 1988, 2000, 2019
Source: Author’s own calculations based on data from The White House (n.d.)
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However, the deficit amount by the end of the Reagan’s policy in 1988 (3.0% of GDP) was not that large as by the end of the Trump’s administration in 2019 (4.6% of GDP) as shown in Appendix C. Even though both presidents used the same tools of cutting the taxes, Reagan managed to achieve a longer lasting growth in revenues than Trump, because of the greater effect of income tax cuts in the first case - from 70% to 50% in comparison to Trump’s 39,6% to 37%.
Clinton: Government Spending During Clinton’s presidency the distribution of government spending changed in favour of mandatory payments, which gradually increased from $951.1 billion or 44% of total mandatory spending in 1993 to $1,209.5 billion or 51% in 2000 as shown in the Figure 13. The amount of discretionary spending, on contrary, decreased and amounted to $901.8 billion or 42% in 1993 and $881.9 billion or 37% in 2000 (Figure 13). The net interest overall decreased in comparison to the beginning of his administration from $288.5 billion or13% in 1993 to $285.8 or 12% in 2000 (Figure 13). Figure 12. Composition of Federal Discretionary Spending at the end of each presidency as a percentage of total, 1988, 2000, 2019
Note: the latest available data for Trump’s presidency is 2019 Source: Author’s own calculations based on data from The White House (n.d.)
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The allocation of mandatory spending at the end of Clinton’s presidency is the following: social security has the largest share of 43% ($519.8 billion), income security is almost equal to Medicare program – 22.4% ($271.3 billion) and 20.3% ($245.7 billion), followed by Medicaid – 12.5% ($151.5 billion) and the rest is offset by fees and payments (Figure 11). In comparison to Reagan, Clinton significantly increased spending on Medicaid insurance program for low-income groups to almost twice as high as the amount in 1988 (from 7% to 12.5%) as shown in Figure 11. The share of Medicare expenses also increased from 17.1% to 20.3%. Such redistribution became possible due to the budget surplus in 1998 (Figure 15), when the increase in taxes for upper-income taxpayers resulted in high revenues. These outcomes are reflected in McDonnell and Weatherford (1996) publication which was observed in the first Chapter of this thesis. Figure 13. Government Spending by categories during Clinton's presidency in billions of constant (Financial Year 2012) U.S. dollars and as a percentage of total, 1993-2000
Source: Author’s own calculations based on data from The White House (n.d.)
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At the same time the share of social security contributions decreased by six percentage points in comparison to Reagan’s level (Figure 11), but remained high in the distribution. The share of spending on education fell to near zero, which Stiglitz (2003) criticized in his review of Clinton’s policies described earlier in the literature review section. In respect to the composition of federal discretionary spending, Clinton set the lowest share of national defense (49%) in spending distribution in comparison to Reagan (61.5%) and Trump (51.3%) as shown in Figure 12. In absolute terms it totalled $432.4 billion in 2000. This cut of defense spending contributed to a rise in revenue and lowering in spending relative to GDP (Figure 15) and led to a surplus in budget for the first time after 1969 (Appendix B).
Trump: Government Spending During the Trump’s presidency the share of receipts to GDP was decreasing from 17.2% of GDP in 2017 to 16.3% in 2019, whereas spending was growing from 20.6% to 21.0% in the same period (Figure 15). Trump set the new record in the share of mandatory spending, 63% at the beginning of his term (Figure 14). Large part of this spending occurred due to inevitable increase in expenses of Medicare and Social Security programs because of the aging population (Committee for a Responsible Federal Budget, 2021). The discretionary spending share decreased in comparison to Reagan and Clinton’s economic policies, however the share of defense remained high and amounted to 51.3% in 2019 (Figure 12). The increase in defense occurred at the expense of social discretionary programs such as education, transportation, income security, health and other. Basically, Trump repeated Reagan’s approach with boosting military expenses while cutting the budget for social programs which resulted in a growth of budget deficit as shown in the Figure 15. Trump’s policy showed how the increase in the share of mandatory spending resulted in less budget spending on discretionary programs, which in the long run means inflexible and unresponsive fiscal policy (Saez & Zucman, 2019). Moreover, the growing demand in Social Security and Medicare due to ageing population, which comprises the two largest parts of all
53 CHAPTER 2: OUTCOMES AND IMPACT ON INEQUALITY OF THE MAJOR TAX REFORMS IN THE UNITED STATES mandatory spending, contributes to the growth of budget deficit. Considering that these items are funded mainly by payroll taxes, which are paid by employed population, the revenues received from these taxes are not enough to cover the inevitably growing expenses.
Figure 14. Government Spending by categories during Trump's presidency in billions of constant (Financial Year 2012) U.S. dollars and as a percentage of total, 2017-2019*
Note: the latest available data for Trump’s presidency is 2019 Source: Author’s own calculations based on data from The White House (n.d.)
The analysis of the interest spending shows that it was increasing after the first year of Trump’s administration (Figure 14). This means that the national debt was growing and so did the expenditures to cover this growth. In absolute terms the amount of net interest totalled $333.6 billion by 2019 in comparison to $258.3 billion in the last year of Reagan’s presidency and to $285.8 billion at the end of Clinton’s presidency in constant (FY2012) dollars (Appendix A).
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Figure 15. Federal Receipts and Federal Spending as a percentage of Gross Domestic Product, 1981-2019
Source: Author’s own calculations based on data from The White House (n.d.)
To sum up, the analysis of spending and revenues revealed the following: - The surplus in the budget was observed only during the Clinton’s presidency; - The most stable growth of revenues as a percentage to GDP was observed during the Clinton’s presidency; - The largest total amount of revenues collected was observed during the Clinton’s presidency; - The highest annual amount of revenues in absolute terms was observed during the Trump’s presidency; - The highest share of defense spending to GDP was observed during the Reagan’s presidency; - The highest share of interest spending was observed during the Reagan’s presidency; - The largest sources of revenues were individual income tax and payroll taxes under all governors;
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- The tax revenues received during Trump’s presidency were not enough to cover mandatory expenses and led to a growth of deficit.
2.4. Tax Rates
Tax policy ideally should reach a compromise between equity and economic efficiency as the most fundamental principles that were discussed in the Chapter 1. The balance can be achieved through the redistribution function of taxation, which is aimed at effective allocation of collected revenue from taxes between the income groups to meet the needs of each of these groups. This is the most difficult task for politicians as it involves not only the moral aspects, but also consideration of financial incentives for different categories, issues with deficit and national debt.
The Figure 16 below shows the distribution of the average effective federal tax rates among income quintiles and for the richest top 1% of taxpayers during the Reagan’s, Clinton’s and Trump’s presidency.
Overall, it can be concluded that all tax systems are progressive, and the tax rates grow with the increase in income. As seen from the Figure 16, the Trump’s distribution of tax rates looks pretty much the same as was during the Reagan’s presidency with the only difference between the lowest income groups. Thus, after the first Reagan’s tax reform in 1981 the average effective tax rates totalled to about 10% for the lowest income households, which is significant. Under the Trump’s governance, the rate was 1.3% before the reform and 3.3% after, which means that the burden for the poorest doubled. Clinton’s tax reform had the opposite effect and on contrary increased the rates for the highest income percentile and lowered the tax burden for the rest income groups. However, not all the taxes are equally progressive. The further analysis by types of taxes will be more illustrative.
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Figure 16. Average Effective Federal Tax Rates by Income Group
Note: the latest available data for Trump’s presidency is 2019 Source: Author’s own calculations based on data from CBO (2020)
2.4.1. Tax rates: Reagan The breakdown of all federal taxes by their types during the presidency of Ronald Reagan shows that individual income tax and corporate income tax are progressive and the rate increases with the growth of income.
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Figure 17. Average Effective Federal Tax Rates by Type of Tax, at the beginning and the end of Reagan’s Presidency, by income percentiles, 1981, 1988
Source: Author’s own calculations based on data from CBO (2020)
Reagan: Individual Income Tax The average effective rate of the individual income tax was significantly reduced for all income quintiles, which was the main point of the tax policy reforms of 1981 and 1986 (Figure 17). Thus, the highest Individual Income Tax rate fell from 70% to 50% and the lowest from 14% to 12% after the first reform of 1981. However, at the microeconomic level it had a controversial impact on inequality. The analysis of tax cuts impact on households is more illustrative when comparing the effects between the year preceding the changes and the year of their introduction. Evaluation will be based on the example of the largest tax cut after the reform of 1981.
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Table 4. Income Tax Brackets and Rates for Single Taxpayers, in current U.S. dollars, 1981- 1982
For Single Taxpayers, Taxa- Rate, 1981 Rate, 1982 ble Income Over - 0.00% 0.00% 2,300.00 14.00% 12.00% 3,400.00 16.00% 14.00% 4,400.00 18.00% 16.00% 6,500.00 19.00% 17.00% 8,500.00 21.00% 19.00% 10,800.00 24.00% 22.00% 12,900.00 26.00% 23.00% 15,000.00 30.00% 27.00% 18,200.00 34.00% 31.00% 23,500.00 39.00% 35.00% 28,800.00 44.00% 40.00% 34,100.00 49.00% 44.00% 41,500.00 55.00% 50.00% 55,300.00 63.00% 81,800.00 68.00% 108,300.00 70.00% Source: Author’s own calculations based on the data from Tax Policy Center (TPC, 2019)
The main property of the individual income tax is that different rates are applied to taxable income from different tax brackets. In 1981 before Reagan signed into law his first Economic Recovery Tax Act of 1981, there were sixteen tax brackets. After the reform this number decreased to thirteen as shown in the Table 4. The standard deductions and personal exemptions did not change (Table 5).
Considering the large number of tax brackets, the analysis will be more illustrative if only several income groups will be observed. Thus, the mean income received by each fifth and top 5 percent percent of all households will serve as the base for calculation of taxable income for 1981 (Table 6).
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Table 5. Standard Deduction and Personal Exemption for Single Taxpayers, in current U.S. dollars, 1981-1982
Type of deduction Deduction Amount 1981 1982 Standard Deduction 2,300.00 2,300.00 Personal Exemption 1,000.00 1,000.00 Source: Author’s own calculations based on the data from Tax Policy Center (TPC, 2019)
The following example shows how income tax was computed for 1981 for single individual filing a tax return, claiming for a standard deduction and personal exemption with the gross income of $11,464.00. Derivation of income subject to tax: $11,464.00 – Adjusted Gross Income - $2,300.00 – Standard deduction - $1,000.00 – Personal exemption $8,164.00 – Income subject to tax
Derivation of Regular tax: lowest $ 2,300.00 taxed at 0.00% = $ 0.00 Next $ 1,100.00 taxed at 14.00% = $ 154.00 Next $ 1,000.00 taxed at 16.00% = $ 160.00 Next $ 2,100.00 taxed at 18.00% = $ 378.00 Next $ 1,664.00 taxed at 19.00% = $ 316.16 $ 8,164.00 $ 1,008.16
The calculation from the Table 6 shows that the most beneficial group of taxpayers consists of the top 5 percent income group, which is true both in absolute and relative terms – the saving totalled to $4,164.72 or 13.26%. Taxpayers from the second group saved only $117.28 which is equal to 11.63%.
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Along with the decrease in marginal tax rates, also the tax brackets for the highest income groups shrank. Thus, the taxpayers with the income above $55,300 fall into the same group as taxpayers with the income over $41,500 (Table 4). Therefore, it can be concluded that the Reagan’s tax cuts benefited only wealthy and rich, and left the issues with inequality unsolved. These results support the ideas expressed by Stiglitz (2017) as was mentioned in the Chapter 1.
Table 6. Effect of Individual Income Tax Cut on Single Taxpayers from Each Fifth and Top 5 Percent of All Households, in current U.S. dollars, 1981-1982
Lowest Second Middle Fourth Highest Top 5 per- fifth fifth fifth fifth fifth cent 1981 Annual Income 4,602.00 11,464.00 18,991.00 28,309.00 50,568.00 75,144.00 Standard Deduction 2,300.00 2,300.00 2,300.00 2,300.00 2,300.00 2,300.00 Personal Exemption 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 Taxable Income 1,302.00 8,164.00 15,691.00 25,009.00 47,268.00 71,844.00
Income Tax 0.00 1,008.16 2,812.30 5,955.51 16,564.40 31,404.72 1982 Annual Income 4,602.00 11,464.00 18,991.00 28,309.00 50,568.00 75,144.00 Standard Deduction 2,300.00 2,300.00 2,300.00 2,300.00 2,300.00 2,300.00 Personal Exemption 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 Taxable Income 1,302.00 8,164.00 15,691.00 25,009.00 47,268.00 71,844.00
Income Tax 0.00 890.88 2,516.57 5,365.15 14,952.00 27,240.00 Variance 1982 - 1981 Saving (absolute 0.00 117.28 295.73 590.36 1,612.40 4,164.72 amount) Saving (percentage) 0.00% 11.63% 10.52% 9.91% 9.73% 13.26% Source: Author’s own calculations
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Reagan: Payroll Taxes The payroll taxes which include social security contributions paid by the employer and employee can be considered regressive as at some point the rate decreases with the increase in income. This stems from two factors. First, the payroll taxes have the ceiling: thus, in 1981 the maximum level of income subject to taxation was set at $29,700 in current dollars, so households from first half of income quintiles fell into taxable base range (Census Bureau, 1991). After the tax cut reform the taxable maximum almost doubled and reached $45,000 in current dollars (Tax Policy Center, 2015). Thus, it increased the number of groups with taxable income far above the median. However, it is easy to conclude that regressive taxes shift the most burden to the lower income groups, which are not exempted from paying the payroll taxes.
Reagan: Corporate Income Tax The average effective corporate income tax rate reduced only for top 1 percent of households and worsened or remained unchanged for the rest income quintiles. At the macro level the reduction of corporate income tax led to a significant fall in federal revenues and resulted in the growth of budget deficit as was described earlier in this chapter. Although it is considered to be a progressive tax, because it is levied on income from dividends and capital gains, which are only received by high-income households, at the micro level it increases the burden for the workers who suffer from the lowered wages.
Reagan: Excise Taxes Excise taxes are considered indirect taxes, which are not levied on the income and not paid directly by taxpayers to the government. However, at the micro level their increase affects mostly low-income groups, since it disproportionally hits their earnings. Thus, as seen from the Figure 17, the highest average tax rate falls into the lowest income group and is equal to 2.4%, whereas the top 1 percent of households enjoys the lowest rate of 0.4%.
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2.4.2. Tax rates: Clinton The average effective tax rates imposed by Clinton under his tax reform of 1993 show that the changes mainly affected income taxes. As was mentioned earlier, Clinton aimed at lowering individual income taxes for low-income groups and increasing for wealthy. Thus, as seen from the Figure 18 below, it had a positive impact on the distribution of tax burden in a way that it eased the lower income households (-6.1% and 1.8%) but at the same time increased the overall effective tax rate for all quintiles (11.8%), thus increasing the revenues for the federal budget.
Figure 18. Average Effective Federal Tax Rates by Type of Tax, at the beginning and the end of Clinton’s Presidency, by income percentiles, 1993, 2000
Source: Author’s own calculations based on data from CBO (2020)
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However, the detailed analysis of saving will better illustrate how the changes in individual income tax affected the savings of households. Clinton: Individual Income Tax Unlike Reagan’s and Trump’s tax reforms aimed at cutting the taxes for the wealthy, Clinton raised taxes on higher taxpayers. The Omnibus Budget Reconciliation Act of 1993 signed into law in 1993 imposed a 36% to 39.6% income tax for high-income individuals in the top 1 percent of wage earners. The below Table 7 shows the tax brackets and marginal rates applied to each range one year prior to the reform and after the reform.
Table 7. Income Tax Brackets and Rates for Single Taxpayers, in current U.S. dollars, 1992, 1993
1992 1993 Rate For Single Taxpayers, Rate For Single Taxpayers, Taxable Income Over Taxable Income Over 15.00% - 15.00% - 28.00% 21,450.00 28.00% 22,100.00 31.00% 51,900.00 31.00% 53,500.00 36.00% 115,000.00 39.60% 250,000.00 Source: Tax Policy Center (TPC, 2019) However, unlike standard deduction, which applied to all taxpayers equally, the personal exemption which enacted during the Clinton’s presidency had phase-out limits. The amount of standard deductions and personal exemptions remained almost the same before and after the implementation of the Clinton’s tax reform as shown in the Table 8.
Table 8. Standard Deduction and Personal Exemption for Single Taxpayers, in current U.S. dollars 1992-1993
Type of deduction Deduction Amount 1992 1993 Standard Deduction 3,600.00 3,700.00 Personal Exemption 2,300.00 2,350.00 Source: Tax Policy Center (TPC, 2019)
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When the adjusted gross income reaches certain threshold where the phaseout starts, the amount of personal exemption gradually reduces as the income increases. Thus, beginning with 1991 the personal exemption was reduced by 2% for each $2,500 when income exceeded the phaseout lower threshold (TPC, 2020). The gross income exceeding the phaseout upper threshold is not subject to personal exemption (Table 9).
Table 9. Phaseout Limits for Personal Exemptions for Single Taxpayers, in current U.S. dollars, 1992-1993
Year Phaseout lower threshold Phaseout upper threshold 1992 105,250.00 227,750.00 1993 108,450.00 230,950.00 Source: Tax Policy Center (TPC, 2020)
The following example shows how the personal exemption decreased after the phaseout limits were applied to the taxpayer from a top 5 percent income group with annual gross income of $144,608.00. Derivation of phaseout reduction in personal exemption: The gross income exceeds the lower threshold of phaseout limit by $39,358.00 (=$144,608.00- $105,250.00). Next, this overlimit is divided by $2,500.00 and multiplied by 2% according to the order stated above ($39,358.00/$2,500.00*2%=0.31). The resulting amount is multipled by the amount of personal exemption which gives the reduction of $724.19 (=0.31*2,300.00). Thus, the total amount of personal exemption is equal to $1,575.81 (=$2,300.00-$724.19). Thus, the results of the calculations showed the expected impact on the richest taxpayers, which eventually started to pay more after the tax reform. The Table 10 below presents the comparison of tax amounts before and after the reform for the households from each fifth and top 5 percent of all households. Thus, the richest taxpayers from the top 5 percent income group with annual gross income of $144,608.00 would pay by 2.62% more taxes in 1993 than in 1992 which is equal to an increase of $1,019.12 in absolute terms. For the lowest income tax bracket the
65 CHAPTER 2: OUTCOMES AND IMPACT ON INEQUALITY OF THE MAJOR TAX REFORMS IN THE UNITED STATES economy is not material and rounded to zero percent in relative terms or $22.50 in absolute terms. The highest percent of savings is observed in the second fifth percent and equals to 3.06% or $126.50 in absolute terms. Therefore, the obtained results prove the progressivity and focus on reduction of income inequality which supports the ideas expressed by McDonnell and Weatherford (1996) that the reform was not aimed at support of the middle class, but on shift of the burden to rich taxpayers.
Table 10. Effect of Individual Income Tax Cut on Single Taxpayers from Each Fifth and Top 5 Percent of All Households in current U.S. dollars, 1992-1993
Lowest Second Middle Fourth Highest Top 5 per- fifth fifth fifth fifth fifth cent 1992 Annual Income 7,256.00 18,181.00 30,631.00 47,021.00 91,110.00 144,608.00 Standard Deduction 3,600.00 3,600.00 3,600.00 3,600.00 3,600.00 3,600.00 Personal Exemption 2,300.00 2,300.00 2,300.00 2,300.00 2,300.00 1,575.81 Taxable Income 1,356.00 12,281.00 24,731.00 41,121.00 85,210.00 139,432.19
Income Tax 203.40 1,842.15 4,136.18 8,725.38 22,069.60 38,878.48 1993 Annual Income 7,256.00 18,181.00 30,631.00 47,021.00 91,110.00 144,608.00 Standard Deduction 3,700.00 3,700.00 3,700.00 3,700.00 3,700.00 3,700.00 Personal Exemption 2,350.00 2,350.00 2,350.00 2,350.00 2,350.00 1,670.23 Taxable Income 1,206.00 12,131.00 24,581.00 40,971.00 85,060.00 139,237.77
Income Tax 180.90 1,819.65 4,009.68 8,598.88 21,890.60 39,897.60 Variance 1993 - 1992 Saving (absolute 22.50 22.50 126.50 126.50 179.00 -1,019.12 amount) Saving (percentage) 0.00% 1.22% 3.06% 1.45% 0.81% -2.62% Source: Author’s own calculations
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Clinton: Corporate Income Tax Before the reform of 1993, corporate income above $335,000 was taxed at 34%. After signing into law of the Omnibus Budget Reconciliation Act of 1993 the new tax brackets were applied as follows: 35% for income from $10 million to $15 million, 38% for income from $15 million to $18.33 million, and 35% for income above $18.3 million (Taylor, 1993). At the macro level it led to an increase in revenues for the budget. At the micro level however the burden of corporate profit taxes is quite complicated and vague. Logically in can lead to a conclusion that an additional tax burden on corporations will pass a significant portion of this burden on to consumers. Hence, the poorest will be hit more.
Clinton: Payroll taxes Within the increase of individual taxes for high-income groups the reform of 1993 implied also an increase in the proportion of social security benefits taxed for middle-income individuals, which according to the proposal would help to maintain the social programs for low-income individuals (Weatherford & McDonnell, 1996). However, based on the Figure 17 and Figure 18, the average affective tax rate did not differ much from what was enacted under Reagan’s presidency for high-income quintiles.
Clinton: Excise Taxes As seen from the Figure 18 not much had been done with the regressivity of excise taxes. As was during the Reagan’s administration, the excise taxes put the higher burden on the lowest income groups and equal to 2.4% of effective tax rate for the lowest income quintile in 2000 and just 0.2% for the top 1 percent income group.
2.4.3. Tax rates: Trump The analysis of average effective tax rates by types of taxes during the Trump’s administration shows that income taxes remained progressive, and the payroll and excise taxes are regressive in general (Figure 19).
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Figure 19. Average Effective Federal Tax Rates by Type of Tax, at the beginning and the end of Trump’s Presidency, by income percentiles, 2017, 2019
Note: the latest available data for Trump’s presidency is 2017. The data for 2020 is based on estimates. Source: Author’s own calculations based on data from CBO (2020)
Trump: Individual Income Tax In comparison to Reagan’s tax reform, the rates of individual income tax for the lowest and second income quintiles are significantly lower and fell below zero (Figure 19), which means that the tax liability of these groups is lower than the standard deduction or they receive refundable tax credits (TPC, 2021).
The main innovations of the Trump’s tax reform in the field of income taxation are as follows:
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1. The rates were reduced almost in all tax brackets, and the tax brackets themselves were shifted (Table 11). Thus, in 2017 the marginal (maximum) tax rate was 39.6% and was applied to taxable income exceeding $418.4 thousand; in 2018 it was reduced to 37% and applied to income over $500 thousand (for a single taxpayer). 2. The standard deduction for all categories of declarants (single, married couples with joint and separate declarations, heads of households) has been significantly (almost doubled) increased. Thus, for single individuals the standard deduction increased from $6,350 to $12,000 (or by 89.0%) as shown in the Table 12.
Table 11. Income Tax Brackets and Rates for Single Taxpayers, in current U.S. dollars, 2017, 2018
2017 2018 Rate For Single Taxpayers, Rate For Single Taxpayers, Taxable Income Over Taxable Income Over 10.00% - 10.00% - 15.00% 9,325.00 12.00% 9,525.00 25.00% 37,950.00 22.00% 38,700.00 28.00% 91,900.00 24.00% 82,500.00 33.00% 191,650.00 32.00% 157,500.00 35.00% 416,700.00 35.00% 200,000.00 39.60% 418,400.00 37.00% 500,000.00 Source: Tax Policy Center (TPC, 2019)
Table 12. Standard Deduction and Personal Exemption for Single Taxpayers, in current U.S. dollars, 2017-2018
Type of deduction Deduction Amount 2017 2018 Standard Deduction 6,350.00 12,000.00 Personal Exemption 12,700.00 - Source: Tax Policy Center (TPC, 2020)
69 CHAPTER 2: OUTCOMES AND IMPACT ON INEQUALITY OF THE MAJOR TAX REFORMS IN THE UNITED STATES
In 2017 the phaseout limits were as shown in Table 13. Every $2,500 earned above the lower threshold reduced the personal exemption by 2%. After the Tax Cuts and Jobs Act of 2017 personal tax exemptions were eliminated.
Table 13. Phaseout Limits for Personal Exemptions for Single Taxpayers, in current U.S. dollars, 2017
Year Phaseout lower threshold Phaseout upper threshold 2017 261,500.00 384,000.00 Source: Tax Policy Center (TPC, 2020)
The analysis of savings of households after the implementation of the Trump’s tax reform will be based on the same methodology for calculation of taxable income, taxes and savings for the taxpayers as was used in case with the Reagan’s reform. The analysis of savings revealed the following (Table 14): The lower-income taxpayer categories benefited more than other categories of taxpayers from shifting the tax brackets and doubling the standard deduction. Thus, for a single individual with the annual adjusted gross income before deductions of $35,401.00 (falls into the second fifth percent of all households by income), the tax saving would be 20.29% or $666.28 in absolute terms, with income of $99,030.00 (fourth fifth percent) – 15.20% saving or $2,719.55, with income of $385,289.00 (top 5 percent) – 1.94% saving or $2,108.47 in current dollars. The relative gains are more tangible for people with low incomes, but in absolute terms, the wealthier gains.
Trump: Corporate Income Tax Prior to the entry into force of the 2017 reform, the United States had the income tax rate set in 1986 by the Reagan administration with the top marginal rate of 35%. At the same time, taking into account the existence of local tax rates established by different states and the procedure for deducting these taxes, the maximum rate reached 39.1% (although for large corporations it was,
70 CHAPTER 2: OUTCOMES AND IMPACT ON INEQUALITY OF THE MAJOR TAX REFORMS IN THE UNITED STATES according to estimates, 18.6%) (Saez & Zucman). The new corporate income tax rate of 21% became the lowest rate since 1939. As seen in the Figure 19, the highest burden is put on the shoulders of top 1 percent of households within income quintiles. However, as was discussed previously, the decrease in corporate income tax reduced the revenues for the federal budget, increased the budget deficit and shortened the government spending on social programs. The most adverse impact it had on the poor.
Table 14. Effect of Individual Income Tax Cut on Single Taxpayers from Each Fifth and Top 5 Percent of All Households, in current U.S. dollars, 2017-2018
Lowest Second Middle Fourth Highest Top 5 per- fifth fifth fifth fifth fifth cent
2017
Annual Income 13,258.00 35,401.00 61,564.00 99,030.00 221,846.00 385,289.00
Standard Deduction 6,350.00 6,350.00 6,350.00 6,350.00 6,350.00 6,350.00
Personal Exemption 4,050.00 4,050.00 4,050.00 4,050.00 4,050.00 0.00
Taxable Income 2,858.00 25,001.00 51,164.00 88,630.00 211,446.00 378,939.00
Income Tax 285.80 3,283.90 8,529.75 17,896.25 53,176.43 108,449.12 2018 Annual Income 13,258.00 35,401.00 61,564.00 99,030.00 221,846.00 385,289.00 Standard Deduction 12,000.00 12,000.00 12,000.00 12,000.00 12,000.00 12,000.00 Personal Exemption 0.00 0.00 0.00 0.00 0.00 0.00 Taxable Income 1,258.00 23,401.00 49,564.00 87,030.00 209,846.00 373,289.00
Income Tax 125.80 2,617.62 6,843.58 15,176.70 49,135.60 106,340.65 Variance 2018 - 2017 Saving (absolute 160.00 666.28 1,686.17 2,719.55 4,040.83 2,108.47 amount) Saving (percentage) 0.00% 20.29% 19.77% 15.20% 7.60% 1.94% Source: Author’s calculations
71 CHAPTER 2: OUTCOMES AND IMPACT ON INEQUALITY OF THE MAJOR TAX REFORMS IN THE UNITED STATES
Trump: Payroll Taxes The effective rate of payroll tax at the beginning of Trump’s presidency was much higher than during the Reagan’s governance and equalled to 9.4% in 2017 against 8.1% in 1988. However, according to estimates (CBO, 2020), the effective rate of payroll should be equal to 7.2% in 2020.
Trump: Excise Taxes The breakdown of the effective tax rates for excise taxes shows that the gap between the lowest income percentile and the top 1 percent of households is the same as it was during the Reagan’s presidency and equals to 2 percentage points on average (Figure 19). However, the estimated values for 2020 is quite optimistic and shows the significant decrease of a burden for the lowest percentile from 2.2% to 1.1%.
To sum up, the results of tax rates investigation showed the following: 1. Under all three tax systems during Reagan, Clinton and Trump’s presidency both individual and corporate income taxes remained progressive, whereas payroll taxes are mostly regressive, and excise taxes are fully regressive. 2. The highest cumulative burden of federal taxes for all households is observed at the end of Clinton’s presidency – 23.1% in 2000. 3. The highest burden of individual tax for the top 1% of income group is observed at end of Clinton’s presidency – 24.7% effective tax rate in 2000. The lowest burden – at the end of Reagan’s presidency – 21.1% in 1988. 4. The lowest burden of corporate income tax for the top 1% of income group is observed during Trump’s presidency – 4.8% effective tax rate in 2017 and estimated 3.2% in 2020. The highest burden – at the end of Reagan’s presidency – 5.8% in 1988. 5. The highest burden of payroll tax for the lowest income quintile is observed at end of Clinton’s presidency – 9.3% effective tax rate in 2000. The lowest burden – at the end of Trump’s presidency – 7.2% according to estimates.
72 CHAPTER 2: OUTCOMES AND IMPACT ON INEQUALITY OF THE MAJOR TAX REFORMS IN THE UNITED STATES
6. The effects of changes in individual income tax rates revealed that: a. Reagan’s tax cuts benefited the richest more than poor – savings of 13.26% for top 5% of income groups against 11.63% for the second income group. b. Clinton’s tax increase benefited all income groups except for the richest – they would have 2.62% increase in tax. c. Trump’s tax cuts benefited the poorest more than the richest – 20.29% of savings for taxpayers from second fifth percent income group against 1.94% for the top 5 percent income group.
2.5. Recommendations
Speaking about recommendations, the two main directions can be highlighted. First relates to the income inequality. Although the results of the study confirmed progressivity of the tax system, some of the federal taxes like payroll and excise taxes appeared to be regressive, thus causing the shift of tax burden to the lowest income groups. As was mentioned in theoretical part, ideally the politicians should follow the principle of vertical equity or the ability-to-pay principle. This means that the amount of tax should be dependent on the amount of burden it puts on taxpayers. In practice, unlike income taxes, which are imposed directly on the taxpayers, payroll taxes are being remitted from employers to employees reducing their wages and causing the increase in burden to less protected groups. Therefore, it is recommended to consider the economic incidence of the proposed tax changes by allocating the taxes from those who can remit it to taxpayers in order to analyse the real distribution of the tax burden. Second, the deficit amount should be considered in the process of policymaking. As the study showed, all three reforms were aimed at boosting the economic growth, however, using the different economic tools. Trump and Reagan used tax cuts for the businesses and wealthy, whereas Clinton increased the burden for the top-income groups. However, only Clinton’s tax policy was successful and created a surplus in the budget, the rest reforms resulted in a large
73 CHAPTER 2: OUTCOMES AND IMPACT ON INEQUALITY OF THE MAJOR TAX REFORMS IN THE UNITED STATES budget deficit and growing national debt. This was accompanied by the wrong strategy in allocation of government spending. In case with Trump’s policy, the mandatory spending for social needs was increasing due to the ageing population, while the revenue was decreasing due to the tax cuts. Thus, two options can be recommended to make the budget balance. First option is to broaden the tax base by including more economic activity of the wealthy subject to tax, like elimination of exemptions, deductions and credits. The second option would be to raise income taxes together with elimination of double taxation, which implies avoiding the situation when increased burden on corporations remits to the working-class. Such elimination would be possible through integration of corporate and individual income taxes.
74 CONCLUSION
Conclusion
The aim of this thesis was to present the overview of the major tax reforms implemented throughout four decades in the United States, analyse the outcomes they had on the economy overall and on population in particular, find the correlation between tax changes and income inequality. Considering a broad scope of issues related to taxation and variety of theoretical approaches among economists and researchers, the study adopts the views of contemporary authors and elaborates on the findings described in the literature review section. The thesis is divided into two parts: the first part is dedicated to the theory of taxation, functions of taxes, general background of the United States tax systems, progressivity and inequality. Second part includes analysis of the three largest tax reforms for the period from Reagan‘s to Trump’s presidency, summary of the findings, and recommendations given. The methodology used for the detail review of tax reforms combines the indicators for evaluation of the outcomes both at macro and micro level. Macroeconomic analysis included examination of the primary federal budget components such as revenues, discretionary spending and mandatory spending, analysis of total average effective tax rates and rates by type of taxes. The overview included both absolute figures and ratios to GDP and to total amounts. At micro level the study was aimed to show how particular income groups or households benefited from the changes in taxation. This was done through detailed evaluation of savings for every income percentile in the year before and after the tax reform. The biggest challenge of this thesis is that it deals with the most recent data on the latest tax reform introduced by Donald Trump in 2017, which has not been fully studied by the researchers and economists. Moreover, there is no consensus among economists on the long-term implications of this reform. Unlike the previous studies on tax reforms evaluation, this thesis incorporates an innovative approach based on comparison of the outcomes of three different tax policies proposed by the presidents from opposing political parties with fundamentally different principles and tools applied. As no study presented the cumulative analysis over several decades with the detailed breakdown by households, it appeared vital to compile information on the
75 CONCLUSION figures as of the beginning and end of each president’s governance as well as at the year prior to implementation of tax reforms. Findings of this study found their reflection in the literature provided in the theoretical part of the thesis. The outcomes of the latest tax reform implemented by Donald Trump in 2017 are of the greatest concern among economists due to the large scope of changes in the tax code. Not only this reform was the biggest overhaul of the tax system since the Reagan’s tax cuts in 1986, it was regarded as the “triumph of injustice” according to Saez & Zucman (2019). However, contrary to the Saez & Zucman’s conclusion that the United States tax system is regressive, the detailed analysis of tax burden combined with analysis of savings after tax cuts supports the ideas of tax progressivity. Even though the authors claim that the burden of taxation should be considered cumulatively at federal, state and local levels, their estimates are quite high. Thus, according to Saez & Zucman the average effective tax rate for all income groups from poorest to riches amounts to 28%, which means that every individual pays on average 28% of their income in taxes (Saez & Zucman, 2019, p.14). As a measure of tax burden distribution this thesis used the average effective tax rates of federal taxes. Since federal taxes collect around 67% of all state revenues, the analysis of tax burden distribution at the federal level is considered to be fair. Thus, the results of the survey showed that the average effective tax rate including all federal taxes put the highest burden on top 1% of the wealthiest households and is equal to 31.6% against the value for the poorest households, which on average paid taxes at effective rate of 1.3% in 2017. Such variance in estimates is explained by the fact that the authors do not include the earnings of the lowest income groups into their calculation as they believe that the income of people from the bottom of distribution is offset by the consumption taxes. However, this study showed that it is not true since the lower income taxpayers receive tax refund and their effective tax rate is negative. The findings on savings after tax reform revealed that the lower income groups benefited more than richest in relative terms – by 20.29% for the second lowest income group and by 1.94% for the top 5 percent.
76 CONCLUSION
The findings on the macroeconomic outcomes of Trump’s tax reform, however, agree with Bhattarai et al. (2018) and Han (2020) statements. They claimed that the reform boosted an economic growth and brought large revenues in the first year, but at the same time increased the budget deficit and national debt. Thus, the investigation of revenue versus spending indicators shows that the share of receipts to Gross Domestic Product was decreasing throughout his term, whereas spending was growing, thus enlarging the deficit and raising the share of net interest paid on servicing the debt. The Reagan’s tax reform was marked by the highest income tax cuts since the beginning of the twentieth century as was mentioned in the first Chapter. The reform caused a lot of debates and many authors judge it for generating a large deficit (Looney, 2001), slow growth of economy and inequality (Stiglitz, 2017), while others evaluate it as the most successful in the history of the United States (Summers, 2018). The findings of the study confirm that the budget deficit was observed throughout both presidential terms (1981-1988) due to the large increase in defence expenditures from 47% of total discretionary spending in 1978 to 61.5% in 1988 and loss of revenues from 19.1% to GDP to 16.9% during the first term of Reagan’s presidency due to decreased marginal income taxes. At the household level the analysis shows that the highest income group had the lowest effective individual income tax rate within all compared tax reforms. The review of savings supports Stiglitz (2017) conclusions about inequality - the savings of the wealthiest group with selected annual income totalled 13.26% in the year after the reform, whereas for the lower income groups it amounted to 11.63%. Finally, the Clinton’s Omnibus Budget Reconciliation Act of 1993 stands out in comparison to the previous reforms mentioned above. This reform was included into comparison to highlight the contrast in economic decisions made by Clinton as a member of Democrat party against Republicans – Reagan and Trump. Unlike previous reforms aimed at cutting the taxes to boost economic growth, this reform increased marginal income tax rate for high-income groups from 36% to 39.6% and reduced government spending in order to decrease the deficit by generating higher revenues. Indeed, the total amount of revenues both in absolute and relative terms was growing steadily and resulted in a budget surplus for the first time after 1969 which aligns with
77 CONCLUSION the findings of Stiglitz (2003). At the micro level it led to enhancement of progressivity of the tax system, shifting the burden of income tax from poor to rich, which is supported by the calculated savings of 1.22% for the individual at the bottom of income distribution against the increased spending by 2.62% for the rich with selected annual income. Although the scope of indicators for evaluation of impact of tax reforms on the economy and inequality can be expanded drastically, this study allows to highlight the most problematic areas, propose general recommendations for their elimination, and serve as a short and inclusive summary of the major outcomes for further research.
78 REFERENCES
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82 APPENDIX A
Appendix A
OUTLAYS BY BUDGET ENFORCEMENT ACT CATEGORY IN CONSTANT (FY 2012) DOL- LARS: 1962 - 2025 (in billions of dollars) Discretionary Mandatory and Net Interest Mandatory Undis- Programmatic Total Na- trib- Fiscal Non- Net Out- tional Other uted Year Total de- Total Means Offset- In- lays De- Total Social fense Medi- Medi- Tested ting terest fense Total Secu- Other care caid Entitle- Re- rity ments ceipts (1) (2) 1962 785.9 582.9 425.9 157.0 203.2 162.6 211.6 83.5 ...... 0.6 25.2 102.2 -48.9 40.5 1963 784.9 580.4 416.4 163.9 204.4 159.4 211.5 90.8 ...... 0.9 26.8 93.0 -52.1 45.0 1964 822.3 597.0 421.1 175.9 225.5 178.4 228.1 94.1 ...... 1.2 27.7 105.0 -49.7 47.1 1965 809.0 579.9 391.6 188.3 229.5 181.0 229.7 97.6 ...... 1.6 28.3 102.2 -48.7 48.5 1966 896.1 648.7 432.2 216.4 247.7 195.9 248.0 113.7 ...... 4.3 28.3 101.7 -52.1 51.9 1967 1,026.7 748.6 510.9 237.6 277.8 222.7 279.4 116.4 13.0 6.4 27.5 116.1 -56.7 55.1 1968 1,120.1 799.2 556.6 242.7 320.8 263.3 323.6 123.5 22.6 9.6 30.3 137.6 -60.3 57.5 1969 1,085.7 749.2 530.2 219.0 336.6 273.7 329.7 135.8 26.5 11.6 32.3 123.4 -56.0 62.9 1970 1,095.8 729.5 499.5 230.1 366.1 298.5 354.4 144.0 27.5 13.2 35.7 133.8 -55.9 67.6 1971 1,101.1 695.1 453.6 241.6 406.2 339.8 399.2 163.3 28.2 15.6 46.5 145.6 -59.4 66.4 1972 1,134.8 674.3 415.8 258.5 460.5 394.3 446.6 176.3 30.8 20.6 55.1 163.8 -52.3 66.1
83 APPENDIX A
1973 1,155.7 645.7 377.5 268.1 510.1 439.0 508.2 207.9 32.3 19.9 52.4 195.7 -69.2 71.0 1974 1,169.3 640.4 370.1 270.3 528.6 446.6 528.0 219.6 35.1 23.2 57.3 192.8 -81.4 82.0 1975 1,314.5 674.0 368.8 305.3 640.5 560.0 621.5 230.1 43.2 24.8 68.2 255.3 -61.5 80.5 1976 1,372.5 705.0 355.9 349.0 667.7 581.1 641.2 247.1 50.2 29.1 74.4 240.4 -60.1 86.6 TQ 345.8 188.4 86.7 101.8 157.3 135.4 152.5 64.1 13.1 7.3 17.7 50.2 -17.1 21.9 1977 1,408.1 736.8 357.9 378.9 671.2 580.9 638.5 264.5 57.9 31.2 73.9 211.0 -57.6 90.3 1978 1,485.4 770.9 359.5 411.4 714.8 614.4 671.6 273.8 63.7 31.7 72.5 229.9 -57.2 100.4 1979 1,501.8 779.4 370.8 408.6 722.2 610.5 670.3 280.6 68.8 34.0 70.8 216.2 -59.8 111.7 1980 1,592.3 813.8 386.3 427.5 778.4 651.9 714.8 289.5 75.4 34.5 76.7 238.6 -62.9 126.6 1981 1,645.3 817.3 408.7 408.6 828.2 677.4 758.4 310.8 84.1 38.0 79.7 245.8 -81.0 150.8 1982 1,679.9 797.8 441.6 356.2 882.3 707.9 779.6 326.7 94.6 36.9 73.9 247.5 -71.8 174.4 1983 1,735.9 825.3 475.2 350.1 910.6 734.2 824.6 342.1 102.2 38.6 77.8 264.0 -90.4 176.5 1984 1,745.5 841.9 490.8 351.1 903.5 692.7 775.5 344.2 107.6 39.2 75.4 209.1 -82.8 210.8 1985 1,870.5 886.8 524.4 362.4 983.7 746.0 827.3 352.2 119.1 42.8 76.0 237.2 -81.3 237.7 1986 1,917.5 916.5 554.9 361.6 1,001.0 756.8 837.8 361.8 123.7 46.0 77.2 229.0 -81.1 244.2 1987 1,889.3 907.9 564.1 343.8 981.5 738.0 840.1 368.0 129.1 49.3 77.8 215.9 -102.0 243.4 1988 1,936.3 921.8 566.7 355.2 1,014.7 756.4 860.4 374.8 129.6 52.7 82.3 220.9 -103.9 258.3 1989 2,001.6 938.0 570.2 367.8 1,063.6 787.3 888.0 381.5 132.0 57.4 84.1 233.0 -100.8 276.3 1990 2,131.0 935.1 544.2 390.9 1,196.0 905.2 987.8 392.0 146.8 65.5 86.9 296.6 -82.6 290.8 1991 2,155.6 949.5 552.4 397.2 1,206.1 910.0 993.5 408.1 150.8 80.6 99.2 254.9 -83.6 296.1 1992 2,161.0 919.2 514.6 404.5 1,242.0 945.8 1,026.3 425.1 168.9 101.4 113.1 217.9 -80.6 296.2 1993 2,141.3 901.8 492.4 409.4 1,239.6 951.1 1,024.0 438.8 182.4 110.5 121.2 171.2 -72.9 288.5 1994 2,182.4 892.3 470.8 421.5 1,290.1 1,001.7 1,072.2 450.9 197.6 117.3 130.2 176.2 -70.5 288.3 1995 2,197.6 868.0 447.7 420.4 1,329.4 1,006.5 1,086.9 464.2 215.2 124.7 133.7 149.2 -80.4 322.9 1996 2,216.0 828.6 426.0 402.6 1,387.4 1,058.2 1,123.2 473.8 230.9 126.2 135.6 156.7 -64.9 329.2 1997 2,226.8 835.7 428.5 407.2 1,391.1 1,063.7 1,147.9 484.8 248.0 128.5 137.5 149.1 -84.2 327.4 1998 2,279.3 837.0 418.3 418.6 1,442.1 1,122.6 1,200.5 498.7 248.5 134.7 137.7 180.9 -77.9 319.5 84 APPENDIX A
1999 2,318.8 849.5 418.1 431.5 1,469.4 1,168.8 1,233.5 507.1 242.7 142.0 143.2 198.6 -64.8 300.6 2000 2,377.4 881.9 432.4 449.5 1,495.3 1,209.5 1,274.3 519.8 245.7 151.5 147.2 210.2 -64.8 285.8 2001 2,412.3 902.7 433.9 468.8 1,509.9 1,251.7 1,321.7 537.7 265.4 162.5 149.1 206.9 -70.0 258.2 2002 2,564.6 992.1 479.1 513.0 1,572.3 1,361.6 1,428.4 559.7 279.8 183.2 165.4 240.4 -66.8 210.7 2003 2,678.4 1,063.3 522.2 541.1 1,615.1 1,429.7 1,502.5 571.2 296.8 195.7 177.6 261.3 -72.7 185.3 2004 2,771.1 1,115.2 564.3 551.0 1,655.8 1,466.3 1,541.0 583.9 313.4 209.8 181.4 252.6 -74.7 189.5 2005 2,888.5 1,156.1 585.5 570.6 1,732.4 1,521.3 1,600.8 599.4 339.0 210.3 195.8 256.2 -79.5 211.1 2006 2,998.6 1,166.5 591.4 575.1 1,832.1 1,580.2 1,660.5 609.9 363.1 202.8 195.1 289.5 -80.3 251.9 2007 2,998.9 1,153.7 603.3 550.4 1,845.4 1,588.8 1,682.2 638.3 406.5 209.4 193.4 234.6 -93.3 256.6 2008 3,168.2 1,212.5 649.4 563.1 1,955.7 1,687.7 1,782.5 649.3 408.0 213.7 238.8 272.8 -94.8 268.0 2009 3,737.1 1,318.6 697.8 620.8 2,418.4 2,222.5 2,322.3 719.5 450.7 266.3 254.4 631.4 -99.8 195.9 2010 3,608.3 1,406.4 718.8 687.6 2,201.9 1,998.0 2,084.0 731.2 466.3 284.7 302.5 299.3 -86.0 203.9 2011 3,674.8 1,369.0 709.0 660.0 2,305.6 2,071.3 2,160.8 740.4 490.7 280.9 315.4 333.4 -89.5 234.3 2012 3,526.6 1,275.7 670.5 605.2 2,250.9 2,030.4 2,134.0 767.7 466.0 250.5 283.5 366.3 -103.5 220.4 2013 3,406.5 1,188.6 621.4 567.2 2,217.8 2,000.9 2,092.9 796.1 484.5 261.5 293.8 257.1 -92.0 216.9 2014 3,403.5 1,144.7 582.8 561.9 2,258.9 2,038.3 2,122.8 820.2 490.8 292.6 291.4 227.8 -84.4 220.6 2015 3,565.2 1,128.8 567.2 561.6 2,436.3 2,223.7 2,333.2 852.6 523.1 338.1 306.5 312.9 -109.5 212.6 2016 3,695.9 1,134.8 566.3 568.6 2,561.2 2,334.6 2,423.4 873.9 566.3 353.5 312.0 317.6 -88.9 226.6 2017 3,757.3 1,130.5 563.6 566.9 2,626.8 2,383.2 2,464.8 886.7 560.2 353.7 307.9 356.3 -81.6 243.5 2018 3,790.9 1,155.3 578.6 576.7 2,635.8 2,341.2 2,426.8 908.3 541.5 359.9 301.7 315.4 -85.6 294.6 2019 4,033.3 1,202.0 616.7 585.3 2,831.3 2,497.7 2,582.0 945.1 589.8 372.5 312.0 362.6 -84.3 333.6 2020 4,250.0 1,265.6 638.1 627.5 2,984.6 2,656.6 2,748.5 971.8 621.6 398.0 317.5 439.6 -92.0 328.0 esti- mate 2021 4,193.6 1,280.8 661.1 619.8 2,912.6 2,589.3 2,704.1 1,001.8 632.2 390.0 291.7 388.3 -114.8 323.3 esti- mate
85 APPENDIX A
2022 4,250.9 1,247.3 661.0 586.3 3,003.5 2,669.4 2,759.2 1,035.2 666.5 382.1 287.1 388.3 -89.8 334.1 esti- mate 2023 4,241.3 1,198.9 650.3 548.6 3,042.3 2,690.9 2,779.0 1,070.3 660.8 374.5 282.6 390.7 -88.1 351.4 esti- mate 2024 4,232.1 1,164.4 643.1 521.3 3,067.8 2,699.1 2,786.3 1,107.5 653.5 368.1 278.5 378.8 -87.2 368.7 esti- mate 2025 4,333.3 1,132.6 640.0 492.6 3,200.8 2,806.8 2,897.1 1,145.6 718.6 360.1 282.5 390.2 -90.3 394.1 esti- mate (1) See the Section Notes for Section 8 in the Historical Tables Introduction for a list of mandatory accounts classified as means-tested entitlements. (2) Including asset sales.
Note: “Table 8.2—Outlays by Budget Enforcement Act Category in Constant (FY 2012) Dollars: 1962–2025” Source: The White House (n.d.)
86 APPENDIX B
Appendix B
TOTAL GOVERNMENT SURPLUSES OR DEFICITS ( - ) IN ABSOLUTE AMOUNTS AND AS PERCENTAGES OF GDP: 1948 - 2019 In Billions of Current Dollars As Percentages of GDP Federal Government State Fiscal and State Total Total Total Year On- Off- Local and Government Total Government Federal Budget Budget (NIPA Local Basis) 1948 10.4 11.8 10.5 1.2 -1.4 4.0 4.5 -0.5 1949 -1.5 0.6 -0.7 1.3 -2.1 -0.5 0.2 -0.7 1950 -6.6 -3.1 -4.7 1.6 -3.5 -2.4 -1.1 -1.3 1951 3.2 6.1 4.3 1.8 -2.9 1.0 1.9 -0.9 1952 -4.6 -1.5 -3.4 1.9 -3.1 -1.3 -0.4 -0.9 1953 -9.0 -6.5 -8.3 1.8 -2.5 -2.3 -1.7 -0.6 1954 -4.7 -1.2 -2.8 1.7 -3.6 -1.2 -0.3 -0.9 1955 -8.0 -3.0 -4.1 1.1 -5.0 -2.0 -0.7 -1.2 1956 -1.0 3.9 2.5 1.5 -5.0 -0.2 0.9 -1.1 1957 -2.1 3.4 2.6 0.8 -5.5 -0.5 0.7 -1.2 1958 -10.8 -2.8 -3.3 0.5 -8.1 -2.3 -0.6 -1.7 1959 -21.4 -12.8 -12.1 -0.7 -8.5 -4.2 -2.5 -1.7 1960 -7.2 0.3 0.5 -0.2 -7.5 -1.3 0.1 -1.4 1961 -11.5 -3.3 -3.8 0.4 -8.1 -2.1 -0.6 -1.5 1962 -15.6 -7.1 -5.9 -1.3 -8.5 -2.7 -1.2 -1.5 1963 -13.8 -4.8 -4.0 -0.8 -9.0 -2.2 -0.8 -1.5 1964 -15.4 -5.9 -6.5 0.6 -9.5 -2.3 -0.9 -1.4 1965 -11.7 -1.4 -1.6 0.2 -10.3 -1.7 -0.2 -1.5 1966 -15.8 -3.7 -3.1 -0.6 -12.1 -2.0 -0.5 -1.5 1967 -22.3 -8.6 -12.6 4.0 -13.6 -2.7 -1.0 -1.6 1968 -40.3 -25.2 -27.7 2.6 -15.1 -4.5 -2.8 -1.7 1969 -14.0 3.2 -0.5 3.7 -17.3 -1.4 0.3 -1.8 1970 -17.8 -2.8 -8.7 5.9 -15.0 -1.7 -0.3 -1.4 1971 -42.8 -23.0 -26.1 3.0 -19.7 -3.8 -2.1 -1.8 1972 -40.1 -23.4 -26.1 2.7 -16.7 -3.3 -1.9 -1.4 1973 -26.6 -14.9 -15.2 0.3 -11.7 -2.0 -1.1 -0.9 1974 -25.5 -6.1 -7.2 1.1 -19.3 -1.7 -0.4 -1.3 1975 -82.8 -53.2 -54.1 0.9 -29.6 -5.2 -3.3 -1.8
87 APPENDIX B
1976 -107.2 -73.7 -69.4 -4.3 -33.4 -6.0 -4.1 -1.9 TQ -20.5 -14.7 -14.1 -0.7 -5.7 -4.3 -3.1 -1.2 1977 -74.6 -53.7 -49.9 -3.7 -21.0 -3.7 -2.7 -1.0 1978 -77.6 -59.2 -55.4 -3.8 -18.4 -3.4 -2.6 -0.8 1979 -67.9 -40.7 -39.6 -1.1 -27.2 -2.6 -1.6 -1.1 1980 -111.4 -73.8 -73.1 -0.7 -37.6 -4.0 -2.6 -1.3 1981 -116.1 -79.0 -73.9 -5.1 -37.1 -3.7 -2.5 -1.2 1982 -174.3 -128.0 -120.6 -7.4 -46.3 -5.3 -3.9 -1.4 1983 -257.7 -207.8 -207.7 -0.1 -49.9 -7.3 -5.9 -1.4 1984 -218.8 -185.4 -185.3 -0.1 -33.4 -5.5 -4.7 -0.8 1985 -252.4 -212.3 -221.5 9.2 -40.1 -5.9 -5.0 -0.9 1986 -269.9 -221.2 -237.9 16.7 -48.6 -6.0 -4.9 -1.1 1987 -208.6 -149.7 -168.4 18.6 -58.9 -4.4 -3.1 -1.2 1988 -222.0 -155.2 -192.3 37.1 -66.8 -4.3 -3.0 -1.3 1989 -222.1 -152.6 -205.4 52.8 -69.4 -4.0 -2.7 -1.3 1990 -319.1 -221.0 -277.6 56.6 -98.1 -5.4 -3.7 -1.7 1991 -392.1 -269.2 -321.4 52.2 -122.9 -6.4 -4.4 -2.0 1992 -428.0 -290.3 -340.4 50.1 -137.7 -6.7 -4.5 -2.1 1993 -392.8 -255.1 -300.4 45.3 -137.8 -5.8 -3.8 -2.0 1994 -334.8 -203.2 -258.8 55.7 -131.6 -4.7 -2.8 -1.8 1995 -308.1 -164.0 -226.4 62.4 -144.1 -4.1 -2.2 -1.9 1996 -239.1 -107.4 -174.0 66.6 -131.6 -3.0 -1.4 -1.7 1997 -150.6 -21.9 -103.2 81.4 -128.7 -1.8 -0.3 -1.5 1998 -53.6 69.3 -29.9 99.2 -122.8 -0.6 0.8 -1.4 1999 -12.7 125.6 1.9 123.7 -138.3 -0.1 1.3 -1.5 2000 85.0 236.2 86.4 149.8 -151.2 0.8 2.3 -1.5 2001 -89.6 128.2 -32.4 160.7 -217.8 -0.9 1.2 -2.1 2002 -465.2 -157.8 -317.4 159.7 -307.4 -4.3 -1.5 -2.8 2003 -709.7 -377.6 -538.4 160.8 -332.1 -6.3 -3.3 -2.9 2004 -704.9 -412.7 -568.0 155.2 -292.1 -5.9 -3.4 -2.4 2005 -568.8 -318.3 -493.6 175.3 -250.5 -4.4 -2.5 -2.0 2006 -477.4 -248.2 -434.5 186.3 -229.2 -3.5 -1.8 -1.7 2007 -435.4 -160.7 -342.2 181.5 -274.7 -3.0 -1.1 -1.9 2008 -811.5 -458.6 -641.8 183.3 -353.0 -5.5 -3.1 -2.4 2009 -1,901.4 -1,412.7 -1,549.7 137.0 -488.8 -13.2 -9.8 -3.4 2010 -1,762.6 -1,294.4 -1,371.4 77.0 -468.2 -11.9 -8.7 -3.2 2011 -1,706.6 -1,299.6 -1,366.8 67.2 -407.0 -11.1 -8.4 -2.6 2012 -1,472.0 -1,076.6 -1,138.5 61.9 -395.4 -9.2 -6.7 -2.5 2013 -1,042.8 -679.8 -719.2 39.5 -363.1 -6.3 -4.1 -2.2
88 APPENDIX B
2014 -827.6 -484.8 -514.3 29.5 -342.8 -4.8 -2.8 -2.0 2015 -784.8 -442.0 -469.3 27.3 -342.8 -4.3 -2.4 -1.9 2016 -937.9 -584.7 -620.2 35.5 -353.3 -5.1 -3.2 -1.9 2017 -1,042.9 -665.4 -714.9 49.4 -377.5 -5.4 -3.5 -2.0 2018 -1,130.3 -779.1 -785.3 6.2 -351.2 -5.6 -3.8 -1.7 2019 -1,340.4 -984.2 -991.8 7.7 -356.3 -6.3 -4.6 -1.7
Note: “Table 14.6—Total Government Surpluses or Deficits (-) in Absolute Amounts and as Percent- ages of GDP: 1948–2019” Source: The White House (n.d.)
89
APPENDIX C
Appendix C
SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES OR DEFICITS ( - ) AS PERCENTAGES OF GDP: 1930 - 2025 Total On-Budget Off-Budget GDP (in Surplus Surplus Surplus Year billions of Re- Out- Re- Out- Re- Out- or Defi- or Defi- or Deficit dollars) ceipts lays ceipts lays ceipts lays cit (-) cit (-) (-) 1930 98.4 4.1 3.4 0.8 4.1 3.4 0.8 ...... 1931 84.8 3.7 4.2 -0.5 3.7 4.2 -0.5 ...... 1932 68.5 2.8 6.8 -4.0 2.8 6.8 -4.0 ...... 1933 58.3 3.4 7.9 -4.5 3.4 7.9 -4.5 ...... 1934 62.0 4.8 10.6 -5.8 4.8 10.6 -5.8 ...... 1935 70.5 5.1 9.1 -4.0 5.1 9.1 -4.0 ...... 1936 79.6 4.9 10.3 -5.4 4.9 10.3 -5.4 ...... 1937 88.9 6.1 8.5 -2.5 5.8 8.5 -2.8 0.3 -* 0.3 1938 90.2 7.5 7.6 -0.1 7.1 7.6 -0.5 0.4 -* 0.4 1939 90.4 7.0 10.1 -3.1 6.4 10.1 -3.7 0.6 -* 0.6 1940 98.2 6.7 9.6 -3.0 6.1 9.7 -3.5 0.6 -* 0.6 1941 116.2 7.5 11.7 -4.3 6.9 11.7 -4.8 0.6 * 0.6 1942 147.7 9.9 23.8 -13.9 9.3 23.7 -14.4 0.6 * 0.6 1943 184.6 13.0 42.6 -29.6 12.4 42.5 -30.1 0.6 * 0.6 1944 213.8 20.5 42.7 -22.2 19.9 42.7 -22.8 0.6 0.1 0.6 1945 226.4 19.9 41.0 -21.0 19.4 40.9 -21.5 0.6 0.1 0.5 1946 228.0 17.2 24.2 -7.0 16.7 24.1 -7.4 0.5 0.1 0.5 1947 238.9 16.1 14.4 1.7 15.5 14.3 1.2 0.6 0.1 0.5 1948 261.9 15.9 11.4 4.5 15.3 11.2 4.0 0.6 0.1 0.5 1949 276.5 14.3 14.0 0.2 13.6 13.9 -0.2 0.6 0.2 0.5 1950 278.7 14.2 15.3 -1.1 13.4 15.1 -1.7 0.8 0.2 0.6 1951 327.0 15.8 13.9 1.9 14.8 13.5 1.3 1.0 0.4 0.6 1952 357.1 18.5 19.0 -0.4 17.5 18.5 -0.9 1.0 0.5 0.5 1953 382.0 18.2 19.9 -1.7 17.1 19.3 -2.2 1.1 0.6 0.5 1954 387.2 18.0 18.3 -0.3 16.8 17.5 -0.7 1.2 0.8 0.4 1955 406.3 16.1 16.8 -0.7 14.9 15.9 -1.0 1.3 1.0 0.3 1956 438.2 17.0 16.1 0.9 15.6 15.0 0.6 1.5 1.1 0.3 1957 463.4 17.3 16.5 0.7 15.8 15.2 0.6 1.5 1.3 0.2
91 APPENDIX C
1958 473.5 16.8 17.4 -0.6 15.1 15.8 -0.7 1.7 1.6 0.1 1959 504.6 15.7 18.3 -2.5 14.1 16.5 -2.4 1.6 1.8 -0.1 1960 534.3 17.3 17.3 0.1 15.3 15.2 0.1 2.0 2.0 -* 1961 546.6 17.3 17.9 -0.6 15.1 15.7 -0.7 2.2 2.1 0.1 1962 585.7 17.0 18.2 -1.2 14.9 15.9 -1.0 2.1 2.3 -0.2 1963 618.2 17.2 18.0 -0.8 14.9 15.6 -0.6 2.3 2.4 -0.1 1964 661.7 17.0 17.9 -0.9 14.5 15.5 -1.0 2.5 2.4 0.1 1965 709.3 16.5 16.7 -0.2 14.1 14.3 -0.2 2.4 2.3 * 1966 780.5 16.8 17.2 -0.5 14.3 14.7 -0.4 2.4 2.5 -0.1 1967 836.5 17.8 18.8 -1.0 14.9 16.4 -1.5 2.9 2.4 0.5 1968 897.6 17.0 19.8 -2.8 14.3 17.4 -3.1 2.8 2.5 0.3 1969 980.3 19.1 18.7 0.3 16.1 16.2 -0.1 3.0 2.6 0.4 1970 1,046.7 18.4 18.7 -0.3 15.2 16.1 -0.8 3.2 2.6 0.6 1971 1,116.6 16.8 18.8 -2.1 13.6 15.9 -2.3 3.2 2.9 0.3 1972 1,216.2 17.0 19.0 -1.9 13.8 15.9 -2.1 3.3 3.1 0.2 1973 1,352.7 17.1 18.2 -1.1 13.7 14.8 -1.1 3.4 3.4 * 1974 1,482.8 17.8 18.2 -0.4 14.1 14.6 -0.5 3.6 3.6 0.1 1975 1,606.9 17.4 20.7 -3.3 13.5 16.9 -3.4 3.9 3.8 0.1 1976 1,786.1 16.7 20.8 -4.1 13.0 16.9 -3.9 3.7 4.0 -0.2 TQ 471.6 17.2 20.3 -3.1 13.4 16.4 -3.0 3.8 4.0 -0.1 1977 2,024.3 17.6 20.2 -2.7 13.8 16.2 -2.5 3.8 4.0 -0.2 1978 2,273.4 17.6 20.2 -2.6 13.8 16.3 -2.4 3.8 3.9 -0.2 1979 2,565.6 18.1 19.6 -1.6 14.2 15.8 -1.5 3.8 3.9 -* 1980 2,791.9 18.5 21.2 -2.6 14.5 17.1 -2.6 4.1 4.1 -* 1981 3,133.2 19.1 21.6 -2.5 15.0 17.3 -2.4 4.2 4.3 -0.2 1982 3,313.4 18.6 22.5 -3.9 14.3 18.0 -3.6 4.3 4.6 -0.2 1983 3,536.0 17.0 22.9 -5.9 12.8 18.7 -5.9 4.2 4.2 -* 1984 3,949.2 16.9 21.6 -4.7 12.7 17.4 -4.7 4.2 4.2 -* 1985 4,265.1 17.2 22.2 -5.0 12.8 18.0 -5.2 4.4 4.1 0.2 1986 4,526.2 17.0 21.9 -4.9 12.6 17.8 -5.3 4.4 4.1 0.4 1987 4,767.6 17.9 21.1 -3.1 13.4 17.0 -3.5 4.5 4.1 0.4 1988 5,138.6 17.7 20.7 -3.0 13.0 16.7 -3.7 4.7 4.0 0.7 1989 5,554.7 17.8 20.6 -2.7 13.1 16.8 -3.7 4.7 3.8 0.9 1990 5,898.8 17.5 21.2 -3.7 12.7 17.4 -4.7 4.8 3.8 1.0 1991 6,093.2 17.3 21.7 -4.4 12.5 17.8 -5.3 4.8 4.0 0.9 1992 6,416.2 17.0 21.5 -4.5 12.3 17.6 -5.3 4.7 3.9 0.8 1993 6,775.3 17.0 20.8 -3.8 12.4 16.9 -4.4 4.6 3.9 0.7 1994 7,176.8 17.5 20.4 -2.8 12.9 16.5 -3.6 4.7 3.9 0.8 1995 7,560.4 17.9 20.0 -2.2 13.2 16.2 -3.0 4.6 3.8 0.8
92 APPENDIX C
1996 7,951.3 18.3 19.6 -1.4 13.7 15.8 -2.2 4.6 3.8 0.8 1997 8,451.0 18.7 18.9 -0.3 14.0 15.3 -1.2 4.6 3.7 1.0 1998 8,930.8 19.3 18.5 0.8 14.6 15.0 -0.3 4.7 3.5 1.1 1999 9,479.4 19.3 18.0 1.3 14.6 14.6 * 4.7 3.4 1.3 2000 10,117.4 20.0 17.7 2.3 15.3 14.4 0.9 4.8 3.3 1.5 2001 10,526.5 18.9 17.7 1.2 14.1 14.4 -0.3 4.8 3.3 1.5 2002 10,833.6 17.1 18.6 -1.5 12.3 15.3 -2.9 4.8 3.3 1.5 2003 11,283.8 15.8 19.1 -3.3 11.2 15.9 -4.8 4.6 3.2 1.4 2004 12,025.4 15.6 19.1 -3.4 11.2 15.9 -4.7 4.4 3.2 1.3 2005 12,834.2 16.8 19.3 -2.5 12.3 16.1 -3.8 4.5 3.1 1.4 2006 13,638.4 17.6 19.5 -1.8 13.2 16.4 -3.2 4.5 3.1 1.4 2007 14,290.8 18.0 19.1 -1.1 13.5 15.9 -2.4 4.4 3.2 1.3 2008 14,743.3 17.1 20.2 -3.1 12.7 17.0 -4.4 4.5 3.2 1.2 2009 14,431.8 14.6 24.4 -9.8 10.1 20.8 -10.7 4.5 3.6 0.9 2010 14,838.8 14.6 23.3 -8.7 10.3 19.6 -9.2 4.3 3.7 0.5 2011 15,403.7 15.0 23.4 -8.4 11.3 20.2 -8.9 3.7 3.2 0.4 2012 16,056.4 15.3 22.0 -6.7 11.7 18.8 -7.1 3.5 3.2 0.4 2013 16,603.8 16.7 20.8 -4.1 12.7 17.0 -4.3 4.1 3.8 0.2 2014 17,335.6 17.4 20.2 -2.8 13.2 16.2 -3.0 4.2 4.1 0.2 2015 18,099.6 18.0 20.4 -2.4 13.7 16.3 -2.6 4.3 4.1 0.2 2016 18,554.8 17.6 20.8 -3.2 13.2 16.6 -3.3 4.4 4.2 0.2 2017 19,287.6 17.2 20.6 -3.5 12.8 16.5 -3.7 4.4 4.2 0.3 2018 20,335.5 16.4 20.2 -3.8 12.2 16.0 -3.9 4.2 4.2 * 2019 21,215.7 16.3 21.0 -4.6 12.0 16.7 -4.7 4.3 4.3 * 2020 esti- 22,210.9 16.7 21.6 -4.9 12.3 17.2 -4.9 4.4 4.3 * mate 2021 esti- 23,353.1 16.5 20.7 -4.1 12.2 16.3 -4.1 4.3 4.4 -* mate 2022 esti- 24,542.7 16.6 20.4 -3.7 12.3 16.0 -3.7 4.3 4.4 -0.1 mate 2023 esti- 25,790.7 16.9 19.8 -2.9 12.6 15.3 -2.7 4.3 4.5 -0.1 mate 2024 esti- 27,104.1 17.2 19.2 -2.0 12.8 14.7 -1.8 4.3 4.5 -0.2 mate 2025 esti- 28,472.7 17.3 19.1 -1.8 13.0 14.6 -1.6 4.3 4.6 -0.2 mate * 0.05 percent or less. Note: “Table 1.2 - SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES OR DEFICITS ( - ) AS PERCENTAGES OF GDP: 1930 - 2025” Source: The White House (n.d.)
93 LIST OF FIGURES
List of Figures
Figure 1. Tax functions from the Russian economists’ perspective ...... 14 Figure 2. Poverty rate (relative threshold) in Selected OECD Countries, 2017 ...... 26 Figure 3. Child Poverty rate among Selected Countries. Poverty data sourced from 2016, 2017, 2018...... 27 Figure 4. Net Pension Replacement Rate among Selected Countries in 2018 ...... 28 Figure 5. Gini coefficient of household disposable income and gap between richest and poorest 10%, in 2014 (or nearest year) ...... 29 Figure 6. Average GDP growth rate, 2014 – 2019 in Selected OECD Countries ...... 30 Figure 7. Federal Receipts in billions of constant (Financial Year 2012) U.S. dollars, 1981- 1988, 1993-2000, 2017-2019 ...... 45 Figure 8. Federal Receipts as a percentage of Gross Domestic Product, 1981-1988, 1993-2000, 2017-2019 ...... 46 Figure 9. Composition of the Federal Receipts as a percentage of total, 1981-2019 ...... 47 Figure 10. Government Spending by categories during Reagan's presidency in billions of constant (Financial Year 2012) U.S. dollars and as a percentage of total, 1981-1988 ...... 49 Figure 11. Composition of Federal Mandatory Spending at the end of each presidency as a percentage of total, 1988, 2000, 2019...... 50 Figure 12. Composition of Federal Discretionary Spending at the end of each presidency as a percentage of total, 1988, 2000, 2019...... 51 Figure 13. Government Spending by categories during Clinton's presidency in billions of constant (Financial Year 2012) U.S. dollars and as a percentage of total, 1993-2000 ...... 52 Figure 14. Government Spending by categories during Trump's presidency in billions of constant (Financial Year 2012) U.S. dollars and as a percentage of total, 2017-2019* ...... 54 Figure 15. Federal Receipts and Federal Spending as a percentage of Gross Domestic Product, 1981-2019 ...... 55 Figure 16. Average Effective Federal Tax Rates by Income Group ...... 57 Figure 17. Average Effective Federal Tax Rates by Type of Tax, at the beginning and the end of Reagan’s Presidency, by income percentiles, 1981, 1988 ...... 58 Figure 18. Average Effective Federal Tax Rates by Type of Tax, at the beginning and the end of Clinton’s Presidency, by income percentiles, 1993, 2000 ...... 63 Figure 19. Average Effective Federal Tax Rates by Type of Tax, at the beginning and the end of Trump’s Presidency, by income percentiles, 2017, 2019 ...... 68
94 LIST OF TABLES
List of Tables
Table 1. Composition and structure of the US tax system ...... 21 Table 2. The three basic types of taxes in the United States ...... 23 Table 3. Economic indicators used for the analysis of reforms ...... 41 Table 4. Income Tax Brackets and Rates for Single Taxpayers, in current U.S. dollars, 1981- 1982 ...... 59 Table 5. Standard Deduction and Personal Exemption for Single Taxpayers, in current U.S. dollars, 1981-1982 ...... 60 Table 6. Effect of Individual Income Tax Cut on Single Taxpayers from Each Fifth and Top 5 Percent of All Households, in current U.S. dollars, 1981-1982 ...... 61 Table 7. Income Tax Brackets and Rates for Single Taxpayers, in current U.S. dollars, 1992, 1993 ...... 64 Table 8. Standard Deduction and Personal Exemption for Single Taxpayers, in current U.S. dollars 1992-1993 ...... 64 Table 9. Phaseout Limits for Personal Exemptions for Single Taxpayers, in current U.S. dollars, 1992-1993 ...... 65 Table 10. Effect of Individual Income Tax Cut on Single Taxpayers from Each Fifth and Top 5 Percent of All Households in current U.S. dollars, 1992-1993 ...... 66 Table 11. Income Tax Brackets and Rates for Single Taxpayers, in current U.S. dollars, 2017, 2018 ...... 69 Table 12. Standard Deduction and Personal Exemption for Single Taxpayers, in current U.S. dollars, 2017-2018 ...... 69 Table 13. Phaseout Limits for Personal Exemptions for Single Taxpayers, in current U.S. dollars, 2017 ...... 70 Table 14. Effect of Individual Income Tax Cut on Single Taxpayers from Each Fifth and Top 5 Percent of All Households, in current U.S. dollars, 2017-2018 ...... 71
95