Reagan’s Proposals:
Tax Cut or Tax Shift?

Jun 30, 1981

In the last several years, there has been a growing mood of opposition to taxes in the

population. In both the middle class layers and in the working class, there is a feeling that the government takes too much. In a few states and localities, there have even been successful referendums to cut back or restrict taxes. And, in most places, new tax proposals are being regularly voted down.

Undoubtedly, Reagan is hoping to play on this feeling in the way that he makes his proposals on taxes. He tries to put himself forward as the champion of the whole population, offering an across-the-board tax cut for everyone and promising at the same time to stimulate investment, revitalize the economy, and provide jobs.

When 10% Is Not 10%

In fact, the cut in the individual income taxes is the least important part of Reagan’s proposals. But it is the part which has gained the most attention, precisely because it seems to be designed to hand taxes back to everyone. Supposedly, according to Reagan, rich and poor will share equally in this wonderful bonanza. In fact, he can make such a claim only because he is using percentages to obscure the reality of who will get how much. For example, a 10 per cent cut for a person who pays $50, 000 a year in taxes comes out to $5, 000, while the same 10 per cent cut for someone who would pay $5, 000 a year in taxes would be only $500.

Reagan’s across-the-board cut, in reality, turns out to be a tax shift. Even the U.S. Treasury admits that this will be the result of Reagan’s proposals. According to the Treasury, the current rates of taxation mean that the wealthiest section of the population, that is, those with yearly incomes over $200,000 a year, pay almost 9 per cent of the total federal tax bill. If Reagan’s proposal is enacted, the Treasury estimates that they will be paying only 7 per cent of the total income tax bill. This does not take into account that, under Reagan’s proposals, their corporations will also be paying a significantly smaller portion of the overall tax bill.

If Reagan had really been concerned with lowering the income tax fairly, he would have looked to change the tax system so that it would not be quite so regressive; he would have proposed to increase drastically the personal exemptions. A proposal, for example, to make the personal exemption on the order of $6, 000 would have resulted in working people going back into the lowest tax brackets, where they were before inflation had pushed them up into the much higher tax brackets. But, of course, Reagan did not do this; he had other things in mind.

The major part of Reagan’s program, in fact, is designed to give big tax relief to the corporations. According to U.S. Treasury estimates, the corporations would pay 122 billion dollars less in total taxes in the 6 years between 1981 and 1986 if Reagan’s proposal on capital investment depreciation is enacted. By 1990, the savings for the corporations would be over 100 billion dollars per year. Of course, all these figures are estimates, which could change widely, depending on the economic situation, and they are also figures prepared in a self-serving way by a Treasury intent on proving that Reagan’s supply-side economics will generate more income while cutting back on taxes. Nonetheless, these estimates give some magnitude of the cut, when we compare them to the fact that in 1979 and 1980 both, the corporations paid something on the order of only 70 billion dollars a year.

In other words, under the guise of preparing tax relief for everyone, Reagan is preparing to shift the tax burden in a still more regressive way against the working class and other poor layers of the population.

Another Gift for the Wealthy

Although the Democrats have raised a big debate about Reagan’s proposals, in fact they

have little difference with Reagan. Oh yes, they have debated over whether the cut should be for 2 or for 3 years. They argue that a 3 year tax cut will tend to make the cuts in the social programs permanent; in fact the cuts in the social programs were not made because of the tax cut so much as because of the increase in military spending, which the Democrats voted for. Certainly, at the beginning, some Democrats vaguely proposed that maybe the tax cut should be weighted to favor the working class. (Of course, what the Democrats mean by working class can be judged by the fact that they proposed to give more of a cut to those people who earn between $20, 000 and

$50, 000 a year!) Soon enough, however, they even gave up on this difference. Now the main bone of contention between them and Reagan seems to be over the issue of 2 or 3 years.

They never disagreed – from the beginning – with the proposal to cut taxes in such an important way for the corporations. They have accepted the main lines of Reagan’s across-the-board cut – which in fact is tax shift.

And, on their own, they even added a few goodies for the wealthy: they proposed to raise the exemptions on estates from $175, 000 to $600, 000 and to lower the effective tax rate; they even want to index this exemption closely to the inflation. They also are proposing to increase the exemption on gift taxes from $3, 000 a year up to $10, 000, with no limit set on how many different individuals may be given to. Finally, they have introduced a specific little benefit for the oil companies – everyone knows how strapped they are – from now on, the oil companies won’t have to pay such high taxes on what is called their “windfall” profits.

So, these are the differences we see between Reagan’s proposals to aid the wealthy and those of the Democrats: they seem to be in a race to see who can offer the most. On one basic thing, they are solidly agreed: that is, that the tax cut, no matter how its details are finally resolved, in fact, will shift more of the burden of taxation away from the wealthy and onto the working class and the poor layers of the population.

The working class has nothing to hope for from either of these parties. Reagan and Tip O’Neill may debate over who knows more about the conditions of life of the working layers of the population, they may argue acrimoniously over who was closer in his origins to the working class, but it’s obvious which class they serve. The working class can not put its hope in tax cuts proposed by people such as this, politicians who serve the bourgeoisie.