Reagan Didn't Invent Low Tax For The Rich All By Himself
We finished the last post by noting that it wasn’t Trump or even Reagan who screw the American public by allowing the billionaire class to get away without paying their fair share of taxes. FDR had a great idea in 1942— a 100% tax on all income over $25,000 for the duration of the war. Adjusted for inflation, $25,000 then would be the equivalent of $441,176. Still 100% sounds a little extreme and I’ve always thought 95% was fairer. Congress boosted the top marginal rate that year to 88% and then raised it to 94% in 1944. Once the war was over, the top marginal rate came down to 91% under Truman and Eisenhower, the greatest building of a middle class in the history on the world.
The very rich were not happy and started pressuring politicians to get off their backs. JFK, from an historically wealthy family, got the ball rolling. He was not well-liked before he was assassinated in part because he advocated for cutting the top marginal tax rate from the 91% down to 65%. He argued, dishonestly, that high taxes stifled economic growth by discouraging investment and incentivizing tax shelters. Although he was assassinated before these cuts could be implemented, his administration laid the groundwork and LBJ cut the top marginal rate to 70%, not as draconian as what JFK wanted, but still disgusting. It represented a significant ideological change: Kennedy and Johnson, supposed progressives embracing supply-side ideas that would later totally define conservative economic policy.
Nixon kept the party going for the wealthy, primarily through deregulation but after his, Ford’s and Carter’s recession and inflation, the rich were mostly given tremendous loopholes to get out of paying their fair share, like deductions for business expenses, investment losses and capital gains treatment, often investing in sectors like real estate and oil to claim large deductions. Tax shelters became a popular way to avoid income tax. By investing in limited partnerships or “tax shelter” investments, individuals could claim paper losses to offset taxable income. Capital gains were taxed at lower rates than regular income. This lower rate encouraged wealthy taxpayers to convert regular income into capital gains through complex financial arrangements, effectively reducing their tax burden. The very rich started using offshore accounts in tax havens to shield income from U.S. taxes, a strategy that gained traction in the 1970s. At that time, charitable contributions became deductible, and the super rich used foundations and charitable trusts to gain substantial deductions while retaining control over large sums of money. The Trump family wasn’t the only one making a fortune from fake charitable trusts. During the Nixon, Ford, and Carter years, the 70% top rate was symbolic but largely ineffective at increasing tax revenues from the very wealthy.
Carter was also widely disliked during his one term, in part because he was a bridge between traditional liberal economics and the rise of neoliberal policies. He pushed the deregulation of key industries like airlines, trucking and railroads, which served to weaken protections against corporate consolidation. His deregulation policies laid the groundwork for a more laissez-faire economic approach. And then along came Reagan.
By the time he took office, the ideological shift toward tax cuts, deregulation, and smaller government was in full swing. What Kennedy started as a growth incentive in the early 1960s morphed into a sweeping, drastic reduction of top tax rates and broad deregulation under Reagan. He reduced the top marginal rate from 70% to 50% in 1981 and then to 28% by 1986, marking a massive shift in tax policy. This cut created incentives for wealth accumulation and investment at the top, spurring hideous income inequality that we still see the effects of today.
The early tax cuts, starting with Kennedy, weren’t designed to spark the wealth gap that emerged by the end of the century, but they paved the way for Reagan-era policies that fundamentally changed the distribution of wealth and economic power. The ideological shift started with JFK’s argument that tax cuts could spur growth and was then amplified by Johnson’s decision to push forward with them during a period of high demand for federal revenue (due to the Great Society and the Vietnam War). Each administration thereafter continued a version of this policy, resulting in a steady erosion of the progressive tax structure that had been in place since the New Deal.
In 1993, Clinton raised the top marginal tax rate from Reagan’s final year 31% to a still historically minuscule 39.6%. Just in case anyone got the wrong idea that he was progressive, he later lowered the capital gains tax from 28% to 20%, a concession to conservatives that benefited wealthier taxpayers.
The Bush tax cuts (2001 and 2003) enacted substantial cuts, lowering the top marginal rate from 39.6% to 35% and reducing taxes on dividends and capital gains to 15%, cuts that were heavenly for the very rich (like the Bush family). His tax cut mania phased out the estate tax, which had been a major source of revenue from. Although this was intended to be temporary, it set the stage for ongoing cuts.
Obama negotiated to raise the top marginal rate back to 39.6% in 2013 for individuals earning over $400,000 ($450,000 for married couples), partially reversing Bush’s cuts. He introduced two additional taxes that affected high earners to help fund the ACA— a 3.8% tax on investment income and a 0.9% Medicare surtax on high wages. So now you know why Republicans have fought so hard to end Obamacare. Although he raised the tax rate on capital gains and dividends for high earners to an incredibly small 20%, this was still far lower than the income tax rate, a continuation of the trend that benefited wealthy investors. And then came the wrecking ball.
Trump’s major tax legislation (2017) lowered the top individual rate from 39.6% to 37% and significantly cut the corporate tax rate from 35% to 21%, a historic low that benefited corporations and the wealthy. His tax cuts doubled the estate tax exemption (up to $11.7 million per individual in 2021) and further restricted the Alternative Minimum Tax (AMT), which was designed to ensure high earners pay a minimum amount.
Biden campaigned on raising the top income tax rate back to 39.6% for incomes over $400,000 and raising the corporate tax rate from 21% to 28%. He also proposed taxing capital gains at ordinary income rates for incomes over $1 million. Conservatives prevented any of that from happening. As part of the 2021 American Rescue Plan, he enacted an expanded Child Tax Credit and Earned Income Tax Credit, which provided tax relief for lower- and middle-income families, though these were temporary. The following year the Inflation Reduction Act introduced a 15% minimum corporate tax on large corporations and a 1% tax on stock buybacks, though these rates are piddling and don’t directly impact personal wealth of high earners significantly. He’s expressed support for a wealth tax on billionaires, including a “Billionaire Minimum Income Tax” that would apply to households worth over $100 million, but conservatives in Congress have laughed that off.
What’s really happened since Clinton’s administration, is that progressive tax policy has been slowly eroded, with each administration up to Biden rolling back some elements of New Deal-style progressive taxation. Though Biden has attempted to increase taxes on the wealthy, these efforts have been limited in scope and largely sidetracked in Congress, meaning that the wealthiest Americans continue to benefit from a tax code with low capital gains rates, high estate tax exemptions, and relatively low top income tax rates compared to the mid-20th century.
Recently, Erica Payne of Patriotic Millionaires wrote that our tax code “is purposely designed to benefit the ultra-rich by valuing wealth over work. That is to say, the tax code gives better rates to people who already have money at the expense of those who work for it. The wealthiest 400 billionaire families in the U.S. pay an average individual tax rate of 8.2%, while the average working taxpayer pays 13%. It gets even worse: the 25 wealthiest U.S. taxpayers paid a “true tax rate” of 3.4% on $401 billion of income. This isn’t just unfair. It’s dangerous. Extreme inequality fosters social chaos and enables oligarchs to wield their money to control institutions and individuals. The result? A rigged tax code.”
She wrote further that "Authoritarian candidates are on the march across the world. In the United States, wealthy oligarchs like Peter Thiel, Elon Musk, and the Mellon family are spending billions of dollars to elect candidates who peddle lies about Trump winning the 2020 election, push for voter suppression laws, and want to take away critical civil rights protections for marginalized groups. Right-wing extremists are gaining ground in legislatures across Europe. The only way to fight back against the meddling of the ultra-wealthy is to prevent them from accumulating so much wealth to begin with. Our allies at Americans for Tax Fairness and Color Of Change are pushing for a series of crucial reforms that could transform our tax system and promote economic equity:
Equalize the tax rates for investment income and work income, eliminating the discount that allows wealthy investors to pay a far lower top tax rate on their income than workers do on theirs.
More accurately tax the income generated by wealth by assessing capital gains income taxes on the wealthiest households annually, instead of only after an investment is sold.
Allow the current pass-through income deduction that primarily benefits hedge funds and other big businesses to expire, freeing up revenue to support small business owners and entrepreneurs in underserved communities.
Implement a Billionaire Minimum Income Tax to ensure the ultra-wealthy pay taxes on their wealth gains each year, not just when they feel like it.
Great piece. Historical explanation is powerful. Bernie would’ve been better.