A Final Report Card on the Reagan Years?

Our current economic meltdown may finally have ended the era that began when Ronald Reagan became President. Now a new study — from the Congressional Budget Office — helps us understand the inequality that has us melting.

Two days before Christmas, with hardly anyone at all paying much attention, the nonpartisan Congressional Budget Office delivered up a final report card on the Reagan era. The highest grades? They went, almost exclusively, to the super rich.

You won't, to be sure, find any As, Bs, and Fs in this new Congressional Budget Office report card [1]. And the CBO's researchers certainly didn't set out to grade America on the years since Ronald Reagan became President a generation ago. But they've done just that. On taxes and income distribution, their new report makes vividly clear, the United States desperately "needs improvement."

[1]That may or may not be the message Senate Finance Committee chair Max Baucus from Montana had in mind, last year, when he asked the Congressional Budget Office to dig a little deeper into the data on taxes and income than the CBO had dug in a report [2] released late in 2007.

The CBO's December 2007 study, Historical Effective Tax Rates, 1979 to 2005, had looked at the federal taxes Americans at different income levels have been paying since the year before Ronald Reagan's election. But the report had a hole. Nothing in it indicated how the really rich have fared in the near three decades that the basic principles of Reaganomics — tax rate cuts, deregulation, and privatization — have set the public policy pace.

Senate Finance Committee chair Baucus asked the CBO to fill that hole — by focusing on the richest of the rich. The CBO's new report meets that request, with dramatic results.

Americans in the overall top 1 percent, the 2007 CBO data showed, did quite well in the Reagan era's first quarter-century. Their average incomes, after taking inflation into account, essentially tripled, rising 201 percent.

But these top 1 percent stats, the new CBO data help us understand, hardly tell the full story. The truly stunning income increases over recent decades have gone to the tippy-top of the U.S. income distribution, not the top 1 percent, but the top tenth — and top hundredth — of that top 1 percent.

The higher up you go on the income ladder, in other words, the sweeter the Reagan era.

Between 1979 and 2005, the bottom half of the top 1 percent saw their average incomes only double, after inflation. These incomes increased 105 percent. The next highest four-tenths of the top 1 percent somewhat raised the income bar. Their average incomes, after inflation, rose 161 percent.

That brings us to the top 0.1 percent of Americans. Their incomes, from 1979 to 2005, rose a staggering 294 percent after taking inflation into account. Not bad at all. But the top 0.01 percent did even better. The 11,000 households in this rarified air took home an average $35.5 million in 2005, a 384 percent increase over average top 0.01 percent incomes in 1979.

Need some perspective here? Let's compare Americans at the top to Americans in the middle. Between 1979 and 2005, the average income of America’s statistical middle class — the 20 percent of Americans in the exact middle of the U.S. income distribution — rose, according to the CBO figures, a mere 15 percent. That's less than 1 percent a year.

But many average Americans never actually saw that less than 1 percent. That's because the CBO takes a kitchen-sink approach to defining income. CBO researchers include in their “comprehensive income” calculations all the standard household revenue streams — wages, dividends, interest, and the like — and lots more, too, from food stamps and Social Security to employer-paid health benefits.

All these add-ins tend to inflate average household “incomes.” If your employer’s health insurance company jacks up prices, for instance, the extra dollars in premiums that your employer has to pay count as income to you, at least in the CBO calculations.

The CBO actually has a good reason to take this "kitchen-sink" approach to defining income. Conservative cheerleaders for the Reagan era have been arguing for years that the United States isn't growing that much more unequal, not when you calculate in the various benefits that poor and average Americans get from government and their employers.

But the CBO figures, by adding in all those benefits, neatly expose the flim-flam behind this cheerleading. The United States definitely has become substantially more unequal. Overall, after taxes, the very rich — the top 0.01 percent — have nearly quadrupled their share of the nation's income since 1979.

These super-rich Americans in the top 0.01 percent, even more amazingly, now pay a lower share of their incomes in federal tax than the merely rich.

The overall top 1 percent paid federal income tax at an average 19.4 percent rate in 2005. The top 0.01 percent paid at just a 17 percent rate, mainly because the richest of the rich get nearly half their income from capital gains — and capital gains enjoy preferential tax treatment.

Under George W. Bush, the tax rate on capital gains income — income from the sale of stocks, bonds, and other assets — dropped to 15 percent, less than half the current top 35 percent tax rate on “ordinary” income from paychecks.

[3]And that brings us to about the only hopeful news we can take, of late, from the Congressional Budget Office. No one on Capitol Hill has spoken out more clearly on the noxious consequences of preferential treatment for capital gains income than Peter Orszag, the CBO director until last month.

Taxing capital gains at a lower rate than other forms of income, as Orszag has testified [4] to Congress, “creates opportunities for tax avoidance and complicates the tax system.”

As CBO director, Orszag couldn’t do much about capital gains tax breaks for mega millionaires. Now he can. President-Elect Barack Obama last month named Orszag his choice to direct the Office of Management and Budget, the federal government’s most powerful fiscal agency.

Sam Pizzigati edits Too Much [5], the online weekly on excess and inequality.