Poor get biggest percentage cut, rich get biggest dollar cut under Reagan plan
Mike and Mary Meager, a fictitious married couple with two children, live at the poverty line, with an annual income of $11,457. Under the Reagan tax plan, the Meager family would no longer pay federal income tax. That would save the Meagers $393, or 100 percent of their 1986 tax bill, under existing law. And the family would get a $254 rebate check, thanks to an expanded low-income tax credit that the Reagan tax plan proposes.Skip to next paragraph
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Ronald and Nancy Reagan, a real-life married couple with no children living at their large Washington home, had a 1984 income of $440,657.
Under the Reagan tax plan, the first family's 1986 tax bill on that income would drop $28,373, or 19 percent.
These two families' finances highlight several facts about the fairness of the Reagan administration's tax reform plan.
First, the nation's most needy citizens get the largest percentage cut in their tax bills of any income group. Second, those with incomes over $200,000 get the biggest dollar savings. Middle- and upper-income individuals get smaller percentage savings than either the richest or poorest citizens.
The fairness of these outcomes is in the eyes of the beholder. The President says the big tax cut he and other wealthy taxpayers would get ``just points out for everyone how advantageous the new tax system is.''
Treasury Secretary James A. Baker III argues that upper-income taxpayers who have been paying high taxes ``ought to get'' relief. He notes that wealthy individuals who have not been paying taxes will find that shelters will ``not be anywhere near as available'' under the Reagan plan.
Critics, like New York Gov. Mario Cuomo, calls the Reagan plan ``dynamite for the rich people.'' The Democratic governor adds that ``people in the middle suffer.''
The suffering that Mr. Cuomo refers to is the fact that the average percentage tax savings for the poorest citizens (those making under $10,000) is 35.5 percent and for the richest (making $200,000 or more) is 10.7 percent. Those making $20,000 to $200,000 get tax savings which average under 10 percent.
While the middle class may feel shortchanged, ``tax reform isn't supposed to be everyone getting a tax cut,'' says David Kahan of the Center on Budget and Policy Priorities. Tax reform, he asserts, ``is supposed to be simplification, getting rid of loopholes,'' and redressing the disproportionate tax burden on the poor.
By that last standard, at least, the Reagan plan appears to be a success. The proposal would virtually double the personal exemption, boost the amount of income not subject to tax, and fatten the earned-income credit for low-income individuals who have children. In addition it would set up an expanded credit for the elderly and disabled.
The result of these provisions, says Deputy Treasury Secretary Richard G. Darman, is that ``all families, all older Americans, blind and disabled, at the poverty line or below, would be totally removed from the tax rolls.''
And Mr. Kahan, whose organization usually views issues from a liberal perspective, agrees that the Reagan tax plan ``makes a very, very significant contribution'' to fairer taxation of the poor. ``It still leaves some in trouble. For all that, it is a very positive contribution.''
The center figures that the tax burden on a family of four at the poverty line would drop from 10.6 percent of its income under current law to 4.9 percent under the administration plan in 1986. Those under the poverty line would not pay federal income taxes but still would face payroll taxes to support the social security system.
Despite the smaller tax bite, the share of a poor family's income going to the government would still be higher than in 1978, when it was 4.0 percent for a family of four, the center estimates.
The tax bite on the rich has loosened sharply under the Reagan administration. The 1981 tax bill cut the top individual tax rate from 70 percent to 50 percent. The President's new tax plan would cut the maximum personal rate to 35 percent -- half of its level when he took office.
Despite the help it promises the poor, some elements of the Reagan tax plan appear to work to the disadvantage of low-income individuals who are either already paying taxes or who are on the borderline for paying taxes. One such provision taxes the first $10 of monthly, employer-paid health-insurance premiums for individuals and the first $25 a month for families. Under the Treasury reform plan issued in November, only employer-paid health insurance premiums over $70 for individuals and over $175 for families were taxed. Under that plan, those with the highest benefits and incomes felt the brunt of the tax. Graph: Who saves the most under Reagan's tax plan
Income class Average
tax cut Less than $10,000 $104
$10,000 - $15,000 $128
$15,000 - $20,000 $132
$20,000 - $30,000 $149
$30,000 - $50,000 $211
$50,000 - $100,000 $252
$100,000 - $200,000 $686 More than $200,000 $9,254 Source: Center on Budget and Policy Priorities; based on 1983 income. -- 30 --