Clinton Tax Bonanza May Not Be So Big
PRESIDENT-elect Clinton's campaign platform called for raising about $83 billion over the next four years from the richest 2 percent of Americans to help lower the deficit.
"I don't think he can get as much revenue as he hopes," says Daniel Feenberg, an economist with the National Bureau of Economic Research (NBER) in Cambridge, Mass.
Mr. Feenberg's conclusion arises from a NBER paper he has written with James Poterba, a Massachusetts Institute of Technology economist, on incomes of the nation's richest taxpayers.
The study shows the rich did extremely well in the 1980s. In 1989, there were 109 million tax returns filed. The top 0.5 percent of these (558,000 returns) had adjusted gross incomes of at least $276,066 in 1991 dollars. That was about $103,000 in 1991 dollars more than the threshold figure for the richest taxpayers in 1980. So this small group's earnings went up at least $57 billion in the decade.
The share of total national income of the top 0.5 percent of taxpayers rose from about 6 percent in 1980 to just over 12 percent in 1988, Feenberg and Mr. Poterba calculate. Half of this group, the top one-quarter of 1 percent of taxpayers, got two-thirds of that gain. In other words, the very rich got even richer.
"A few people at the top went up" in their share of total national income, Feenberg says. "All the rest went down relative to them" in their share.
Nonetheless, Feenberg figures that Clinton won't be able to boost revenues as much as anticipated by soaking the rich with a boost in the top tax rate to 36 percent from 31 percent, a strengthening of the alternative minimum tax, and a surtax on millionaires.
One reason is that the tax returns of the very rich suggest that at least part of their income gains was due to the changing tax incentives resulting from the 1986 Tax Reform Act. By lowering marginal tax rates on top-income households from 50 percent to 28 percent, the legislation reduced the incentive for these households to engage in tax avoidance activities. The share of income reported by top income taxpayers rose throughout the 1980s, but the sharpest increases were in 1987 and 1988 - the years fol lowing the significant decline in marginal tax rates. But, the two economists note, the numbers show that the realization of capital gains does not explain the broad income gain of the rich.
One implication is that the income bang from the tax bill has been petering out. The income threshold to be included in the richest 0.5 percent of taxpayers fell a little in 1990 to $269,376.
Feenberg suspects the 1990-1991 recession also hit the rich hard since they get much of their income from property and other investments. Interest rates are down sharply. Business profits suffered in the slump. Commercial real estate is still depressed.
Combine these factors, and the golden eggs of the golden geese (the rich) may be somewhat smaller.
With the economy apparently picking up some steam, the rich and the not-rich will enjoy rising incomes once again. This should boost federal tax revenues. Feenberg suspects that the greater inequity in the nation's distribution of income will persist. But it is not clear that the rich will get an even bigger slice of the income pie in the 1990s.
The NBER economist warns that a rise this year in marginal income tax rates will to a degree again encourage tax avoidance. That was demonstrated in the closing days of 1992 when many high-income individuals pushed as much income as possible into 1992 to avoid the expected Clinton tax hike for the well-to-do. Though the magnitude of that shift has not been estimated, it could fatten Uncle Sam's wallet at least temporarily when 1992 tax payments are made. Clinton's plan, however, does not call for tax rat es for the rich to go back up to 50 percent or to the 77 percent that was the law before 1969.
The Feenberg-Poterba paper does not indicate whether income mobility - the shift of individuals from middle income to rich, etc., or vice versa - increased in the 1980s. It does not show how much high income was "transient" - a one-time jump, such as when a business person retires and sells his enterprise.
But, using publicly available tax data, it does confirm earlier studies for the Joint Economic Committee and Congressional Budget Office showing a jump in income inequity in the 1980s.