Rich still richer, poor still poorer Tax system doesn't narrow income gap, studies say

April 16, 1992|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- Rich and poor rushed by the millions to meet the annual tax deadline yesterday, but after both paid their share of the nation's $1.8 trillion dues to Uncle Sam, the income gap between them remained as wide as ever.

The tax system does not cause the great divide in income nor does it narrow the gap dramatically, according to a series of recent studies.

Although the system takes more from the rich than the poor, it still leaves the richest richer and the poorest poorer. That trend has become a central issue in this year's presidential campaign.

In the period from 1977 to 1988, after-tax incomes followed the polarizing pattern of pre-tax incomes, with the poorest driven downward and the richest upward, according to the non-partisan Congressional Budget Office.

Frank Sammartino, tax analyst with the CBO, said: "In the absolute sense, income taxes are countering disparity. They are progressive."

But, he added, when one year was compared with another, there was a "very slight" income advantage for the highest-earning group.

Fueling acceleration in after-tax income for the rich were the tax reforms of 1981 and 1986, which reduced the number of tax brackets from 14 to two and brought down the top tax rate from 57 percent to 28 percent.

"That's a fairly big drop in [federal income] tax rates," said Gary Burtless of the liberal Brookings Institution.

Tax changes in 1990, including introduction of a new top rate of 31 percent, help reduce the tax impact on income disparity but are not expected to eliminate it.

Mr. Burtless, who recently testified to Congress on "Middle Class Woes: The Growing Inequality of Pre-tax Income and Wages," said his findings of increasing disparity extended to after-tax incomes as well.

"It means the [after-tax] incomes of the people in the lowest fifth of the income distribution shrank just a little bit faster [than pre-tax incomes]. And the increase for people in the highest fifth increased a bit more.

"But whatever the effects of the tax changes, they have been completely swamped by changes in the economy which have affected the income distribution."

Mr. Burtless, in his congressional testimony, noted that U.S. median family income, adjusted for inflation, rose nearly 2.8 percent a year from 1947 through 1973, and since then has grown just 0.3 percent a year.

"The public is more anxious about the income distribution today than it has ever been. The reason for this is straightforward. When the size of the economic pie stops growing, every person is more concerned about the relative size of his or her own slice," Mr. Burtless said.

The conservative Heritage Foundation argues that raising taxes on the rich does not help the poor. The poor, it says, get richer as the rich get richer. Reducing taxes, particularly on the wealthy, is the best way to increase the size of the economic pie for the benefit of all, it says.

But, says Isaac Shapiro of the liberal Center on Budget and Policy Priorities: "The division of the overall economic pie in the United States became much more unequal over the 11-year period [1977-88]. An especially large share of income is now received by the richest 1 percent of Americans, while the share of income received by virtually all other groups of Americans has fallen."

The average after-tax income of the top 1 percent of households rose 122 percent over the 1977-88 period, increasing from $203,000 in 1977 to $451,000 in 1988.

According to the center, citing data from the CBO, incomes for the richest fifth rose 34 percent and for the middle-fifth 4 percent, while for the poorest fifth average post-tax incomes shrank 10 percent.

The result, according to the center: The richest 2.5 million Americans had almost as much income as the 100 million poorest Americans.

The independent Tax Foundation, using different statistics, comes to another conclusion: The top-earning 10 percent of U.S. taxpayers paid almost 55 percent of the federal individual

income tax bill in 1989, compared with a 49.5 percent share in 1979.

Floyd Williams, chief tax counsel with the foundation, said: "When you look at total taxes, really there has not been much of a shift in the burden over the past 10 years."

He noted that federal rate reductions had been offset by state, Social Security and capital gains tax increases, and increases in taxes on gasoline, cigarettes and alcohol, as well as by elimination of exclusions and deductions.

Mr. Williams said: "Even though the rate has come down, the [tax] base has broadened. You will find the higher-income people are paying as much if not more tax than pre-1986."

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