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President Reagan's Tax policy

Reagan's 1981 Economic Recovery program had four major policy objectives: The first was to reduce the growth of government spending. The second was to reduce the marginal tax rates on income from both labor and capital.The third reduced regulation, and the fourth reduce inflation by controlling the growth of the money supply. These major policy changes, in turn, were expected to increase saving and investment, increase economic growth, balance the budget, restore healthy financial markets, and reduce inflation and interest rates. Arguably the greatest American “job creator” over the past 80 years has been the federal government or in other words, the government built the framework that private companies then used to create profits and jobs. It was Ronald Reagan’s deviation from this formula for success, 30 years ago, that put the United States on its current path of economic decline by crippling the government of resources and providing incentives for the rich, through lowered taxes.

Reagan's policies stemmed from the theory of supply-side economics. Supply side economics says corporate tax cuts give companies more cash. With the excess cash, companies hire new workers and expand business. Income tax cuts give workers more incentive to work, which will subsequently increase the supply of labor. The resultant economic growth expands the tax base. Over time, that replaces the government revenue lost from the tax cuts. The theory of supply side economics will ensure benefits for everyone (Workers, Employers, Government). Reagan's policy of supply side economics did not.

Reagan's Policy on Taxes

Reagan came into office proposing to cut personal income and business taxes. The media named his economic plans for the future, "Reaganomics. In 1981, Reagan passed the Economic Recovery Act, the ERA was intended to decrease revenues by $749 billion over five years. This this was quickly reversed with the Tax Equity and Fiscal Responsibility Act of 1982. TEFRA—the largest tax increase in American history—was designed to raise $214.1 billion over five years, and took back many of the business tax savings enacted the year before.The TEFRA 'also imposed withholding on interest and dividends, a provision later repealed over the president's objection.'

In 1982 Reagan supported a five-cent-per-gallon gasoline tax and higher taxes on the trucking industry. These were seen as wins for the Reagan administration at the time; after the new taxes were enacted the federal government increased tax collection by $5.5 billion a year. In 1983, on the recommendation of his Social Security Commission, Reagan called for, and received, Social Security tax increases of $165 billion over seven years. In 1984 Reagan's Deficit Reduction Act passed and was supposed to raise $50 billion.

Even the Tax Reform Act of 1986(TRA), Reagan's highest regarded piece of legislation tax policy, is more deception than substance. The Tax Reform Act transformed $120 billion over five years from visible personal income taxes to hidden business taxes. It lowered the rates, but it also repealed or reduced many deductions. The TRA significantly lowered individual and corporate income tax rates. However, the effect of rate reductions was not symmetrical in the individual and corporate tax systems. Regardless of signifcantly lowered corporate tax rates, other changes made to the corporate tax system increased revenues, while changes made to the individual tax system reduced revenues. The five-year revenue estimates predicted that, as a result of The Tax Reform Act, individual income tax revenues would decline by $122 billion and corporate income tax revenues would increase by $120 billion. Thus, corporate tax increases were used to "pay for" individual tax decreases.

The Consequences of Reagan's Tax Policy

Cons

Modern Corporate Tax policy as we know today, was first introduced as a subsequent by-product of Regan's Tax Reform act of 1986. According to the US Congressional Research Service, the cut in the rate of US corporation tax from 48% to 35% between 1986 to 1988 (from the Tax Reform Act of 1986) was instrumental in triggering a wave of corporate tax cuts around the world and creating a situation in which ‘none will gain capital, but all will lose revenue’ . Due to Regan's policy and specifically, trickle-down economics, the changes seen in tax rates (especially income tax rates) was the first time Americans saw rates rise for the low income classes(11%to15%) and decrease for the higher income class (50 to 28%). This disproportionate increase and decrease of rates disrupted the equilibrium for corporate taxation that previous laws and policy had created. Congress eliminated the rate preference for capital gains; this reduced the tax rates for individuals and corporations and set the maximum corporate rate higher than the maximum individual rate. After a transition period, capital gains are subject to tax at the same rates as other income.  Eliminating the rate preference dramatically differs from past interactions with current tax policies at the time. This can result in rate increases of between 40% for high-bracket taxpayers, and over 200% for low-bracket taxpayers.Reagan's tax cuts did bring an end to the recession, but government spending wasn't lowered. Spending was just shifted from domestic programs to defense programs. Because of Reagan's change in spending the Federal debt almost tripled, from $997 billion in 1981 to $2.857 trillion in 1989.

Pros

President Reagan’s policies have had a long-term effect on the economic growth of America. During Regan's 8 years in office; 16 million new jobs were created, inflation dropped from 13.5% in 1980 to 4.1% in 1988, and unemployment fell from 7.6% to 5.5%. Tech companies began to flourish in the 1980s and 1990s under Regan's pro-innovation policies, which set the stage for a minimized role for the government in the economy and gave the markets the ability to trade and work freely for themselves. The dramatic decrease in tax rates left a permanent shift in the way America approached economic and tax policy. The modern argument over taxes no longer considers a 70% income tax rate for higher brackets. Instead, the discussions tend to focus on a few percentage points in either direction of 35% .By Reagan's last year in office, the top income tax rate was 28 percent for single people making $18,550 or more. People making less paid no taxes at all. 28% was much less than the1980 top tax rate of 70 percent for individuals earning $108,000 or more. Reagan made certain tax brackets were indexed for inflation.

Tax Policy and the Trump Administration

The Trump Administration has yet to begin the process of attempting to gain Congress’ approval of their desired tax policies. The administration has, however, released the general overview and objectives of their tax policies. Through a thorough analysis of the policy overview, the proposed policy can be considered in relation to academic research regarding both the catalysts and inhibitors of social inequality to logically predict the effects the policy will have on social inequality and social mobility in modern day America.

Overview of Trump’s Proposed Tax Policy

Donald Trump has proposed a very detailed tax plan. Donald Trump’s proposed tax policy would significantly reduce marginal tax rates on both individuals and businesses, increase standard deduction amounts by nearly four times the current levels, and reduce tax expenditures.

In terms of the specifics of Donald Trump’s proposal, both Donald Trump and Republican leaders in the House of Representatives have voiced their plan to integrate America’s current seven tax brackets of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%, to three tax brackets:12%, 25%, and 33%. Trump also proposes repealing the head-of-household tax-filing category. The standard deduction would be $30,000 for married couples filing jointly and $15,000 for single individuals.

Trump’s Proposed Tax Policy and Social Mobility

In relation to social mobility, Trumps proposal does not explicitly hurt those in the bottom class. It does, however, provide the upper class with more savings than the bottom class.

For example, under Trump’s plan, America’s top earners would benefit from tax cuts more than America’s lowest earners. Marginal income tax rates on wages and salaries would be reduced by about 2%. In translation to savings, this means the top 0.1% of earners would see a cut of over 7%, while those with the lowest incomes would see less than a 1% cut.

Donald Trump proposes to repeal the head-of-household filing status, along with personal exemption. Because of this, taxes would be boosted for many families, and some of the largest increases would apply to single-parent families. A married couple with $50,000 in earnings, two children, and no child care costs would face a tax increase of around $150. Meanwhile, a single parent with $75,000 in earnings, two children, and no child care costs would face a tax increase of around $2,440. This disparity in the rate of increased taxes between families with married couples and families with single parents would damaging effects on the lower class in terms of social mobility. This is because there is a higher concentration of single parent families in the lower and working class than in the upper class. Today in America, 90% of single-parent families are headed by females. Single mothers with dependent children have the highest rate of poverty across all demographic groups. About 60% of children in the United States that live with their mother only are impoverished, while only 11% of two-parent families are impoverished. The rate of poverty increases even more drastically in African-American single-parent families, as in this case two out of every three children are poor. Thus single-parent families would suffer even more financial stress than married couple families from their initial state of increased poverty, which makes achieving upward social mobility an even more difficult task than before.

Donald Trump’s tax proposal would directly lead to an even greater concentration of wealth in the United States through its elimination of the federal estate tax. Today, only the wealthiest taxpayers (which surmounts to less than 1% of American taxpayers) pay that tax.

Ultimately, one of the most crucial factors regarding how Donald Trump’s tax policy would affect ease of social upward mobility among the social classes is how the policy would affect the job market. One of the most direct ways for those in the low-income bracket, or those who are unemployed or underemployed, to attain social mobility and improve their financial standing is through employment in steady jobs with benefits. How Donald Trump’s policy would affect the job market depends on how his policy would affect the economy, and as of today economists cannot reach a decisive conclusion on whether or not the tax policy would be good for the economy. Some research points to the government losing $6.2 trillion in revenue over the first decade, while other research outlines the likelihood of an economic boom.

Residential Property Tax Policy

Residential taxes are referred to as “regressive” since lower-income tax payers pay a larger portion of their income in property tax than those of higher income. Tax liability does not change according to the taxpayer’s income fluctuations, and while millions of Americans are poor enough to be exempt from income taxes, this does not apply to property taxes. Instead, “property tax circuit breakers” reduce the tax level for certain homeowners. Some families and individuals, particularly low-income or elderly homesteads, are eligible for these state government provided refunds. Eight states only make circuit breakers available to senior citizens and people with disabilities. Ten other states make them available to families and individuals regardless of age or disability status. Some states only allow taxpayers with incomes less than $20,000 to receive circuit breakers. The maximum refund provided from these breakers also greatly varies, from $200 in Oklahoma to $2,000 in Maine. These caps are responsible for particular individuals not receiving the full compensation that they need. In addition, tax breakers are not automatically applied to families or individuals with particularly low incomes, nor to senior citizens or those with disabilities unless they apply for them. Consequently, those who are unaware of the refund application process do not benefit from the circuit breakers. In contrast, homestead tax exemptions are automatic “across-the-board” tax cuts that do not require petition.

Overview of Residential Property Tax

The residential property tax rate differ all across the states, since each states have their own mean of calculating the real property tax base. The taxing jurisdiction usually estimate the value of real property by measuring what the property would sell for in an arm’s length transaction. However, some jurisdiction value on the last sale price or acquisition value of the property. There are also other states that estimate the value of income that a property could generate. While these policies measures the financial asset of the property, some states assess the size of physical attribution of the property such as design or location. The property tax burden, measured in dollars, are highest in counties in California, Illinois, and the northeast, showing that they have relatively high property values. Average property tax burden in these counties are measured around $3,000 or more. Tax burdens differ among states since they are mostly calculated by house price. The mean house value of the ten lowest absolute property tax burden is $127,341, compared with an average house value of $356,085 in the ten states with the highest absolute tax burden. The counties where the highest property taxes per households collected are those around New York City. Counties in Westchester, Nassau, and Bergen had the highest average tax burdens, all above $8,500. Meanwhile, 24 counties had average property tax below $250. Most of these are located around Colorado, Louisiana and Alabama This reflects higher house prices and higher reliance on property taxes to provide state and local services.

Capital Gains

Hendershott et. al discuss the inefficiencies created by United States capital gains tax policy. In the United States, capital gains taxes are collected on assets that have gained in value but only when that value is realized through sale or exchange of those assets. This policy for capital gains taxes in the United States encourages people to hold onto these assets in an effort to avoid capital gains tax liability while continuing to accrue value. As a result of these benefits associated with holding assets, tax revenues are inherently lower and less capital is in circulation. Asset holders tend to maintain less-optimal portfolios in order to avoid or reduce any tax liability associated with capital gains income. The ability to defer taxation on assets until they are sold or exchanged creates a scenario where the effective tax rate on capital gains is lower than the effective tax rate on income. Poor and middle class people traditionally rely on normal income and thus are affected more by taxation as a proportion of their income despite their limited means. Taxes are further avoided by corporations who limit their dividend payouts. One argument in circulation concerning the corporate tax rate policy in the United States holds that a reduced rate (capital gains tax cut) would motivate capital holders to dispense assets and convert capital gains into income at a higher rate as a result of the reduced penalty. This theory alludes to an effect of higher rates of capital in circulation, higher consumer spending, and increased federal tax revenues.1

Lock-in Effect

The lock-in effect commonly associated with capital gains tax policy refers to the effect of high capital gains taxes causing investors to avoid selling or exchanging their assets for longer periods in an attempt to reduce their tax liability. If an asset’s gain has not been realized, there is no tax liability. Proponents for a reduction in the capital gains taxation rate argue that such a reduction would reduce the effects of lock-in and free up capital through sale or exchange of assets. The proponents assume that any reduction in federal tax revenue through the reduced capital gains tax would be negated by an increased tax revenue through an greater economic activity.2

History

From 1988 to 1997, capital gains were taxed at a rate close to 30%. But President Bush Sr. lowered these rates in the Taxpayer Relief Act of 1997 and his son, George Bush Jr. lowered them again in the Economic Growth and Tax Relief Reconciliation Act of 2001. (need source). This effectively lowers the tax rate of long term capital gains to 15%.

Potential Complications

Why are some people paying 30-50% in income tax while others, who live in the same state and are making much more, pay only 15%?

According to Travis Waldron of thinkprogress.org, “Capital Gains tax cut is the biggest driver of income inequality.” After these policies were put in place, the growth in after-tax income has grown almost 100% for the top .1% while the growth in after tax income for the bottom 20% has decreased by 6%. These figures show how the gap of income inequality has grown larger. With these tax cuts, the wealthiest people working in private equity can generate millions of dollars of income for themselves while paying less than half of the percentage of taxes they should be paying.

Is it really fair that working people have to pay higher tax rate on their income that they earn from working compared the much lower tax rate that large wealthy investors pay for their capital gains in buying and selling stocks?

Income Tax

The distribution of income tax is a contributing factor to the growth of social inequality in America. Income tax is divided into brackets so that people with higher incomes pay a higher percentage of their income in taxes, however this amount is not proportional for those at the very top, and the percentage of income that the highest tax bracket pays has been dropping over the years. In the past 36 years, taxes on multi-millionaires have dropped from 37% to 31%. This means that the very wealthy continue to have more access to resources than the lower classes. Currently, tax brackets range from a low point of 10% to a high point of 39.6%. According to 2013 IRS data, the most common tax bracket is a 15% rate, which includes people who make between $9,326 and $37,950 if filing singly, or between $18,651 and $75,900 if married and filing jointly. The second most common tax bracket is a 0% rate--in 2013, nearly 36.9 million Americans filed at 0% after deducting their income to $0 through the use of tax credits and other tax deductions. Although the tax credit system is generally effective and helps many people get by in their daily lives, abuse of the system can also lead to the rich getting richer and not paying what they proportionally should. This is, however, balanced out by provisions called PEP and Pease, named after Senator Donald Pease, that increase the amount of taxable income for high-income taxpayers. The minimum income threshold for these credits is planned to increase in 2017. Additionally, a program created in the 1960's called Alternative Minimum Tax (AMT) also guarantees that high-income taxpayers pay their fair share in income taxes and cannot avoid individual income tax altogether. This system has taxpayers calculate two different tax bills--one normally and one using the AMT--and pay whichever amount ends up being higher.