The income tax cuts which fueled the so-called Reagan Revolution have resulted in a "growing chasm" between America's rich and poor people, according to Rep. John J. LaFalce.
In a speech Friday before 500 accountants, the Tonawanda Democrat characterized the 1980s as a decade when the nation's tax burden shifted from the wealthy to the working classes. He explained that legislation in 1981, 1983 and 1986 resulted in lower income taxes for the rich, but higher deductions from workers' paychecks to support Medicare and Social Security.
"The 1981 tax bill . . . made the tax code substantially less progressive than it had historically been," LaFalce said in his keynote address for the 37th annual Institute on Taxation, held at the Buffalo Convention Center and sponsored by the New York State Society of Certified Public Accountants.
"Huge tax cuts were included -- and they were targeted, in the main, toward those taxpayers with higher incomes," the congressman said. "What was not included, however, was anything to assist the 'little guy.' "
LaFalce said that if changes had been made in personal exemptions, standard deductions and tax credits for earned income, the current revenue code would be fairer as well as less burdensome.
"It was also noteworthy . . . that at the same time Congress was passing huge cuts in income tax rates, we were also enacting automatic increases in payroll taxes . . . We were doing this to finance Social Security, Medicare and disability benefits," LaFalce said.
He characterized payroll deductions for social services as regressive, because they only impact on wages and are a flat rate for both rich and poor. Under current law, employees pay 7.65 percent of their wages for Social Security, Medicare and other welfare programs. People who earn more than $51,300 pay a lower rate ranging from 4 percent to 1 percent.
"It doesn't make sense to reduce the most progressive element of our tax system (income taxes), and increase the most regressive element (paycheck deductions)," LaFalce said. "This makes the growing chasm even wider," he said.
LaFalce urged the his audience to see the advantage of raising income taxes to pay for welfare, the medical bills of the elderly and assistance to the handicapped. He said it isn't fair to give the entire bill to the working classes. LaFalce noted that payroll taxes have risen an average of three percentage points each decade.
"Everybody wants to cut income taxes, but nobody wants wants to make up for the lost revenues," he said.
The Tax Reform Bill of 1986 and the recent budget compromise, according to LaFalce, are significant because they attempt to make the tax code fairer. Taxes have been lowered for the poor and the middle-class, while the rich have been asked to contribute more to federal coffers.
Despite these modest improvements, however, Uncle Sam still isn't bringing in enough money to pay the nation's bills. For example, personal income taxes represented 42.7 percent of the total U.S. tax burden last year versus 47.2 percent in 1980.
It is ironic, LaFalce says, that the Reagan Administration claimed to have rolled back taxes when it actually increased them for almost every American.
"Nine out of ten Americans were paying more in total federal taxes at the end of the 1980s than at the beginning, while only the wealthiest 10 percent were paying less," he said.
A recent study found that if the tax system had not been changed in the 1980s, the wealthy would have paid $93 billion more last year than they actually did. Moreover, the rest of the population would have paid $25 billion less.
"Some people find statistics dry and boring, but I think this one is significant," he said, noting that the median-income family's (tax) burden has grown to 24.1 percent while the country's richest families have seen their tax burden drop to only 25.7 percent. "These statistics show that the decade of the 1980s almost totally eliminated the overall progressivity of our tax system," LaFalce concluded.
The annual Institute on Taxation is sponsored by the Buffalo chapter of the state Society of Certified Public Accountants, the Erie County Bar Association and the University at Buffalo's Center for Management Development.