Fairness in Rate Cuts in the Individual Income Tax

Authors

Alan L. Feld, Boston Univeristy School of LawFollow

Author granted license

Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International

Document Type

Article

Publication Date

1983

ISSN

0010-8847

Publisher

Cornell Law School

Language

en-US

Abstract

The Economic Recovery Tax Act of 1981 (the 1981 Act) made significant changes in federal income, estate, and gift taxation, touching virtually every taxpayer.¹ The centerpiece of the 1981 Act consisted of rate reductions in the individual income tax.² These reductions, said to average 23%, served a number of different but related objectives. First, those in favor of the tax cuts posited that all taxpayers would benefit from equitable, across-the-board reductions in an excessive and growing tax burden.³ Related to this objective was an anticipated reduction in the size of the federal government, because less tax money would be available to finance federal spending.⁴ Second, supporters of rate reductions focused on the effect of federal taxes on incentives⁵ and argued that a cut in marginal tax rates would lead to an increase in productivity.⁶ Third, marginal rate reductions would offset both the recently enacted increases in the social security tax⁷ and the effects of inflation. ⁸

By contrast, considerations traditionally highlighted in connection with income tax changes played only a minor role in structuring the 1981 Act rate reductions. Little was heard of the virtues of progressivity in the income tax, of the role of federal tax policy in achieving redistribution of income, or of fairness to low- and moderate-income families.

Proceeding from a historical perspective, this article sets the important changes wrought by the 1981 Act against the backdrop of another important transitional period, 1940 to 1945. Part I describes the changes in rates and certain other structural elements of the income tax between 1939 and 1979. Part II develops four criteria for analyzing the impact of rate changes: (1) changes in marginal rates; (2) changes in effective rates; (3) changes in after-tax income; and (4) changes in discretionary income. Part III discusses the 1981 Act changes and evaluates those changes under the four criteria. Finally, Part IV applies the four criteria in a comparison of the 1939, 1979, and 19849 tax schedules.

The article concludes that the Act fell far short of the equity rhetoric that surrounded it. The focus on problems of high inflation and low productivity to the exclusion of other concerns led the 1981 Act to reallocate many of the burdens of the tax system down the income scale, rather than equitably reducing the tax burden on all taxpayers. In addition, the Act will turn many individuals whose incomes fall below subsistence levels into new taxpayers. These effects of the 1981 Act alter some of the nearly forty years of experience that date from the World War II income tax changes.

Recommended Citation

Alan L. Feld, Fairness in Rate Cuts in the Individual Income Tax , in 68 Cornell Law Review 429 (1983).
Available at: https://scholarship.law.bu.edu/faculty_scholarship/2943