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December 1984

The 1981 Personal Income Tax Cuts: A Retrospective Look at Their Effects on the Federal Tax Burden

by John A. Tatom

The author examines whether the 1981 federal tax rate reductions have reduced the federal tax burden. Comparing federal tax burdens in 1980 and 1984, he concludes that federal tax burdens were greater in 1984 for most American families. Both the federal income tax “bracket creep” and Social Security tax increases from 1980 to 1984 have more than offset the 23 percent cut in average and marginal federal income tax rates since 1980. The author uses this analysis to clarify two major sources of confusion about tax changes: First, he shows that the perception that the 1981 rate reductions benefited relatively higher-income groups at the expense of low-income families results from bracket creep and Social Security tax hikes, both of which have raised the taxes of low-income families disproportionately. The actual rate reductions, he shows, fell evenly across income levels. The net result was relatively large increases in federal tax paid per dollar of income for low-income families, and only slight reductions for relatively high-income families. Since taxpayers generally paid higher average tax rates on larger real incomes in 1984 than in 1980, the extent to which the 1981 tax rate reductions have contributed to the federal deficit is obviously open to question. Proponents of the view that the 1981 tax changes raised the deficit apparently focus attention on the rate reductions alone, according to the author, and ignore the other factors that more than offset the rate reductions.