Bloomberg Tax
Nov. 29, 2022, 9:45 AMUpdated: Dec. 12, 2022, 5:53 PM

How Four Decades of Tax Cuts Fueled Inequality: James B. Steele (1)

James B. Steele
James B. Steele
Center for Public Integrity

This story is a partnership between the Center for Public Integrity, a newsroom that investigates inequality, and Bloomberg Tax.

As a dense fog rolled over his California ranch, Ronald Reagan strolled to a table set up outside his adobe farmhouse and flashed photographers a radiant smile.

The president had much to smile about. Stacked on the table, awaiting his signature, was ERTA, the 185-page Economic Recovery Tax Act of 1981 that fulfilled his campaign promise to cut taxes in a big way.

The beneficiaries were largely high-net-worth individuals and corporations. What followed was a $750 billion hole in the federal budget, cuts in multiple public programs and a ballooning deficit.

But that was just the beginning. The bill signing on that foggy day set in motion a trend in tax policy that is supercharging America’s escalating income inequality. In the past four decades, Congress after Congress has cut taxes on the richest people and corporations —billions of dollars that would otherwise have gone to the federal till for spending that could help the rest of the public get ahead.

Soon a new and politically split Congress will make decisions, by action or inaction, that will ripple for years to come. Leave the tax system as is? Rework it to the benefit of struggling people? Or keep cutting? The result could help determine which Americans can build up savings, how bad the racial wealth gap gets and whether longstanding pressure to cut safety-net programs succeeds.

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There have been some income tax increases over the past two generations, most recently the Inflation Reduction Act signed by President Joe Biden in August that levied a 15% minimum tax on corporations and a 1% excise tax on stock repurchases by public companies. But the trajectory has been in the opposite direction.

In 1980, the top income tax rate for individuals was 70%. Today it’s 37%.

The political forces behind that seismic shift haven’t stopped pushing for more. Already, House Republicans are proposing to extend or make permanent some of the most recent tax cuts.

President Reagan shows off his cowboy boots at the signing of the Economic Recovery Tax Act in 1981.
Photo: Bettmann Archive/Getty Images

Setting the Pattern

In the four decades since ERTA was signed, Republicans — with some assists from Democrats — have worked to dismantle a system where the wealthiest people pay substantially higher rates. They’ve tucked large breaks for the rich into proposals with small cuts for millions of other Americans. They’ve promoted tax cuts with claims about economic benefits that have not panned out.

“It’s vastly oversold that tax cuts will generate job and economic growth,” said William Gale, co-director of the Urban-Brookings Tax Policy Center. “When you cut taxes for the upper income, you give them more after-tax income, but you don’t do anything for growth.”

ERTA charted the course in 1981. It cut the top tax rate from 70% to 50% on so-called unearned income — dividends from stocks and interest on bonds and savings. While modest tax breaks sprinkled throughout the bill affected millions of taxpayers, the top rate cut had just one constituency. Only the richest 2% of taxpayers were subject to taxes up to the 70% rate.

Lowering that rate had long been a Republican goal, but the party’s lawmakers had been reluctant to propose it in ERTA for fear that voters would see them as favoring the rich. Instead, it was the Democrats who proposed it. It was a trade, a way to get Republican support for other provisions in the bill.

ERTA gave the wealthiest Americans who received dividend and interest payments a hefty yearly tax cut of $6.7 billion, the equivalent of $21 billion today. Out of 95 million taxpayers who filed that year, this bounty went to just 82,000: the richest sliver of the top 1%.

People in this group who received $250,000 in dividends owed $175,000 in taxes on them for the 1981 tax year. ERTA gave them a tax cut of $50,000 the next year — more than twice what the majority of American families lived on at the time. It was a gift that kept giving, year after year.

To fully understand the amount of money involved, think of it this way:

If the 70% rate were still on the books, taxpayers with more than $1 million in income in 2019 could have owed $87.9 billion more in taxes that year, according to a Center for Public Integrity analysis of IRS data. That’s more than enough money to rebuild and repair all the bridges and water systems across the country slated for work under the Infrastructure Investment and Jobs Act passed by Congress in 2021.

Cutting taxes for the rich over the past 40-plus years has had a huge impact, leaving less money for public programs that benefit millions of Americans while enriching a tiny percentage of the population. Where once the code strove for a certain balance — the more you earned, the more you paid — the rates have been reduced so much that there’s not nearly as much difference now between the top tax rate a billionaire investor pays on their income and what a middle-class salaried professional pays on theirs.

Income inequality in America is at heights not seen for a century. A variety of factors have contributed, including the erosion of good-paying manufacturing jobs, deregulation, a weakened trade union movement and the elimination of pensions and other rungs in the safety net. But taxes have been a principal engine of worsening economic inequality simply because the wealthy, thanks to their success in Congress, now have more money — to buy stocks, invest in real estate, build megayachts, blast off into space and make campaign contributions to politicians so the cycle isn’t interrupted.

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It wasn’t always this way.

For decades leading up to 1980, all incomes from top to bottom rose at nearly the same pace. But that changed dramatically afterward. While median family income was largely stagnant, top incomes soared.

In 1980, the top 4% of taxpayers earned as much as the bottom 39%. By 2019, the top 4% earned as much as the bottom 57%, according to a Public Integrity analysis of the most recent IRS data.

As more money flowed upward, the gap in accumulated wealth widened. In 2019, the top 10% of Americans had three times the wealth of everyone else in the country combined.

The Tax Reform Game

The Tax Reform Act of 1986 was supposed to curb most tax shelters used by big corporations and well-to-do people — and it did. But in exchange for that, Democrats gave Republicans something they wanted: lowering the top rate on wages, salaries and all other personal income from 50% to 28%, the largest single drop in the history of the federal income tax.

Proponents contended that was justified. Thanks to tax shelters, they said, few wealthy people were paying the top rate.

However, the data shows that not every wealthy taxpayer was loaded with tax shelters, and the 1986 act gave them a big break.

In 1985, all taxpayers reporting income of $1 million and up had an average income tax of $910,931, according to IRS data. In 1988, the first year showing the full impact of the law, that same group paid $226,000 less on average.

For Reagan, the low rates were the heart and soul of the bill.

“Our Founding Fathers ... never imagined what we’ve come to know as the progressive income tax,” Reagan said while signing the bill on Oct. 22, 1986. He said it “struck at the heart of the economic life of the individual, punishing that special effort and extra hard work that has always been the driving force of our economy. ... I feel like we just played the World Series of tax reform — and the American people won.”

Some won much more than others.

IRS data shows that taxpayers with upwards of $40,000 in income received on average a modest tax cut of $603 a year. Upper-income Americans earning $500,000 to $1 million took home an average of $73,617. And those at the top received far more.

To those who knew how the benefits of tax reform had been oversold to average Americans, this came as no surprise. Daniel Halperin, a former assistant treasury secretary, told a congressional committee as the bill was being considered: “Over 40% of American families will either have a tax increase or no change.” People with the highest incomes, he said, would be “the biggest winners.”

Republicans claimed that the 1980s tax cuts would stimulate so much economic activity that tax receipts and budgets wouldn’t suffer. But by the end of the eight-year Reagan presidency, revenues were an unprecedented $1.3 trillion short of federal spending. That was more than three times the deficits for the eight years before Reagan — combined.

For years, Republicans have pointed to deficits as a reason to cut spending on Social Security, Medicare and Medicaid. But there’s another way to deal with deficits: raise more revenue. In the 1990s, that’s what Congress did, increasing the top income-tax rate instead of cutting it.

Both hikes came from a Democratic-controlled Congress. The first lost Republican President George H.W. Bush re-election after he agreed to it. Then Democratic President Bill Clinton engineered an increase to 39.6% in 1993 that Republican lawmakers and conservative pundits said would kill jobs and sink revenue collection.

President Clinton, with Vice President Gore at his side, in 1993 signs a budget bill that included tax increases.
Photographer: Renaud Giroux/AFP via Getty Images

Instead, the economy took off. Revenue jumped. Finally, there were budget surpluses for the first time in 30 years.

The federal government went back to running deficits again after President George W. Bush put through two tax cuts in 2001 and 2003.

While those tax bills contained modest cuts for most Americans, the benefits once again flowed largely to the rich: The top 1% of households received an average tax break of $570,000 for the eight-year period that followed the second bill, according to the Center on Budget and Policy Priorities.

It wasn’t just a result of lowering the top rate to 35%.

For decades, dividends paid to shareholders — predominantly wealthier people — were taxed like salaries and wages. But the 2003 law created a new category called “qualified dividends.” What constituted such a dividend was complicated, largely how long the stock was held, but its main benefit was that it would be taxed at 15% rather than 35% for upper-income people.

An auto worker in Detroit who received $5,000 in qualified dividends might have saved $500 under the new law. An auto executive who received $100,000 in such dividends would have saved $20,000.

This tax break, narrowed since then but only modestly, has cost the U.S. Treasury an estimated $350 billion since 2004. Upper-income taxpayers have benefited the most. In 2019 alone, it was worth $16.2 billion to taxpayers earning $1 million or more.

To put that $16.2 billion in perspective: It’s the equivalent of the federal income taxes paid by everyone earning $50,000 or less in California, Idaho, Iowa, Kansas, Minnesota, Nebraska, New Hampshire, Oklahoma, Pennsylvania, South Dakota, West Virginia and Wisconsin — combined.

President Barack Obama later signed legislation that made the tax break permanent, but he also steered tax increases through Congress, pushing the top rate back to where it had been under Clinton.

All this led to what would be the signature legislative triumph of the Trump presidency, the Tax Cuts and Jobs Act of 2017. The sheer magnitude of the tax cuts it gave to the wealthy and corporations made the law the most significant since the Reagan era.

In 2019 alone, the tax cuts cost the U.S. Treasury $259 billion. Virtually half that money flowed to those earning $200,000 or more.

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Corporate Clout

As Congress cut the taxes of wealthy Americans, it also slashed taxes on corporations. Their rate plummeted from 35% to the present 21% — the lowest in 80 years.

When the rate was higher, the largest U.S. companies avoided paying it through tax loopholes, one of the most lucrative of which let them stash their overseas income in offshore tax havens.

As billions and billions of corporate profits piled up offshore and began to approach $1 trillion, the companies fretted. A group that included Microsoft, Intel, Apple and Coca-Cola formed a lobby called the Homeland Investment Coalition to pressure Congress to change the law so they could bring that money back to the U.S. — at a lower tax rate than domestic corporations pay.

For example, while a local construction company in Des Moines might pay 35% on profits from building a high school in Iowa, the coalition proposed in 2003 that multinationals with foreign earnings would pay only 5.25% in U.S. taxes on profits earned from selling products or services outside the country.

Lawmakers were happy to help.

“We want job creation,” Sen. Gordon Smith, a Republican from Oregon, said when the American Jobs Creation Act of 2004 was being considered with a provision he helped insert to make the tax holiday happen. “We want this to get to the shop floor, not to the corporate boardroom. ... We want it to go to those things that will improve the productive capacity of American industry and the rehiring of American workers. We don’t want it to be part of some financial flimflam.”

But flimflam it was. After the bargain-basement tax break became law, companies did bring money back to the U.S. Nearly half the repatriated $312 billion came from just 15 companies, including Hewlett-Packard, Pfizer and Merck. The U.S. Treasury later estimated that the tax break benefited only 4% of American corporations.

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How many jobs were created by the American Jobs Creation Act of 2004?


That’s according to a 2011 report by a subcommittee of the U.S. Senate Homeland Security committee. In fact, it found the 15 largest repatriating corporations cut jobs and reduced their overall U.S. workforce by 20,931 people.

The top companies increased stock buybacks, rewarding shareholders and boosting their executives’ pay — despite provisions of the 2004 law prohibiting use of the repatriated cash for those purposes.

It’s another way that tax changes are worsening both income inequality and the racial wealth gap, because stock buybacks disproportionately benefit high-income white Americans.

The 2004 repatriation “not only failed to achieve its goal of increasing jobs and domestic investment in research and development,” concluded the subcommittee’s report, “it did little more than enrich corporate shareholders and executives while providing an estimated $3.3 billion tax windfall for some of the largest multinational corporations.”

Congress responded by doing it all over again in 2017, giving the same group of companies a variation on the tax break it had awarded them in 2004.

The Tax Cuts and Jobs Act of 2017 lowered the tax rate on most repatriated funds to 15% — not as bargain basement as in 2004, but still a dramatic cut — and gave multinational corporations a much longer holiday to bring the money home: eight years.

Promising that the tax break would “turn America into a job magnet,” President Donald Trump claimed that no less than $4 trillion would come back to the States. “This is money that would never, ever be seen again by the workers and the people of our country,” he said.

The money is coming back — but not to American workers or communities thirsty for corporate investment. Instead, just as in 2004, it is flowing to shareholders and executives. A report by the Federal Reserve found in 2019 that share buybacks for the 15 largest corporations holding offshore cash “rose sharply” after the law passed.

Money helps explain why this sort of thing keeps happening.

Every year corporations spend more than 85% of the total reported expenses associated with lobbying Congress. By contrast, labor unions, which represent interests of working people, account for less than 2%.

And though corporate donors lean Republican as a rule, they give generously to both parties. Over the past six election cycles, business-related donors contributed roughly $7 billion to Democrats and Republicans apiece, according to OpenSecrets, a nonpartisan body that tracks contributions.

Ellen Miller, who long oversaw Washington-based nonprofits that tracked the influence of money in politics, thinks that’s why Republican zeal to cut taxes was long met by less-than-energetic opposition.

“The campaign finance system we have that is inundated by corporate donors has kept Democrats asleep on this issue,” she said in an interview.

The so-called carried interest loophole is a perfect example of how companies use the influence they’ve bought.

Democrats and some Republicans have railed for years against the provision, which lets private-equity and hedge fund executives pay taxes on their pay at nearly half the going rate. Even Trump called for its end. The Inflation Reduction Act negotiated this year by Sens. Chuck Schumer and Joe Manchin would have narrowed the loophole, but even that was too much for the private-equity industry.

Company lobbyists turned to Sen. Kyrsten Sinema of Arizona, a Democrat to whom investment firms have contributed $2.7 million in the past five years.

She killed the provision. The carried interest loophole lives on.

The ‘Angel of Death’ Loophole

Washington’s restructuring of another tax — one that affects only a handful of Americans — may best show how elected officials have shaped the tax system for the few.

In place since 1916, the estate tax has been defended by Democrats and some Republicans for many years to prevent what President Franklin D. Roosevelt once described as the “transmission from generation to generation of vast fortunes by will, inheritance, or gift.” Andrew Carnegie, one of the richest Americans and an income tax foe, had this to say about the estate tax: “Of all forms of taxation, this seems the wisest.”

But laws enacted by Republican-controlled Congresses slashed the number of taxpayers paying it from 27,568 in 1982 to 2,584 in 2021.

Collections, adjusted for inflation, were virtually unchanged over that period — even though household wealth among the rich exploded during that time.

That dramatic reduction in estate tax filings is the result of highly successful campaigns over the years by Republicans labeling it the “death tax” and advancing specious arguments about alleged injustices. One of the most popular was the claim that it forces the sale of family farms.

“They have wonderful farms, but they can’t pay the tax, so they have to sell,” Trump said in 2017.

But according to the Urban-Brookings Tax Policy Center, several analyses have not turned up “a single farm that went out of business due to estate tax liability.”

Because of favorable laws and clever tax planning, the number of estate tax returns continues to plummet. “Only morons pay the estate tax,” Trump White House advisor Gary Cohn is said to have told congressional Democrats in 2017 when they were calling for a rate increase.

Even before cuts in the estate tax, the wealthy long ago figured out how to pass along the family fortune tax free: It’s called the “angel of death” loophole, the vehicle by which great wealth is passed from one generation to the next and allowed to compound tax free into even greater value. It is the foundation on which the wealth of some of America’s richest families is built.

It works like this.

Say you bought 1,000 shares of Widget Company stock at $50 a share in 1980. By 2022, the stock is worth 10 times as much. If you sell those shares, you’ll owe capital-gains taxes of $100,000. But if you die and leave those shares to your favorite niece, no tax is owed and your niece has escaped a $100,000 tax bill.

Estimates put the amount of lost tax revenue from this loophole as high as $54 billion a year.

Closing it is on Biden’s agenda, as it was on Obama’s, as it has been on tax reform agendas for decades. But still it exists, having avoided any serious challenge in recent years.

Contrast that plum preserved by Congress for the rich with what Congress took away from the middle class in the so-called SECURE Act in 2019 (Setting Every Community Up for Retirement Enhancement).

Prior to the law, someone who inherited an IRA could withdraw payments from that retirement account over their entire life, thus stretching out taxes owed over many years, possibly decades. But SECURE mandated that withdrawals from an inherited IRA be taken within 10 years. Now a much larger portion of inherited IRAs will go to taxes because many beneficiaries will have to withdraw the money while in a higher tax bracket, before their own retirement.

That means a middle-class worker who inherits a $1 million IRA might pay $240,000 to $320,000 in taxes. A scion of a wealthy family who inherits $100 million in stock, meanwhile, pays no capital-gains taxes at the time and can cash it out whenever desired.

Activists take part in a 2021 demonstration at the US Supreme Court involving the Poor People Campaign, which has called for action on poverty, including higher taxes on wealthy people and big businesses.
Photographer: Jemal Countess/Getty Images for MoveOn

The Bottom Line

The earnings of the majority of American families have been mostly stagnant since 1981, just barely keeping up with inflation. Think of it as standing still financially for 40 years.

No group of working Americans has paid a steeper price for income inequality in the tax-cutting past four decades than African Americans. Their median household income of $45,870 is nearly 40% lower than that of white households. Over the decades, “next to no progress has been made in closing the black-white income gap,” concluded a report for the Federal Reserve Bank of Minneapolis in 2018. “The typical black household remains poorer than 80 percent of white households.”

Because Black families have fewer opportunities to set aside money and accumulate assets, the wealth gap between white and Black families is even worse. White families on average have six times more wealth than Black families: $983,400 for whites; $142,500 for Blacks, according to Federal Reserve data. Half of African American families have assets of less than $25,000.

And those numbers were compiled before COVID-19, a bigger financial hit to African Americans than any other racial or ethnic group, according to the Census Bureau.

For most of the period when the country had a more progressive tax system, racial discrimination was legal. By rule and practice, the U.S. government largely blocked Black families from accessing federal programs that helped white families build generational wealth.

In the past four decades, meanwhile, wealth-building opportunities for people with modest resources have been in short supply. Sixty percent of the country — the people on the less-income side of the scale — have a lower share of total assets in the U.S. now than in the late 1980s, according to the Federal Reserve.

It would take big change to turn that around. The tax provisions in the Inflation Reduction Act are only a modest step in that direction.

Biden’s original tax proposals were much more ambitious than what wound up in that law. He called for raising top tax rates on individuals back to the Clinton-era 39.6% and on corporations from 21% to 28%, taxing capital gains like wages, eliminating the “angel of death” loophole that allows the wealthy to pass their stock holdings to heirs tax-free, and many other provisions to shift more of the tax load to those at the top.

President Biden signs the Inflation Reduction Act on Aug. 16 as members of Congress look on.
Photographer: Drew Angerer/Getty Images

Public opinion polls show significant support for most of his tax proposals. But there’s virtually no hope for their adoption by the incoming Congress. As control of the House of Representatives shifts, Republicans can stymie Biden’s ambitions for a tax system that does more to blunt inequality. They can push to lock in Trump-era changes that would otherwise expire.

They can keep the trend Reagan set in 1981 going.

To Chuck Collins, a senior scholar at the Institute for Policy Studies who has been tracking income inequality for years, it is more urgent than ever that the U.S. do something about the growing chasm between those at the top and everyone else — something besides making it worse.

“Our current policies are propelling us toward a society that even the rich don’t want,” he said, “with the ultra-wealthy living in walled, gated communities driving bulletproof Mercedes, a precarious middle class with a larger percentage of people with no financial reserves.

“You don’t want your children growing up in an apartheid society. It creates volatility and social and political instability. Which is what we are wading into now.”

Journalist James B. Steele reported this story for the Center for Public Integrity in partnership with Bloomberg Tax. He has twice won the Pulitzer Prize for coverage of federal taxes and is the co-author most recently of America: What Went Wrong? The Crisis Deepens.

(Clarification: The graphic showing business income taxes as a share of the total, originally published Nov. 29, has been updated to clarify how the IRS defines those taxes.)

To contact the reporter on this story: James B. Steele at

To contact the editors responsible for this story: Jamie Smith Hopkins at; Bernie Kohn at

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