8-Did tax cuts for the rich create the Great Divergence?
Income tax rates have changed dramatically during the past 30 years. During the Reagan administration (1981-89), the top marginal rate dropped from 70 percent to 58 percent, and eventually to 28 percent. Under subsequent presidents it has hovered between 30 percent and 40 percent. But effective tax rates—what people actually pay—didn’t change nearly as much. For incomes in the top 1 percent, the effective tax rate went from 37 percent in 1979 to 29.5 percent today, with a big drop and subsequent rise during the 1980s. For incomes in the bottom 20 percent, the percentage change in the effective tax rate was much more dramatic—it was halved, from 8 percent in 1979 to 4 percent in 2007. But to contribute to the Great Divergence, the bottom quintile’s effective tax rate would have to have increased.
Tax cuts for the rich certainly contributed to the Great Divergence. But it would be hard to argue, based on this data, they were a major factor.