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In his latest film, Capitalism: A Love Story , Michael Moore takes more than a few swipes at President Ronald Reagan, essentially asserting that under Reagan's watch, the rich got richer at the expense of everyone else.
During the Reagan era, he said, "the richest Americans had their top income tax rate cut in half."
Moore is correct that the top marginal tax rate — the rate of income tax charged to an individual on their last dollar of earnings — decreased from 70 percent in 1980 to 28 percent in 1989.
That's not the same as saying the richest had their taxes cut in half.
In 1980, the top marginal tax rate was 70 percent on earnings over $161,300. The rate was substantially lower for the income earned below that. For example, that year, there were no taxes on the first $2,300 of income; 14 percent on income between $2,300 and $4,400; and on up via a graduated scale.
So if you made $162,000 in 1980, for example, you paid far less on average than 70 percent of your income in federal taxes.
The marginal tax rate also doesn't take into account various available deductions and tax credits, said Bob Williams of the Tax Policy Center. When Reagan revamped the tax code and dropped the top marginal tax rates to 50 percent in 1982, and then down to 28 percent by 1988, he also closed some of the tax loopholes available to people at the top.
It's much fairer, we think, to look at effective individual income tax rates. That's the actual percentage of income that people paid in income taxes, factoring in not only the graduated percentages along the marginal tax rate scale, but also the deductions and tax credits that people were entitled to.
In 1980, the effective individual income tax rate for the top 1 percent of earners was 22.3 percent. In 1989, that rate dropped to 19.9 percent. That's a decrease of 2.4 percentage points, which works out to an 11 percent drop. That's sizable, but nowhere near 50 percent.
If you widen the field and consider the top 10 percent of earners, instead of just the top 1 percent, the drop in effective individual income tax rate was about the same, just over 10 percent.
For middle incomes, the effective individual income tax rate also dropped, from 8 percent to 6 percent. That's a 25 percent decrease. In other words, it wasn't just the rich who saw their income tax rates drop under Reagan.
One more thing. When the top marginal tax rate dropped between 1980 and 1989, it went from 70 percent on earnings over $161,300 in 1980 to 28 percent on earnings over $128,810 in 1989. Obviously, that's not an apples-to-apples comparison.
Did the rich get richer during the Reagan years? Yes.
And Moore is technically correct when he says that "the richest Americans had their top income tax rate cut in half." But we suspect some may mistake that for the richest having their taxes cut in half. In fact, we first began to look at this claim from a fact sheet provided on Moore's Web site before the movie was publicly released. And in the fact sheet, it states that "the richest had their taxes cut in half." We were prepared to give that a False, as the effective tax rate for the richest was cut by about 10 or 11 percent.
But in the movie, Moore describes it as "the top income tax rate," apparently referring to the highest marginal rate. As we said, some may misinterpret that, but we think Moore has been careful enough with his words to get a Mostly True.
Interview with Bob Williams of the Tax Policy Center, Oct. 1, 2009
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