It's Time to Roll Back Reagan’s Middle-Class Tax Increases!

Most Americans don’t realize Reagan put a tax on income from Social Security, unemployment benefits and tips

Sharon McCutcheon on Unsplash ...

It’s time for some middle-class tax breaks. Reagan did such a great job selling tax cuts as a good thing that now Democrats should pick up some of that slack.

The money you receive when you retire or become disabled and begin to draw Social Security is money that you already paid in, in large part, through your working life. Therefore, when Franklin Roosevelt passed the Social Security act in 1935, the money people got from Social Security was not taxable and not even tracked by the IRS.

When Congress passed legislation enacting unemployment benefits, they also established a trust fund that employees, through money their employers could have paid them in other benefits, pay into throughout their working years.

Most workers never use this fund, but those who do are simply receiving what they already, indirectly, have paid into the system to create a safety net that will catch people so they don’t fall too hard or too far when they lose their jobs. Because this money was usually deducted from people’s income before wages were calculated, unemployment benefits were also not taxable and not reported to the IRS.

People who work in jobs where they receive tips rarely have their own back office accounting system to daily keep track of those tips and report them to the IRS, and, besides that, those tips are actually gratuities rather than income and are wildly variable. As a result, for most of the history of the United States tips (although technically taxable) were not reported to the IRS.

Back in 1981, Reagan passed the biggest tax cut for billionaires and giant corporations in the history of the world, lowering the top rate from around 74% to around 28% and shoveling, in today’s money, trillions to the top 1%. 

The result was an explosion in the budget deficit the following year, so Reagan decided something had to be done, requiring the largest tax increases since World War II. But, being a Republican, he put it almost entirely on the shoulders of working people, unemployed people and those receiving Social Security.

Reagan and his Republicans decided that people on Social Security should pay income taxes on Social Security benefits as if they were still working and not retired or disabled.

Tips, he and his GOP buddies figured, were actually part of “wages” even though employers didn’t have to bother paying them, and therefore forced employers to begin counting and reporting tips, and made sure the minimum wage stayed around two bucks an hour and the IRS could now come after tipped employees.

And people on unemployment, Reagan decided, would have to give back to the IRS some of the money they received out of the unemployment trust funds that they, themselves, had paid into throughout their working lives through their employer’s payments.

He also raised taxes substantially on working-class people who still had regular jobs, and ended the ability of working-class people to deduct credit card, car loan and other interest payments (except for mortgages) from their taxes.

When Reagan arrived at the White House there was a 0% tax bracket for Americans making under the equivalent, in today’s dollars, of around $8,500 a year. Those folks paid absolutely nothing in income taxes.

Reagan did away with that altogether, so pretty much everybody making less than $29,750 would pay up to a 15% tax rate, and anybody making over $29,750 would be taxed at 28%.

Finally, instead of indexing Social Security payments to one of the cost of living indexes like CPI-E that reflects actual costs of older or disabled people (relying heavily on medical expenses, medication, and food rather than toys, electronics and the price of gas), Reagan stuck us with a COLA irrelevant to retired people and, to as an added slap in the face, increased the Social Security tax paid by people making under $37,500.

(People making more than $37,500 under Reagan’s formula then paid no Social Security tax whatsoever on their income above that point, just like people today pay no Social Security taxes whatsoever on income above $137,700. It’s called the “Social Security Tax Cap For Millionaires” and it needs to be repealed as well.)

Reagan also made the “income” that people receive from Social Security benefits subject to taxation by the IRS.

To add insult to injury, Reagan also raised the retirement age from 65 to 67, although to avoid political blow-back in the next few elections, that only applied to people born after 1960 so it comes into full a effect next year, in 2022. Reagan is gone, but his tax hikes on working class people roll on.

Given how popular Republicans have made tax cuts, and what a hard time they’d therefore have in opposing them, how about Democrats take a page from their playbook and turn the tables?

How about some tax breaks — or at least a return to pre-Reagan tax fairness — for average and low-income working people and those on retirement, unemployment or who receive tips?

And while we’re at it, let’s clean up Social Security by getting rid of the “Millionaire Cap” that says wealthy people don’t have to pay any Social Security tax at all on most of their income, and also use a more reasonable COLA to determine every year’s benefits.

It’s time to roll back the Reagan tax increases.

Let’s make “income” from Social Security, unemployment benefits and tips — things that pretty much exclusively benefit low income and working class people — free of taxation once again.