WASHINGTON, November 14, 2017 – The Republican-controlled U.S. House of Representatives and Senate are trying to convince the American public to support their current tax cut bill. They say the bill represents a tax cut for a middle class that’s desperately in need of a significant tax break. But the GOP is going about this in precisely the wrong way.
Various agencies have evaluated the tax plans put forth by each chamber of Congress. Their general conclusion: most of the middle class will indeed see a tax reduction. But some may see a slight tax increase instead.
Does the middle class really need a Federal income tax cut?
While it is currently true that the middle class carries a heavy tax burden, reducing their Federal income tax tally with a tax cut will actually do little to ease that burden. Most households, in fact, pay more in Social Security taxes than they do in Federal income tax dollars.
According to the Congressional Budget Office (CBO) 73 million households in the middle of the income distribution (earning between $32,000 and $140,000 annually) pay an average of 3.4% of their income in Federal income taxes.
The middle class worker pays 6.2% of gross wages – really 12.4% considering the employer pays an additional 6.2% for each employee – for Social Security tax. That’s on top of the sales tax paid on almost everything purchased in 45 of the 50 states. Add to this the mandatory Medicare tax, plus a state income tax in 43 states. And then there are always those ever-escalating real estate and personal property taxes, as well as additional local taxes and fees for items ranging from utility taxes to automobile tags and license fees.
There are also those relatively hidden taxes on products like gasoline, alcohol and tobacco. It is true that the middle class carries a heavy tax burden. But clearly, that burden is not heavy solely because of the Federal income tax. That’s why simply cutting income taxes for the middle class will not represent much of a tax break, give that the currently proposed tax cut will scarcely address all each individual’s other tax obligations.
The middle class needs more opportunity
The middle class is struggling, and has been for decades. While the Federal tax burden contributes significantly to this problem, the real problem is that the middle class has for a long time lacked new and better opportunities to increase household incomes. If middle class incomes were gradually rising, as used to be the case, their tax burden wouldn’t feel so heavy.
While incomes remain essentially static, the middle class feels frustrated by the rapidly rising cost of healthcare as well as the increasing cost of food, housing and clothing, even while income growth remains flat. This is a direct result of the lack of opportunity to leave a current employer for better-paying jobs elsewhere.
It has been eleven years since the economy has seen annual economic growth of at least 3%, and it’s that kind of growth rate or better that leads to the creation of those better-paying jobs. This unprecedented period of economic stagnation has resulted in much of the middle class finding employment opportunities that do not meet their qualifications. Because of this under-employment, lower middle class and lower class workers have essentially been squeezed out of the job market or forced to take part-time or lower paying jobs in a desperate attempt to make ends meet..
To remedy this, it is critical that the economy at least returns to the one-time average U.S. growth rate of about 3.5%. Even better would be an economic growth rate exceeding 4%, at least over the next few years. This indicates that the primary goal of tax cut legislation should actually be to increase America’s economic growth.
A new tax cut bill can rapidly increase U.S. economic growth
Simply states, there are two basic inputs into any nation’s economy: capital and labor. How productive these inputs are depends on factors such as the amount of available natural resources, the educational level of the workforce, the national regulatory climate and the current state of technology and innovation. To increase growth, there must be a significant increase in these basic inputs.
Today, there are still about 7 million discouraged workers in the U.S. These individuals are unemployed people who previously were employed but have given up seeking work because of the seemingly perpetual lack of opportunity. They have tried and failed numerous times to find good jobs that pay a decent wage, so they’ve given up looking, regarding the employment picture as essentially hopeless. That means there are plenty of available workers with essentially no place to go.
The final tax cut legislation must create new capital to enable the economy to grow 4% or more annually. Regarding any tax cut, we all need to remember that capital is created essentially in three ways, namely by
- Lowering the corporate tax rate
- Lowering the tax rate on pass-through income from small business (LLCs and Subchapter S corporations, for example)
- Lowering the tax rate on the highest income earners
Lowering the corporate tax rate to 20%, setting a maximum tax rate of 25% on pass through small business income and reducing the top personal income tax rate from 39.6% to 36% are thus the essential steps needed to create new capital.
Instead of calculating the immediate tax savings for any income earner or the lack of an immediate tax break, or loophole, for a given group, the real purpose of any final tax cut legislation should be presented to the public as an action that will lead to a significant and long-lasting increase in economic growth.
The middle class needs opportunity. The final GOP tax cut legislation should provide them with that opportunity.
*Cartoon by Branco. Reproduced with permission and by arrangement with LegalInsurrection.