The Only Changes That Would Really Help The Middle Class

The American middle class isn’t disappearing. The middle class way of life is just being redefined. Downward.

Being middle class on these shores no longer means that in return for a reasonable amount of work one receives a reasonable return in salary and benefits that allows a family to enjoy reasonable comforts and security. In recent years the bar on all these “reasonables” has been changed in ways that undermine the American middle class standard of living — a fact hidden for a time by easy access to credit. But no longer

Neither major political party is fighting for policies that would significantly make things better for the middle class, in spite of endless blather to the contrary.

There are two changes, however, that would very quickly generate such improvement and protection. One involves taxation — specifically the Payroll Tax. The other involves debt — specifically laws related to bankruptcy. This post is about the former. The latter will be described in another post.

The Payroll Tax is usually referred to as “dedicated tax,” one dedicated to a specific purpose, providing Social Security and disability benefits. That’s a correct definition from the payout end of things, from the point of view of where the Payroll Tax money goes after it’s collected. From the other end of things, the collection end, this tax is best described as “the middle class tax.”

The median income in this country is about $50,000 per annum. The middle class is usually described as having an income 50 percent on either side of this figure — between $25,000 and $75,000 per annum. Because costs of living differ so much in different parts of the country, you can probably add a few thousand on either end of those parameters for a more accurate gauge of middle class income.

Put these numbers together with the fact that the Payroll Tax is only collected on earned income up to $113,000 per annum. The conclusion? The Payroll Tax is really just a tax on working middle class people. They (and some of the poor) are the only ones who pay it.

When it comes to another kind of tax, the income tax, there are all kinds of exemptions and deductions that can be applied to gross income to lower one’s payments. This rule doesn’t apply to the Payroll Tax, collected from dollar one of earned income. That’s the reason that about three- quarters of all working middle class Americans end up paying more in Payroll Taxes than income taxes.

So…you have a Payroll Tax that only the middle class pays. And it’s a tax that’s larger for most middle class Americans than their income taxes. Even an economist or a Washington policy maker who claims to be interested in improving middle class economics should realize that the best way, indeed the only real way, to improve the middle class tax situation, is to do a real reform of the Payroll Tax.

Economists and Washington policy makers don’t seem to realize this, however. Or more likely, don’t care because they have a richer constituency to service.

If they did care there are a number of ways to restructure the Payroll Tax in a middle class favorable way. Here’s the simplest:

Subject all earned income, with no top, to this tax, and make unearned income (like dividends, capital gains. et. al) subject to this tax as well. And keep the payout cap at its present level.

Then (and this is critical), do NOT use the extra revenue generated for any purpose whatever other than to lower overall Payroll Tax rates. Most especially do NOT use the extra revenue generated to pump up the bogus Social Security Trust, which only buys government bonds, which would make this revenue enhancement just another way for government to borrow cheap and help the middle class not at all.

Instead, use the extra revenue to lower the Payroll Tax rate for everyone on all levels of incomes, earned and unearned, to 4 percent or 4.5 percent or perhaps 4.75 percent — whatever the rate needed that generates enough to meet Social Security and disability benefit commitments.

What would be the positive effects of this restructuring?

Middle class earners would get richer immediately because they would pay less in taxes. Most employers of middle class workers, big ones and small one alike, would also have a better bottom line because they would still be matching employee tax as they do now, but doing so at lower rates for the bulk of their workers — those now earning less that $113,000 a year.

One of the biggest beneficiaries of this change would be the self-employed, who pay a slightly reduced rate that combines the employer AND employee share of Payroll Taxes. Their rates here would go down from the current 10.4 percent to perhaps 8 or 8 1/2 percent. This would be a huge boom to enterprise in this country as well as a middle class boost.

This is a simple and obvious proposal that would significantly improve middle class spending power. most employers’ bottom lines, and a great many self-employed persons ability to keep doing the creative things the economy depends on.

Something that has to be emphasized here is that this is NOT one of those liberal, progressive approaches. God forbid anyone would want to pursue that sort of thing. No. This is an exact replica of what conservative Republicans are proposing to reform business taxes.

Conservatives want to do away with some business exemptions and deductions in order to expand the business tax base at the same time that overall business taxes are reduced — an approach they say would be revenue neutral.

That’s exactly what’s proposed above with the Payroll Tax. The exemption for higher income earners and unearned income is done away with, the collection base is broadened, and overall tax collections remain the same.

What’s good for business, tax-wise, is good for the middle class, tax-wise. Who could argue with that?

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  • MICHAEL SILVERSTEIN, Wall Street Columnist

    Hi Steve,

    Fair question. Here’s my answer.

    I use numbers in my posts, but I don’t measure the way things ought to run based on piling up numbers and pitting them against one another. I measure the way things ought to run based on how people really live in the real world.

    We all of us have our own griefs and pleasures in this world. Rich folks and poor alike. In purely economic terms, however, in recent years, based on everything I have personally observed, rich people are living better economically so I feel no compassion for their economic plight. While middle class people, me and almost everyone I know, is getting squeezed and squeezed and squeezed in ways we weren’t years ago.

    Looking beyond the numbers you employ above, isn’t this really your own observations? And if it is, why would you think what I propose wouldn’t make life better for most of us, and not reduce the real world economic pleasures of the rich in any meaningful way?

  • SteveinCH

    Michael,

    Thanks for your reply. To answer your question.

    1. I don’t trust my observations as representative of the world. I do a lot of statistical survey research and, if it has taught me anything, it’s that my impressions of the world are often incorrect. If I did trust my own observations, I would argue that many people are being squeezed by the recession. But I would not describe the squeeze as a result of federal policy. I also do not believe that income distribution is an appropriate objective for federal policy.

    2. The logic of your last paragraph justifies more or less any level of taking from anyone. You seem to assume that anything another person earns is yours by right as long as you believe it won’t materially harm the other person. That’s a justification for theft is it not? Note, I’m not equating taxes to theft, I’m simply noting that your justification of making life better for many without hurting a few justifies all manner of taking. In other words, why stop at your current construct. Why not cancel FICA taxes altogether and fund them with a tax on wealth. After all, the rich won’t miss it and the “poor” would be even more helped.

    I think I can infer an answer to the question I asked you but let me test it with you. Any tax burden on the rich is acceptable as long as, in your view, “it doesn’t reduce their real economic pleasures.” This is true regardless of what the tax rate is on everyone else. Is that an accurate view of your perspective?

  • sheknows

    Good arguments on both sides. Waitng to hear rebuttals.
    For myself, I have only one argument and that is why payroll taxes do not include income above $113k. Why not? Income is income. It is all relative to a payroll tax. It is a seperate tax that has nothing to do with income tax, and should not be used as an excuse that higher earners pay more in income taxes. Higher earners also have more deductions and loopholes to avoid paying a good portion of their taxes, where few middle class folk do. But that is not the discussion. It is about why ALL income is not payroll taxed equally, be it 50k or 250k and up.

  • SteveinCH

    Sheknows,

    I’ll give you my best answers to your question.

    1. The government wants us to believe that payroll taxes and future benefits are somehow related. In effect, the government has said that you “earn” no benefits on payroll taxes above the cap and therefore you don’t pay the tax. To keep the current construct alive, taxes paid above the current cap would need to result in additional social security benefits in the future. To eliminate the cap without changing benefits, as Michael proposes, would put the lie to that construct. Personally, I don’t have an issue with that because I don’t believe the government is obligated to pay SS benefits in the future but many in DC worry about it.

    2. Higher earners pay much, much higher federal taxes than lower earners. The forecast for 2013 is that the top 1% of earners will pay 36.4% of their income in federal taxes. The middle 20% of earners (roughly in line with Michael’s middle class) will pay 15.5% of their income in federal taxes. Were we to compare that to 2000, the top group is paying 3 percentage points more while the middle group is paying 1 percentage point less. Under Michael’s plan, the top group would pay a further 6 or 7 percent more while the middle group would probably pay about 2 percentage points less, making the comparison more like 43% versus 14%.

    I would be happy to see all income payroll taxed equally if others would be happy to see all income income taxed equally. My preferred tax system is all income under 2x the poverty level is free from any tax and all income from whatever source above that level is taxed equally. There would then be no payroll tax versus income tax versus capital gains tax, there would just be tax.

  • MICHAEL SILVERSTEIN, Wall Street Columnist

    You’re missing the real focus here. More and more Americans are losing their faith in the fairness of government. In the integrity of markets. In the belief that their own lives, and those of their children, are going to get better.

    Unless steps are taken — like the very modest one I suggest here — the next great economic dive is going to bring about an horrendous social upheaval.

    Look around. Listen. The center is still holding. But it won’t last much longer if we continue on this path.

    I used to be angry at growing inequality. Now it’s getting worse and there doesn’t seem like an effective mechanism — like an election — that’s able to change a thing. This just plain scares the hell of out me.

  • zusa1

    Changing the tax code as suggested would be a stop gap measure for the middle class at best. It does nothing to identify and address the root of the problem. For one thing, I think many of us are sick of the corruption of lobbying.

    “For the U.S., the moment to act is now, before the cancer of crony capitalism metastasizes. The tax code needs an overhaul that eliminates special treatment and bans any form of corporate subsidy—starting with too-big-to-fail banks. We must find ways to introduce more competition into sectors such as education and health care, while expanding economic opportunity for those at the lower end of the income spectrum. And we must curb the political power that large industry incumbents have over legislation. Not only does it distort legislation, it also forces new entrants to compete on lobbying instead of concentrating on making more innovative and cheaper products.”

    http://online.wsj.com/article/SB10001424052702303665904577450071884712152.html

  • SteveinCH

    Zusai,

    Fair enough from my pov. I don’t think it is possible to eliminate crony capitalism without dramatically reducing the scale and scope of the Federal government. Money seeks influence. As long as the influence/control is there, the money will find a way to follow.

  • sheknows

    I don’t think it is about blaming anyone. It is simply about inequity. Inequity that our laws have been allowed to continue to the point where the rich DO get richer and the poor, poorer. Wages are but one example of this.
    To deny that there is a tremendous discrepancy and an ever widening gap in “class” structure if you will in this country is not going to do any more good than blaming the rich. The rich themselves are not to blame, but the lawmakers who find ways to protect their wealth, clever though they may be, should work a little harder for the middle class as well.

  • zusa1

    “Crony Capitalism? Thanks, Big Government

    Would a farmer who put out a trough of slop be surprised if it attracted a bunch of pigs? Yet activists who promote ­enlarging the size and scope of government always seem to be shocked when one program after another is hijacked by corporations that find it easier to seek favors in Washington than ­customers in the marketplace.”

    What I would add to the above analogy is that we then blame the pig.

    http://www.forbes.com/forbes/2011/1219/opinions-capital-flows-capitalism-government-bill-frezza.html

  • sheknows

    Well try capital gains for one thing. How is it that a Warren Buffet in our society can see the inequity and you cannot?! If you do not think that tax laws and loopholes ( sorry I cannot site the entire IRS regulations on them at the moment) are not a contributor to inequity, than you are standing in a forest but not seeing any trees.
    Go all the way back to Rockefeller and Morgan. The power of wealth to make laws has a very LONG and unfortunate history in our nation.

  • sheknows

    BTW, “inequality is a fact of life”. yes indeed it is, when you are talking about a NATURAL design of the universe, not when you are talking about man made inequality. Only MAN has made that.

  • SteveinCH

    Sheknows.

    Again you are illustrating my point. The tax rate paid by the rich is far higher than the tax rate paid by the rest of us. I already cited the numbers for you. If the rich control the tax code to increase inequality, they are making rather a muck of it.

    Even the capital gains tax rate is a flat 23.8 percent today for the rich. If you compare that to the combination of income and payroll taxes for people who are wage earners, you would have to be in the very top of the income distribution. In other words, people with income from capital gains are no better off than others, at least others in the bottom 99% of the income distribution. To provide you with a simple example, people with an income between 100 and 200K per year, pay an average effective tax rate of 20.0 percent. That’s below the 23.8 percent that capital gains is. People with incomes between 50 and 75K pay only 16 percent, again below the capital gains rate.

    One point on Mr. Buffet. When he wrote what he wrote, the capital gains tax was a flat 15 percent. It is now 23.8 percent or 60 percent higher than it was then. It is also the case that Mr. Buffet did the math wrong in the argument he made but it’s not worth going into that.

  • sheknows

    So you are saying Warren Buffet was talking out of his hat. He in fact saw only an imaginary inequity and decided to alert everyone to an unsubstantiated allegation? Yes, that seems likely coming from a billionair who can’t get his math correct apparently. Or Maybe he didn’t feel he had to know the exact math to see something was wrong with this system, ya think?

    You like to talk about the tax rates and percentages alot to support your argument that no, all the middle class does is complain, and things really ARE fair…just look at the numbers, and if you can’t site laws and regulations off the top of your head, you must not have an argument. The truth is though, that you also refuse to take a look at history, admit that the wealthy people and corporations control our lawmakers ( just as Rockefeller and Morgan did) and consequently have put laws in place which favor them disproportionately.
    I know you think they have the highest tax but it is that way because they MAKE the most. It’s relative.
    I am all in favor of a flat tax for everyone, but congress will never approve it…why do you think that is?? It certainly is equitable…but who do you think doesn’t want that in a million years?

  • sheknows

    Well SteveinCH, I appreciate your viewpoint, especially in lieu of the fact that I cannot site tax laws about loopholes and deductions off the top of my head, but it doesn’t mean they don’t exist…as you well know.

    But since this is about payroll tax and not income tax, I will only state that a cap set at 113k because the wealthy “earn no benefits above the cap” is puzzling. That would imply they can use that extra money to save for their own retirement since SS would not be needed. Then why do these retired people receive checks each month?

  • SteveinCH

    Well sheknows,

    There are many tax laws that exist but their net effect is as I described it to you even after all the loopholes and deductions. This is true whether you believe it or not.

    As to your last question, I think it’s a very good one. As far as I’m concerned, the wealthy should not receive SS benefits.

    It’s one more example of the issues with our system. Rather than focusing on giving things to those who have need, we give them away broadly, in effect wasting money. Then we argue we don’t have enough taxes. Seems odd to me.

  • DR. CLARISSA PINKOLA ESTÉS, Managing Editor of TMV, and Columnist

    Steve in CH, if you’d like to keep commenting here at TMV, please read the commenters’ rules. The conversation is to remain on the topic of the post, and is not to be about what any commenter thinks about whether other commenters or writers grasp the issues or not. Stay to the topic and not the commenters, remain civil, that means courteous, and all is well and will be well.

    Thanks,
    archangel/ dr.e

  • dduck

    My wih list: I agree with raising the 113k to whatever it takes to pay the current SS liability.
    I also don’t know why SS and Medicare aren’t means tested.
    Certainly the egregious presto chango that some financial institution use to change ordinary income into dividend income and other sleight of hand measures should be corrected. After that, a total tax reform (easier said then done)eliminating buckets of deductions and loopholes that have built up over the years including a phaseout of the hone mortgage deduction, again perhaps means-like adjusted.
    A, lot of work to be done at the sausage factory. It ain’t elementary but alimentary if congress does it.
    Oh, and a little pinch of growth would be nice.

  • dduck

    ooops, missed the edit.

  • DR. CLARISSA PINKOLA ESTÉS, Managing Editor of TMV, and Columnist

    Dear All: We appreciate it when our commenters stay to the topic of the post –which most do most all the time. If a commenter wishes to ‘debate’ back and forth with one person or a couple people about topics of their choices, and at length, please take it offline into email with each other. That way, the comments section flows in the way it was set up.
    Thanks.
    archangel/ dr.e

  • dduck

    The topic broadly is about the middle class and its economics which includes taxes and revenue and social programs. Many factors go into the mix.

  • sheknows

    Sorry Dr E..somehow got all caught up but realized ( too late) I was off topic.

  • DR. CLARISSA PINKOLA ESTÉS, Managing Editor of TMV, and Columnist

    Sheknows, all is well, and thank you for noting. Classy.

    Thanks,
    archangel/ dr.e

  • zephyr

    Excellent post Michael. Agree with your sugggestions and sentiments. As dd mentioned, means testing should also be part of the equation. If govt were to take these reasonable and progressive steps it might go a long way toward restoring some lost faith in the ablity and willingness of lawmakers to work in the interest of the country as a whole rather than just a few.

  • KP

    Thanks for the article, Michael. Good stuff.

    SteveinCH, I hope you keep offering opinions.

    Nothing pleases me more in the blogosphere than having read an article and a thread and then feeling like I have gained additional perspective. Brilliant.

  • ShannonLeee

    We need to attacking income equality in different ways. I would start by trying to purchase locally produced goods. Globalization, which is inevitable, has focused global wealth into the hands of the .1 percent. We as consumers, need to be willing to pay a little bit extra for local goods, even if that means just buying what is made in the US.

    Is there a good microbrewery in your city? buy their beer instead of Bud Light.
    Go to a trusted farmers market.
    Garmin or TomTom? I grew up in KC, so of course I bought a Garmin.

    Debating the tax code is great, but the only influences we have are voting, letters, and protests. In the end, money talks and bs walks (death and blood are a close second to money). It is how you spend your money, especially within an organized group, that can really make a difference.

    the system is so utterly corrupt that only a bottom-up solution is possible.

  • Steve Sv

    Steve,

    I am curious as to where you are getting your numbers especially the 36.4% projection of federal taxes that will be paid by high-income earners.

    Thanks

  • Stephen S

    Steve,

    I am curious as to where you are getting the numbers that you cite especially the 36.4% of income in federal taxes the high-income earners are projected to pay in 2013.

    Thanks