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?

(Check out and support if you can Kay Wood’s quirky environmental graphic novel, The Big Belch, on Kickstarter. http://www.kickstarter.com/projects/704467087/the-big-belch-graphic-novel