Monday, January 14, 2013

Drastic tax changes only way to save middle class

By Marcus D. Pohlmann 

MEMPHIS, Tenn. (MarketWatch) — The midnight hour deal struck in Washington raised taxes for the wealthiest Americans, amid conservative protests that it would discourage the wealthy from investments that could add badly needed jobs to the sagging American economy. The squabble ignores a much larger economic problem, however, and that problem is the steady demise of the American middle class over the past several decades. 

The U.S. had a large and vibrant middle class as recently as the 1950s and 1960s, at a time when organized labor was at its strongest and there existed one of the most progressive tax structures in the nation’s history.

The $25,000 workout

Charles Passy joins Lunch Break to look at luxury gym memberships, including Equinox's deluxe, $25,000-a-year facilities in Greenwich, Conn. Photo: Getty Images.

Middle-class households typically had a breadwinner with reliable full-time work that provided opportunities for skill development and advancement. The breadwinner’s job also provided enough income to own a home, support a family of four, put two children through college, and have roughly six months worth of income in savings in case of an emergency. Both a health care and retirement plan were provided, as was a two-week paid vacation. 

Since that time, however, labor unions have declined significantly in membership and the 1980s ushered in major tax reform. Today, only the top quintile of Americans appears to meet or exceed such a package of wages, benefits and opportunities. They also hold 90% of the nation’s wealth and account for virtually all recent income growth. 

Meanwhile, the bottom 80% of the working population increasingly have lesser-skilled jobs in places such as restaurants, retail stores, and hospitals. These jobs often pay little more than minimum wage; entail few, if any, benefits; involve little to no skill development or opportunities for significant advancement; and are often only part-time. 

Marcus Pohlmann
This trend is not sustainable unless we are willing to see the United States gradually transformed into the equivalent of a “banana republic” where a wealthy elite lives behind iron gates in cloistered suburbs while the rest of the population scrambles just to make ends meet. Missing in that scenario is a large and secure middle class whose level of affluence gives them a personal stake in the survival of existing political and economic orders. 

Without such a large and faithful center, class warfare is likely to become more prevalent and that can destabilize a nation. 

Tax reform proposals that raise the top bracket from 35% to 39% will do virtually nothing to revive the American middle class. Instead of dawdling over incremental changes in the existing tax code, we should be doing something quite different. 

Instead of increasing top tax rates from 35% to 39%, we should return to the pre-Reagan tax rates that went up to 90% on the highest earners. One would then get tax breaks only for investments that clearly increase the likelihood of middle-class development here in the United States. Tax breaks could be retained for such things as child care, education, charitable giving, out-of-pocket health-care expenses and a limited mortgage-interest deduction for one home. 

All of these help sustain the middle class and assist those in lower income brackets to work their way toward middle-class status. 

Tax breaks for capital gains income, on the other hand, would change considerably. They would apply only for investment in companies that provide American citizens with the kind of middle-class wages, benefits and opportunities discussed above. All other income would be taxed at a steeply progressive rate that could rise as high as 90%. This would encourage wealthier Americans to invest in ways that help America as a whole. The alternative for them would be having much of their income taxed away so that government could then provide the assistance. 

We should change the way the tax code treats capital gains because capital investment in today’s globalized economy no longer guarantees an increase in American jobs, let alone American middle-class jobs. 

If a corporation is not employing Americans, then it is not advancing the cause of increasing the size and strength of the American middle class. This kind of corporate income should be taxed like any other income.
The current debate over marginally raising the tax rates of the wealthiest Americans is little more than a diversion from this far more serious economic issue. Moreover, utilizing the federal tax code in this manner might accomplish much of what unions have been able to gain without the disruption or impediments to change that have at times accompanied union activity. 

Marcus D. Pohlmann is professor of political science at Rhodes College in Memphis and has written extensively on race and poverty in the United States. 

Please like us on Facebook:
and follow us on Twitter: @onlinetaxpros

No comments:

Post a Comment