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About Those Middle Class Tax Cuts

Summary:
These days, you can’t turn around without hearing someone talk about how the Republican tax cuts shouldn’t raise taxes on the middle class, should cut taxes on the middle class, or will for sure hike taxes on the middle class. Senator Rand Paul has been quite vocal about his concerns about the framework’s impact on the middle class. He isn’t the only one concerned about this, but considering the small margin in the Senate, his vote matters a great deal.  As many have pointed out before, his concerns are premature since in truth we do not know how the middle class will be affected quite yet. The framework is missing some key elements that make it really hard to say who will pay what and whose taxes will go up or down, contrary to what the liberal Tax Policy Center model claims. Ryan Ellis

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These days, you can’t turn around without hearing someone talk about how the Republican tax cuts shouldn’t raise taxes on the middle class, should cut taxes on the middle class, or will for sure hike taxes on the middle class. Senator Rand Paul has been quite vocal about his concerns about the framework’s impact on the middle class. He isn’t the only one concerned about this, but considering the small margin in the Senate, his vote matters a great deal

As many have pointed out before, his concerns are premature since in truth we do not know how the middle class will be affected quite yet. The framework is missing some key elements that make it really hard to say who will pay what and whose taxes will go up or down, contrary to what the liberal Tax Policy Center model claims. Ryan Ellis is optimistic about how the middle class will fare under the tax framework. I also assume that the Ways and Means Committee will work out the math to make sure the tax works and provides somewhat of a tax cut to the middle class and more money for low income earners. Also, it appears that the president has now given some guarantees to Sen. Paul that the middle class won’t be adversely affected by the tax reform. 

Yet, I am left wondering if this focus on the middle class tax relief is a wise way to frame this debate. Everyone wants to pay less in taxes, of course. But lowering taxes while government spending is growing is not a good idea in the long run. Instead, Congress and the administration should focus on the most pro-growth elements of their tax plan, such as the reduction of the corporate income tax rate, rather than tax relief for the middle class or the expansion of the child tax credit. Corporate income tax reform, we know, will spur investment, bring foreign earned income back into the country, improve workers’ productivity and grow their wages, and create employment opportunities that didn’t exist before. That is, of course, if the administration doesn’t mess it up with a global minimum tax.  

Now, I do understand that it would be politically difficult to implement a large reform on the corporate side without doing something for individuals. Still, I worry that continuing to focus on giving the middle class a tax relief could be a golden opportunity for Democrats to extract counterproductive compromises like agreeing to more handouts for the middle class — paid for with a higher corporate income rate. If that’s the case, Republicans will have agreed to more spending through the tax code in exchange for less economic growth. 

Then, there’s the minor detail that the middle class isn’t shouldering that much income tax burden in the first place. Most income taxes are paid by higher income earners. As Chris Edwards noted a few weeks ago, the average income tax rate of the middle income quintile was 2.6 percent in 2013. In 2014, the top 10 percent shouldered around 70 percent of the total income tax burden, up from 49 percent in 1980. This means that the bottom 90 percent have seen their share of taxes go down considerably as the weight was shifted to higher income earners. Do we really want to shift even more of the burden to the top? Well, apparently yes, considering that middle-class tax relief is often debated alongside the proposal to slap an extra tax rate on higher income earners. 

Also worth noting is the fact that more tax relief for the middle class means that many will be removed from the income tax rolls entirely. I, for one, think this is not a good idea and that it makes the fight for smaller government even harder than it is now. It is also not reasonable if having fewer taxpayers paying the income tax isn’t matched with serious spending cuts. The bottom line is that Republicans should stay away from the “middle class tax relief” rhetoric and instead focus on the power of economic growth, business expansion and hiring of new employees, and wage growth. They should explain how reductions to the corporate income tax will benefit workers and how their tax reform framework will make filing taxes easier for all, as opposed to the nerve-racking exercise it is now. These points are more inspirational. 

Veronique De Rugy

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist. Her primary research interests include the U.S. economy, the federal budget, homeland security, taxation, tax competition, and financial privacy. Her popular weekly charts, published by the Mercatus Center, address economic issues ranging from lessons on creating sustainable economic growth to the implications of government tax and fiscal policies. She has testified numerous times in front of Congress on the effects of fiscal stimulus, debt and deficits, and regulation on the economy.

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