McConnell’s Middle Class
On Sunday, Mitch McConnell’s proposed cutting the 25 percent income tax rate to 15 percent, which he described as a move to help the middle class. As usual with conservative tax proposals, this is true as long as you see “the middle class” as primarily composed of extremely wealthy people. Ben Furnas points to new analysis from the Tax Policy Center:
As economic stimulus, meanwhile, anything that — like McConnell’s proposal — would do nothing at all for folks earning less than $40,000 is a terrible idea. You need to direct tax relief at people who have a high propensity to spend a marginal dollar, even in a climate when there are some deflationary expectations. That means first poor people, second middle class people, and not at all the $2.8 million a year crowd that McConnell’s trying to help out.
61 Responses to “McConnell’s Middle Class”
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January 7th, 2009 at 1:31 pm
I think a point has to be made about the current hubbub about “middle-class tax cuts”: that is to say, whatever constitutes “middle-class” in terms of purely economic definitions may have no relation whatsoever to the “middle-class” definition that is useful for politicians.
One of the most important lessons learned by New Labour (if not the most important), was that selling the sort of tax-the-rich-to-help-the-lesser-off sort of electoral calculus don’t work anymore in today’s economy. Let me quote from the Observer (weekend edition of the left-liberal Guardian paper):
And I think this is a salient point politicians will have to keep in mind when formulating their tax policy. This especially applies to the United States, home of the American Dream, the land of the firm and unshakable where every man is supposed to be able to make it big (whether it is true is another question).
That’s why taxing the wealthy doesn’t really work as a permanent policy calculus; Americans, by their national character, aspire to be wealthy and resents limitations and caps put upon the objects of their aspirations.
January 7th, 2009 at 1:33 pm
firm and unshakable belief*
January 7th, 2009 at 1:38 pm
Then why fiddle with the income tax at all, just cut the FICA tax (which starts at dollar one of income, has no deductions and caps out at around $100,000)? And since FICA taxes are split betweenb oth the employee and the employer, a tax cut means you’re putting money in the pockets of both.
FICA collects $65 billion a month (almost $800 billion a year). An immediate FICA tax holiday (in full or part) could kick in this pay period and can go in as long as necessary. Its going to get money circulating in the economy faster than corporate tax rebates or even “shovel-ready’ infrastructure projects.
January 7th, 2009 at 1:41 pm
good point beowulf.
I think the real 3rd rail around SSis that everyone is supposed to pretend it is a seperate entity rather than simply being part of the overall budget funded by current taxation.
If I could waive a magic wand I’d simply do away wit FICA all together and just increase income taxes to cover it.
January 7th, 2009 at 1:56 pm
Once again the GOP has proved itself worthless and committed to an ideology with no relevance to improving our current economic situation. If Obama believes that he must make any real concessions to these idiots we are in serious trouble. Anything and everything the right wishes to do at this time will only damage the economy and deepen the recession needlessly.
January 7th, 2009 at 1:57 pm
What this does demonstrate is the diminished marginal returns of continued tax-cutting.
If you propose tax cuts that are going to save me $5000, I’m going to sit up and tax notice. Once they’re so low that cutting the marginal rate singnificantly only gives me about $200, it’s not going to figure into my calculus. We’re at the point where even those among the top 15-20% of wage earners aren’t going to be affected by these tax cuts. The flip side of creating mass amounts of tax relief is that taxes get more or less taken “off the table” as an issue. At this point, why should we care what the top marginal tax rate is? Even if you’re in that bracket, you’re talking about relief equal to a nice meal out to dinner each month, and at that point, it’s nothing to get excited about compared to, say, a better job, a raise, or a more valuable 401(k).
January 7th, 2009 at 2:01 pm
Fine, if you don’t Middle Class Tax Cuts…
CAPITAL GAINS!!! CAPITAL GAINS!!! CAPITAL GAINS!!! CAPITAL GAINS!!! CAPITAL GAINS!!! CAPITAL GAINS!!! CAPITAL GAINS!!! CAPITAL GAINS!!! CAPITAL GAINS!!! CAPITAL GAINS!!! CAPITAL GAINS!!! CAPITAL GAINS!!!
January 7th, 2009 at 2:02 pm
So we say that for the time being, the Feds will make your contributions for you. It could even still show up on your paycheck. A payroll tax holiday would immediately add almost $20B a week directly into the pay packets of those most likely to spend it; would give immediate relief to businesses by reducing their payroll costs by 6.5%; and would be easy and qucik to administer (no complicated withholding to figure out – just stop collecting the money.) and would be esy to start up later if we’re in danger of overheating the economy (although I would agree that it would be better to abolish it altogether…)
The only problem, from the Republican point of view, is that it gives most of its relief to the wrong sorts of people.
January 7th, 2009 at 2:06 pm
Al seems to be right on the first part—based on the available info, I don’t really see how the graph correlates in any way with the reduced rates.
Al’s second point—if I understand it correctly, that a small reduction to the marginal rate of the middle class will involve more money in total than a larger reduction would to those with higher earnings—seems indisputably true, and also totally irrelevant.
January 7th, 2009 at 2:07 pm
Al,
It’s because of other deductions. Even though the 25% rate kicks in at 32k lots of people have deductions that bring them in under that (children, mortgages, etc.), so the number of people actually subject to the rate is a good deal lower than those just making more than 32k. What this really shows is that most people pay very little in income taxes, so it’s hard to reduce their taxes much (FICA taxes are another matter entirely).
January 7th, 2009 at 2:12 pm
I hate to say it, but Al has a point in this case. Can someone explain how this result is reached? Shouldn’t reducing that bracket from 25% to 15% save a flat 10% of the width of the bracket for everyone who makes more than the top end of it (that is, singles making more than $78,850 and couples more than $131,450)?
January 7th, 2009 at 2:15 pm
But the savings is expressed in raw dollar amounts, that doesn’t make any sense. It should be in percentage of income, or percentage of taxes paid. Right?
January 7th, 2009 at 2:18 pm
Too Many Steves—
I think Al’s point of expressing the savings in raw dollar amounts is based on the “trickle-down” principle that the total money saved will automatically be used for stimulus purposes, and therefore it’s not important how the money is distributed.
January 7th, 2009 at 2:22 pm
I would like to see this chart with “percent reduction” on the vertical access instead of “dollar amount of the reduction.
Suppose we call 66K-110K middle class. It looks like, at least for incomes less than 600K, the 66K-110K group gets the biggest percentage cut.
What is the average tax burden for someone earning over 2.8 million? Is 4 thousand a big reduction for them in percentage terms?
January 7th, 2009 at 2:27 pm
But if you do not cut the taxes for the wealthy, who will invest in foreign ventures and help speed along the outsourcing of the American worker?
January 7th, 2009 at 2:30 pm
Presumably not, which is why it might make more sense to put that money toward the lower-income people instead, which is why giving the dollar amounts makes sense.
But I still want an explanation of why this doesn’t just ramp up more or less linearly between $xx,000 and $1xx,000 and then stay flat at somewhere around $5,000.
January 7th, 2009 at 3:36 pm
Let me guess why the tax cuts don’t show up for lower brackets. First, many people have large deductions, so we don’t actually see the 25% bracket cut in until incomes around $100,000 dollars. And after that, depending on your circumstances, the Alternative Minimum Tax cuts in, and if you pay the AMT, like me, this “tax cut” will give you absolutely no relief. It’s only after you get out of the range of the AMT (at several hundred thousand dollars) that these tax cuts actually start giving you real money.
Very cleverly done, on McConnell’s part.
January 7th, 2009 at 3:41 pm
was that selling the sort of tax-the-rich-to-help-the-lesser-off sort of electoral calculus don’t work anymore in today’s economy.
It worked on November 4, and a good thing it did.
January 7th, 2009 at 4:06 pm
I’m sorry, I don’t get this chart at all (or the original data). Can someone please explain what exactly this chart is trying to demonstrate? Why should a cut in the rate from 25-15% for those individuals that have taxable income in the range of 33-29 impact people not in that range what so ever?
Thanks in advance…
January 7th, 2009 at 4:07 pm
Sorry, the bracket is roughly 33,000-79,000, I mistyped…
January 7th, 2009 at 4:09 pm
I’m also expressing skepticism here. These numbers make no sense. Cutting the 25% rate to 15% would not save earners of over $600,000 more than those making 200K to 600K. Or at least not much more. Something is wrong with these numbers.
January 7th, 2009 at 4:26 pm
I agree with Al that something is up with the chart (maybe it has to do with the Y axis not being labeled). I dug into the Tax center Excel sheet and could not understand how they got their results.
According to Wikipedia, the 2009 25% bracket for married couples (filing jointly) is from $67,901 to $137,051. Any wage earning couple without long term capital gains or dividends (they already get the break) that makes over $137k will get a tax break of $6,960. That break is prorated from 68k to 137k. You don’t have to make 2.8M to get the break, as the chart seems to suggest. I think it would be more proper to call it an upper middle class break, but it isn’t even noticeable to the rich.
I don’t think many people in this thread are concerned over the cap gains and dividend types not getting as big a break.
January 7th, 2009 at 4:33 pm
Seth, clearly a cut in the rate for that bracket would benefit everyone with any income taxed in that range, which includes all those whose incomes are above that range. You do understand that the rate for a bracket applies only to the part of your income that’s within that bracket, not all of your income, right?
January 7th, 2009 at 4:34 pm
I think Peter may be on to something with the AMT explanation. Large deductions aren’t going to do it, though.
January 7th, 2009 at 4:38 pm
The Tax Policy Center guys’ stuff is pretty opaque… they massage the numbers a lot to make them as comprehensive as possible. I think that’s why this chart looks so odd.
For example, the x-axis of this chart is based on “cash income.” But cash income includes some stuff that we probably wouldn’t think of as income. For example, it includes a person’s employer’s share of the payroll tax, and it includes the person’s share of the corporate income tax. (I.e., if the Center allocates $5,000 of corporate income tax burden to a taxpayer, they also boost the taxpayer’s cash income by $5,000.)
These are reasonable adjustments. But you can’t talk about someone with $2.4 million in “cash income” as making $2.4 million dollars. If memory serves, the Tax Policy Center allocates corporate income tax in proportion to taxpayers’ capital gains income. So if our $2.4 million “cash income” taxpayer had $1 million in capital gains, some non-trivial chunk of the $2.4 million isn’t really that taxpayer’s income at all.
January 7th, 2009 at 4:55 pm
My bad…marginal rates, duh.
So it’s an issue of targeting, and when you phase out the cuts. So if Obama’s 500/1000 tax rebate scheme is capped at 100K or 200K, people with that level in income won’t get the 500/1000?
The logic of McConnell’s proposal is pretty politically seductive. I’m not sure if the best argument against it is to paint it as a sop for the rich, especially if it applies to anyone with income in that range. There’s way more non-wealthy people with income in that range than there are wealthy people with income in that range. So the fact that there is some distributional skew to the rich seems to be irrelevant to all the people falling in the upper half of that 25% band that would be glad to have a cut – and couldn’t care less that people making more than them also get it.
Better arguments would be on efficiency grounds (that it is too blunt an instrument that wastes money on people who don’t need it) or effectiveness grounds (that those with higher incomes are less likely to immediately spend the money).
January 7th, 2009 at 6:23 pm
would do nothing at all for folks earning less than $40,000 is a terrible idea.
Others have already said this, but it bears repeating. From the IRS website:
http://www.irs.gov/individuals/article/0,,id=118506,00.html
“Earned Income Tax Credit
If you earned less than $41,646 in 2008 you may qualify.”
(and for this coming year, from another page: http://www.irs.gov/individuals/article/0,,id=150513,00.html
the limit could be as high as 43,415 married filing jointly with two kids.)
So right off the bat, it is likely you are not going be able to do much at all for folks making less than 40K strictly in terms of “cutting income taxes”. You are either going to have to increase the EITC (a form of rebatable tax credit as DTM mentioned above) or do something about payroll taxes.
And just to do the calcs – A gross of 40K for married couple filing jointly with two kids comes out to a taxable income (after deductions and exemptions) of about $12,759 (10,900 standard deduction, 4 x $3,500 excemptions, 2x$1000 child tax credit, $341 EITC). Per the tax table, they would pay $1,278 per year in income tax. So a little under $1300 is the maximum you can squeeze out of giving ‘working families’ and income tax ‘cut’.
January 7th, 2009 at 9:21 pm
So one of Bush’s big lies is again brought forward as truth. I suspect the lie will find less success in this environment. Can we finally all admit the supply side revolution was a plutocratic sham?
January 7th, 2009 at 11:05 pm
“ While old Labour promised social change for the working classes en masse, the Tories offered individuals the chance to opt out of being working class altogether.”
Which is why we really do need to point out that progressive taxation – indeed, progressive/left policies in general – doesn’t just aim at helping people and their kids to move into the middle or upper middle class (or beyond) and stay there . . . indeed, it has a pretty good record of hitting that target. Support for decent wages, worker protections,real family values, working health care, well-funded services like schools and libraries; affordable higher education y’know, the sort of thing that rewards both constant strivers and bold innovators who don’t happen to be born into an already pretty financially-advantaged family.
January 7th, 2009 at 11:37 pm
Didn’t we get into this mess by subsidizing poor people to spend more than they could afford, e.g., on houses? So why would more of such subsidies (transfer payments to those with no net income tax liabilities euphemistically called tax cuts) be a good idea?
Here’s a stimulus idea that would cost nothing, and would even increase federal revenues: stop blocking mining and oil drilling on federal lands and off the Atlantic and Pacific coasts. Stop blocking the same in Alaska. This would create hundreds of thousands of jobs and increase federal royalty revenue.
Here’s a case where lefties oppose the creation of high paying jobs.
January 8th, 2009 at 12:03 am
Didn’t we get into this mess by subsidizing poor people to spend more than they could afford, e.g., on houses?
No.
January 8th, 2009 at 2:13 am
Support for decent wages, worker protections,real family values, working health care, well-funded services like schools and libraries;
Card check legislation, i.e. coercive unionisation, is hardly giving “people the chance to opt out of the working class altogether.”
You can’t get any more Big Labour than UAW-style unions. I am surprised they still exist, given how economically obsolete they are. What a disgusting cancer on society!
January 8th, 2009 at 2:14 am
(And this is coming from someone who was briefly a member of the Teamsters a result of a closed-shop summer job that I took.)
January 8th, 2009 at 8:10 am
“Card check legislation, i.e. coercive unionisation”
Hey, I could say ‘Card check opponents, i.e., heartless, greedy motherfuckers who literally get off on the thought of hardworking American families being increasingly reduced to impoverished peonage, generation after generation (or, at best, dumb bastard easily convinced that the warmed-over industry bullshit they’re being fed tastes like candy’ – but that doesn’t necessarily mean it’s true.
But anyway, I’ve been struck at how many people are suddenly so deeply, deeply concerned about the plight of the workers that they must speak out against the evil, coercive misery of card check and all the horrible, horrible union abuses! – So, anyone who starts down this road: I’d like to see some previous comment, post or whatever defending workers against corporate abuses. Doesn’t have to be no un-american socialistic stuff, neither – just things like ‘hey, locking employees into stores overnight maybe isn’t the best idea’, or ‘hmm, illegally forcing employees to work off the clock doesn’t seem quite fair’ or even ‘Triangle Shirtwaist Factory: not cool’.* I’ll even settle for any remark in support of workers that isn’t immediately obvious as disingenuous concern-trolling.
And of course, the reality is that even granting your Luntzian/Gingrichian wankery, even focusing obsessively on the worst (genuine) abuses of the past combined with modern fantasies peopled with ‘Sopranos’ actors or whatever, unionization is giving “people the chance to opt out of the working class altogether”; indeed, it was one of the major factors in creating widespread postWWII prosperity and a burgeoning middle class. (Why do you hate the middle class, Stephen Myles?)
* according to wikipedia, “ In 1913, [Triangle Shirtwaist Company owner] Blanck was once again arrested for locking the door in his factory during working hours. He was fined $20.” (You know that there were people shrieking about the violent, disorderly blackguards in the ILGWU, and if any employers happened to use toughs , well, they need to protect themselves and their poor loyal employees from the strikers . . . No I mean, this isn’t a snarky hypothetical; there were.)
January 8th, 2009 at 10:21 am
Why do you hate the middle class, Stephen Myles?
Because he is middle class and his hoping that if he expresses hatred for his own kind enough, then his wealthier, snobbier classmates will be more accepting of him.
It’s pretty much a rite-of-passage for those aspiring to faux-maturity to start expressing outrage at unions.
January 8th, 2009 at 12:44 pm
It hardly bears repeating that I was once (very briefly) a union member (Teamsters). Did me no damn good as far I was able to discern. I mean, what’s the good of an union in a supermarket? And they garnished quite of bit of my paycheck too, as there is a $80 lump sum fee that is spread over the first five weeks. (I found a much better, non-unionised summer job in financial services in that time).
I am talking about the American Dream; unionism, by organising people in a fixed social position (i.e., reasonably compensated union member) with a fixed political outlook (quasi-socialistic, Democrat) it limits their upward potential. Every man should have the chance to become an American millionaire, billionaire, whatever; the concept of unions, as a self-consciously class-based, faux-egalitarian organisation, is antithetical to that vision of upward mobility and aspiration.
And the worst offenders are the teachers’ unions. I have been in both the public and independent systems; the superiority of the independent system in instill personal confidence and character, and in transmitting key skills of knowledge and analysis, is undeniable. Unions allow the retention of the inept and the protection of the political hacks within the classroom. (I once had a raging socialist; she was quite vocal about it in the classroom).
January 8th, 2009 at 12:51 pm
And using the Triangle Shirtwaist Company as any sort of example for modern purposes is rather absurd. That was at the height of egregious Edwardian-era abuse of the working classes; it hardly bears any semblance to modern corporate practice. This was before there was any federal legislation protecting workers (and workplace safety laws are in effect with or without unions, unions are hardly relevant).
This is like saying some remote ancestor of Senator McCain owned slaves; what exactly does that have to do with the personal qualifications for office of Sen. McCain himself? (Believe it or not, some liberals actually tried to raise that point.)
January 8th, 2009 at 1:44 pm
“Every man should have the chance to become an American millionaire, billionaire, whatever”
It really does sound jarring, nowadays. But that’s off-topic.
“am talking about the American Dream; unionism, by organising people in a fixed social position (i.e., reasonably compensated union member) with a fixed political outlook (quasi-socialistic, Democrat) it limits their upward potential.”
As opposed to shit wages, unsafe working conditions, and crappy benefits – that really does wonders for their upwards potential.
“ it hardly bears any semblance to modern corporate practice.”
Sadly, this isn’t true. Things are rarely quite so bad, but . . .
January 8th, 2009 at 2:05 pm
Stephen Myles, what became clear to me when I started working, and what will become clear to you, is that the best chance you have to live a good live is by having a job that allows you to accumulate wealth, secures your retirement, and leaves you insulated from catastrophic disasters like health crises. You have a better shot at being a millionaire by parlaying your union-benefits job into savings that you put into a house and starting capital for a small business or investments than you would as a non-union wage-slave at, say, Wal-Mart. In the latter case, the workers are kept just at the poverty level restricting the opportunities for they or their family to get out of it. Unions give workers a level of economic and personal autonomy that many others don’t, and they are free to take advantage of it or not. By contrast, in analagous non-union jobs, there are those confronted with far fewer opportunities, and I really fail to see how diminishing the economic opportunities and increasing their
vulnerabilities gives them “more opportunities.” The opportunities seem to come from unionization, not being victimized by exploitation.
January 9th, 2009 at 3:17 pm
Here’s the explanation. There’s a chart I found that says, in 2010, 80% of taxpayers who make between 100,000 and 200,000, and 94% of taxpayers who make between 200,000 and 500,000, pay the AMT. This drops to only 34% when you reach a million and up. Now, if you pay the AMT, this tax cut won’t save you a thing.
So it basically affects people who make too little to pay the AMT, but enough to be in the 25% bracket, and people who make too much to pay the AMT. This is why it benefits the top brackets so much.
January 13th, 2009 at 10:43 am
I think media controls politics i.e. Murdock and Fox.
There was a law 20 years ago that restricted the # of media owned by one person of business entity to FIVE. Not more than two on one kind in that mix. That controlled what the Soviets dispized (free speech) and substituted “Disinformatia”.
The latter being today’s press confirming GOP lies about Iraq nuclear weapons (white-(party)-cake). The huge bludgeoning of our economy was and is still two wars. One was a lie supporting oil profits pumping 2 to 4 million barrels a day all along, to secret holding tanks and tankers during the “oil shortages” I saw them in Nassau. So we now stay in Afganistan, dying sons for a poppy field economy. Our sons and daughters die for this? We need to end these wars and stop pouring their blood into sand and bleeding the our country dry into joblessness and price gouging poverty.
When will voting booth cheaters (exposed in Bush’s 2nd race by Vanity Fair magazine reporters) stop making lethal oil price deals. Remember the GOP locking our government doors as we saw in the last eight years and crafting more mad Reganomics designed only for election contributors. We need to stop the false war in Iraq and work with other countries in the future of Afganistan.
January 14th, 2009 at 2:17 pm
I find this posting a little intersting from the stand point that Obama’s platform heavily advocated a middle class tax cut primarily for FAMILIES. He also stated that his election would require people be HONEST with themselves and their standing on all fronts.
The authors suggestion that lower income Americans be the first and primary recipients of a tax cut misses the point and defies of BOTH of Obama’s campaign principles. Issuing tax cuts to those “who have a larger propensity to spend the marginal dollar” not only suggests lower income americans have a universal inabilty to manage personal finance, but would subject them to the same paycheck to paycheck trap of spending what the dont have to a larger extent.
While american families have taken on many forms(a fair consideration when drafting any middle class plan)two parent households generally clear 40k a year are still expressly the norm, combined with child tax credits and other deductions, would recieve the relief they need. Lower income americans also have several programs currently available that have either expanded their scope or have loosened their qualifications from bankruptcy rules to EBT.
Rather than rework a new program to address the lower income citizens once again, there should be better advocacy for existing programs to aid their plight and a push toward McConnell’s plans or some variant for the middle class where it counts the most: FICA taxes
I can think of a number of things to do with an extra 400 a month even though i am not as affected by the downturn as others
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