“What’s this F.I.C.A.?” said my son. He was home from college (in 1992) and was deconstructing his first pay stub from his summer work at a local nursery. F.I.C.A., which everyone knows is the payroll tax that feeds the Social Security and Medicare trust funds, was larger than any deduction on the stub. Such are the travails of a 19-year-old working for minimum wage.
The tax is very regressive. It penalizes low wage earners more than high wage earners as it takes 7.5% of every dollar earned up to $117,000 each year. It’s only one of the ways in which middle class taxpayers are hurt more than those at the top and bottom.
The poor receive government benefits in the form of the Earned Income Tax Credit, Medicaid, Section 8 housing and food stamps to keep them afloat. By the time your earnings get to around $35,000 annually, most of that is phased out.
At the top, the wealthy can lower their tax bill though a variety of credits and deductions associated with owning assets, like stocks and real estate. Those factors typically don’t help the middle class as much.
The middle class squeeze is about more than just taxes though. It’s about inflation.
We keep hearing that inflation is under control. And, the numbers don’t lie. Overall inflation has been running well below the Federal Reserve’s target of 2% for years now. However, as the cost of manufactured goods has been going down, the cost of essential services has gone up a lot! Here’s a chart from the liberal think tank Center for American Progress (CAP) that illustrates the problem very well:
Which of these services can you forgo?
Meanwhile incomes are dropping in real terms. This chart compiled by Mother Jones using data from the US Census Bureau shows the trend going back to 1967 and indicates that 2012 median income is about the same as it was in 1989.
Politicians on the left and right are now talking about the middle class and I suppose that’s good. But, what are the solutions they propose? It may be too soon to tell how the President and his Republican opponents in Congress will define the battleground. However, it’s easy to predict that it will be more of the same standoff.
CAP proposes a long list of solutions reminiscent of the 1960’s before globalization and automation stripped good paying factory jobs out of the US economy. These include raising the minimum wage, strengthening unions, improving education, reforming healthcare and realigning factors leading to more equitable home ownership.
Will a return to the policies of the Great Society work in the 21st Century?
For their part, Republicans haven’t come up with a viable alternative – or any alternative other than lowering taxes and reducing the deficit. Both are attractive but unlikely to trickle down to the middle class.
But, if these policies won’ t work, what will?
It’s hard to know for sure. However, I would favor those that provide opportunity through programs that would likely defy the dogma of both the left and the right. We can encourage the growth of high paying, blue-collar jobs in industries like energy and manufacturing through deregulation and subsidies. We can reform the tax code so that the burden falls less on employers and employees than on those who profit from asset appreciation. And, rather than imposing huge tuition costs on those who might graduate without needed skills, we could provide support for technical skills demanded by the market.
Moreover, capitalists – those who believe in a society built on opportunity rather than welfare – must find a way to ensure that the middle class can share in the benefits of our system.
WHO WILL LEAD?