Four Ideas to Help Revive the American Middle Class
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The Fiscal Times
March 14, 2014

The Senate Finance Committee on Thursday took up the difficult question of how to improve the lot of the middle class in America. In a hearing entitled “Innovative Ideas to Strengthen and Expand the Middle Class,” Chairman Ron Wyden (R-OR) solicited ideas from a panel of experts on how to jump-start economic growth among middle income Americans 

“We have to focus on getting more people inside the middle class winners’ circle, because the alternative is unacceptable. If working families fall further behind now, still fewer will be able to climb America’s ladder of economic mobility and secure better futures for their kids,” Wyden said. 

Related: Is the Middle Class Better Off than We Think?

Although there was some disagreement among members of the committee on just how bad things really are for members of the middle class, there was no shortage of proposals for how to make things better for people in the center of the income distribution. Here are four of the big ideas floated in the committee room on Thursday.

Use the tax code to fight the effects of wage stagnation.  Leonard Burman, director of the Tax Policy Center at the Urban Institute in Washington, proposed a radical change to the income tax system aimed at protecting workers from what is known as “bracket creep.” Bracket creep refers to the fact that as wages increase with inflation, workers see their tax rates rise regardless of the fact that their purchasing power does not.

There are currently protections in the tax code that help protect many workers from this effect – but not those whose incomes don’t rise at the rate of inflation. 

Burman pointed out in his prepared testimony that in some cases, “parents whose earnings fail to keep up with inflation could actually lose child tax credits if the threshold for refundability is indexed, as scheduled under current law. 

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He suggested a change to current policy that, rather than indexing tax rates on consumer prices, would tie them to measures of income inequality. A major downside, Burman admitted, is that if inequality continues to increase, such a plan would require marginal tax rates on the wealthy that would be so high as to be politically toxic. But on the upside, in years such as 2008, when income fell among the most well off, rates could decline for high earners. 

Facilitate restructuring of long-term debt.  Coming out of the financial crisis and the Great Recession, said Diane C. Swonk, chief economist and senior managing director of Mesirow Financial, the country has a large number of middle and lower income families and individuals struggling under the burden of accumulated debt. 

Servicing a heavy long-term debt burden, she said, not only means that individuals dedicate significant amounts of income to debt service, but that “they don’t have access to other ways of building wealth and saving going forward,” which puts financial security out of reach. 

Stressing that she was not advocating for debt forgiveness – “Some people did make mistakes, and they’ll pay the price for that,” she said – Swonk argued instead for facilitating debt restructuring. 

Related: The Truth About Minimum Wage Workers’ Take-Home Pay 

“An ability to restructure debt is one of the most critical issues,” Swonk said, particularly for individuals who took out substantial student loans only to graduate into an economy with no jobs. “We need to have a way to restructure out of student debt so that we don’t keep these generation committed to an overhang of debt.” 

Remove complexity from the tax code.  Economist Lawrence B. Lindsey, a former Federal Reserve Board member and director of the National Economic Council under President George W. Bush, pushed for simplification of the income tax system. 

Lindsey, who holds a Ph.D. from Harvard, told the committee that for years he has taken pride in doing his own taxes, but that the system has, over time, become so complex and confusing that he recently gave up and hired a professional. 

Using data from a study conducted by the Urban Institute, Lindsey argued that the current state of the tax code combined with federal benefits programs creates tremendous confusion among taxpayers, particularly those at the low end of the income distribution. He noted that a single parent with two children can face a marginal tax rate of up to 82 percent, once lost benefits are accounted for, at relatively modest income levels. 

Lindsey proposed the radical – and controversial – conversion of the U.S. income tax system into a “cash flow” tax. Often proposed for corporations only, a cash flow tax is a variation of the flat tax that would calculate tax liability as a fixed percentage of income minus certain allowed expenses. 

Related: Dreams of Home Ownership Are Alive and Well 

Flat tax proposals have been criticized harshly over the years by proponents of a progressive tax code. The concern is that even after deductions and exclusions are accounted for, it is unfair that a low to middle income worker should pay the same tax on his or her last dollar of income as a multi-millionaire. However, in theory at least, a cash flow tax could be constructed to protect large percentage of low-wage workers’ income from taxation. 

Ignore all this “innovation” stuff and get back to basics.  Of all the economists on the panel William C. Dunkelberg, chief economist for the National Federation of Independent Businesses, seemed least excited about the search for innovative answers to the problems of the middle class. 

“My suggestion is that we get back to basics first, fixing what we know is wrong before we try to overlay new “innovative” policies on the economy,” Dunkelberg said in his prepared testimony. Most of his organization’s members he reported, citing an NFIB survey, are concerned about taxes and government regulations. 

“Small businesses are a major source of economic activity and job creation in the economy, but small businesses have struggled to recover from the recession,” he said. “The ‘middle class’ includes millions of small business owners who compete with each other for the business of consumers. And most of the 6 million employer firms provide tens of millions of jobs to the ‘middle class,’ people who want a job and want to earn a living. The best way to help the middle class for those who want to join it is to provide job opportunities in the private sector where they earn their way by producing value.”

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A longtime reporter on the intersection of the federal government and the private sector, Rob Garver is National Correspondent, based in Washington, D.C. He has written for ProPublica, The New York Times and other publications.