How Middle Class Families are Faring in Today’s Economy

Subcommittee on Select Revenue Measures, February 13, 2019

Thank you for the opportunity to submit comments to the subcommittee. We look forward to working with the new Congress.  In these remarks, we will both explain why the Middle Class is not faring so well, but also how it can fare better. As usual, we will preface our comments with our comprehensive four-part approach, which will aid members’ familiarity with its points, inform new committee members and provide context for our comments. We will follow this with a further exploration of who is and is not in the middle class and how we can make life better for it.

•          A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure every American pays something. Carbon taxes are included in this category.
•          Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending, with graduated rates.
•           Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.
•          A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support,  health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.

The term Middle Class has become a catch all. While it can be defined in term terms of percentiles, it is much more complicate than that. Formerly, economics defined each class into three subclasses (upper middle and lower). The lower class is now called the poor and the working poor, who have no illusions about their poverty.

The upper class is simply called the wealthy. They are is limited to the top 2% of incomes or the notorious one-percent as designated by Occupy Wall Street. The very rich, which I have called the Donor Class, usually hit at about the 0.1% of income.

The upper middle class are people who are fairly well off and can called comfortable, although they have fears about adequate retirement savings brought on by the loss of defined benefit pensions. As an aside, this change should be investigated by this Committee and the Financial Services Committee to determine whether the shift was manufactured by the investment industry in order to earn larger commissions. This industry is likely a major driver in seeking new tax advantaged savings instruments, which are good for the business of milking commissions out clients, which keeps them in the upper middle class as well.

Every time a new savings opportunity emerges, those who use it feel that they must take full advantage to avoid poverty in retirement. Of course, the biggest danger for these savers is the lack of good instruments available to them, which has them seek higher reward investments with more risk, like tech stock and mortgage backed securities, as well as buying “too much house” because of lower interest rates which sometimes do not stay low.

The upper middle class would be well served with less savings opportunities and renewed radicalism in bringing back pension rights.  This would make them feel more secure in retirement planning, although this would not be good for the financial services industry, from brokerage to insurance.

Ending the need to compulsively save would also be good for the Treasury, both to collect more in what is now avoided in tax advantaged accounts and to end subsidies like the mortgage interest deduction. This will also to end demand for continued tax benefits that the upper middle class really don’t need to live comfortably. Such a development would likely hurt K Street, who play off the insecurities of the financial services industry in fear that tax reform will kill the goose that laid the golden egg.

The insecurities of the upper middle also drives donations to campaign and political action committees and campaign fundraisers who would otherwise have to work for a living. Let the takeaway from last November be that enough is enough. Tax reform would kill that golden goose, but it is time for that goose to be served on a platter.

For purposes of our tax reform plan, upper middle class would be those who make over $50,000 a year (before tax benefits) or families who make twice that. The upper class would be those who get to what is now considered the top marginal tax rate, while the really wealthy are those who Senators Warren Markey and Harris and Representative Ocasio-Cortez would force into even higher tax brackets, although I would put in more interim brackets between $400,000 and $10,000,000. Pity the upper middle class.

We have made these remarks to delineate those who need less help and pay more tax, not only regardless of their ability to give to campaign committees, but because they are able to do so. The real middle class is radicalizing, as last November demonstrates, and not just because they feel that the President of the United States needs to be arrested (and that those who do not talk about that are guilty of abetting his conduct – and yes, that means the Majority).

The wealthy are also worthy of mention because of how their historically low marginal tax rates lead to lower wages for the working class and the entry levels of the professional class (who have now found a reason to vote). The dirty little secret of the 1981 tax cuts, the 1986 tax reform and the 2001, 2003, 2010 and now the 2017 tax cuts is their ability to control wage inflation.

Much as we used to love to give credit to or blame Paul Volcker for breaking inflation, the real cause was the micro-economic incentives which go with decreases in the marginal rate paid by CEOs and investors (the big dollar donor class). When rates were higher, especially before the Kennedy/Johnson rate cuts), America had labor peace and CEOs and management worked for reasonable salaries. The latter had no desire to cut wages or break unions, because if they did so, all of those savings, which would be paid to them in bonuses, would go the Internal Revenue Service. Lower tax rates changed that.

Lower tax rates also made money available to chase the same supply of investment instruments, which bid up their price, and caused the invention of a whole range of new products which would be built up and sold by the emerging financial class, who would profit-take and watch what they created go bust and start yet another modern recession, especially the Great Recession just experienced. Only higher tax rates or increased deficit spending control such asset inflation (and the consumption cycles associated with them – which Marx thought was the driver of the boom bust cycle – Marx had a failure of imagination).

The Tax and Job Cuts Act (not a typo) was a classic piece of Austrian Economics, where booms are encouraged, busts happen with no bail outs and the strong companies and best workers keep jobs and devil take the hindmost. It is economic Darwinism at its most obvious, but there is a safety valve. When tax cuts pass, Congress loses all fiscal discipline, the Budget Control Act baseline discipline is (as it should be) suspended and deficits grow. Taxpayers don’t mind because bond purchasers are sure to pick up the slack, which they will as long as we run trade deficits, unless the President’s economic naivete ruins that for us.

Modern economics has become infected with the idea that higher tax rates and lower public spending hurt the economy. By definition, this is not case. The exact opposite is true. To refresh our memories of what is in the U.S. Code and most basic economics textbooks, Gross Domestic Product equals equal government purchases, consumption from government employee, contractor, transfer recipient and second order private sector spending, which leads to private sector investment, and exports net of imports (which creates a source of funds for debt finance).

Sadly, there are witnesses coming before the Subcommittee, especially but not only those requested by the majority, who quarrel with this definition. Don’t invite these people to testify, it only spreads untruths.

Anything that is not part of GDP is considered “savings” or in reality, is asset inflation. If you want to end poverty, give poor people and retirees more money and the economy will grow. Increase government expenditure (even bombers) and the economy will grow, including for the now notorious upper middle class. Now that I have set the stage after three pages, let us discuss how our tax reform plan will do so.

Our value added tax won’t do so, because it does increase consumer prices unless the transition to it increases net wages by the same percentage as the new Goods and Services Tax. The tax should be very broad, because it will be a substitute for income tax collection now taken by the lower tiers of the income tax (even as paid by the wealthy).

Tying the VAT  to government spending, especially on a regional basis (which would require a constitutional amendment to repeal the single rate requirement for excise taxes), because this would lead to less spending on whatever is taxed, which we propose to be domestic spending for military and civil government. While this will provide a decrease in funds for the middle class Making the link between discretionary spending and taxes makes for a more deliberative process that may see demands for higher spending and taxes. That would be up for the voters to decide, especially if regional caucuses to make such decisions were created, although that is a step too far for now.

As a new development to our plan, carbon taxes (CVAT), if enacted, would fund environmental enforcement, research and remediation (but not income redistribution, see below). As a sin tax, it will discourage use of greenhouse gases but will also be the goose that lays the golden egg for Green New Deal spending.

Both the VAT and CVAT would be zero rated at the border. Not doing so would be an unconstitutional consumption tax. Burying these taxes currently in the income tax likely violates this provision, which is an essential reason to break them out separately. The Net Business Receipts Tax supports workers rather than customers and taxpayers, so it will not be zero rated at the border. Doing so would be an incentive to short change both public and employer support of worker needs.

We have already made clear the reasons for a higher income and inheritance surtax. Taxing all cash or in-kind distributions from estates, including sale of estate assets and their distribution as cash taxes heirs on the same rules as workers. The dead have never ever paid taxes. If you can’t take it with you, it cannot be tax free. Since there are no U-Haul attachments to hearses, we can be fairly certain of that.

The VAT, CVAT and the Net Business Receipts Tax/Subtraction Value Added Tax (NBRT or SVAT -  which can be used interchangeably) are balanced budget taxes, meaning that they must either be increased or spending lowered  (or the reverse) to keep these funds in balance. We mention this because such balance allows the Surtax to eventually end the current practice of rolling net interest on the debt to new borrowing.

The surtax will also be used to fund deployment of troops and because such spending is usually debt financed. This will also be a disincentive to war (which is one of the President’s priorities – even a broken clock is correct twice a day – and I am sure he will not consider me a nice person, which I regard as a badge of honor).

Most importantly, the Surtax will pay down the debt itself, starting with paying back the Social Security Trust Fund. It can only be paid back with income taxes. Consumption taxes or additional retirement taxes is a disservice to those of us who subsidized spending due to tax cuts on the wealthy. The wealthy must pay this back.

At the risk of repeating ourselves yet again, we remind the Committee that in the future we face a crisis in net interest on the debt, both from increased rates and growing principle. This growth will only feasible until either China or the European Union develop tradable debt instruments backed by income taxation. 

This is the secret to the ability of the United States to be the world’s bond issuer. It is why a trade deficit is not necessarily a bad thing, although the President does not seem to realize this. Indeed, exporting the debt is the essential feature of neo-liberalism, as is the belief that saving more for retirement with tax assisted accounts while shifting jobs overseas can have their slavery pay for our retirements. At some point overseas workers will rebel, so we need incentives to pay down the debt.

The national debt is possible because of progressive income taxation. The liability for repayment, therefore, is a function of that tax. For every dollar you pay in taxes, you owe $13 in debt. People who pay nothing owe nothing. People who pay tens of thousands of dollars a year owe hundreds of thousands.

The answer is not making the poor pay more or giving them less benefits, either only slows the economy. Rich people must pay more and do it faster. Most workers cannot reliably save, or even eat . Don’t look to them to ever pay off the debt. Your children and grandchildren and those of your donors are the ones on the hook unless their parents step up and pay more. How’s that for incentive to raise taxes?

The Old Age and Survivors Insurance payment is only included if a tie between retirement income and wages is necessary to preserve broad based support for the program. There should be a floor, however, because most of the heavy lifting to support retirees will come from the NBRT, with these contributions to FICA credited on an equal dollar basis, rather than as a tie to wage levels. Doing so makes contributions less regressive, both because they tax all value added and because there is no upper limit to their collection. This ends the need for the Earned Income Tax Credit. Lowering the ceiling on the Employee contribution reduces what must be paid out in benefits to those who are in the upper middle class and above.

Other than limiting what the wealthy can take from workers in economic rent, the engine of redistribution will be the NBRT. For those who are new to our comments, the NBRT is collected from employers but is not visible on purchase receipts, making it an SVAT.

It is designed to redistribute income within companies rather than having the government do it through more overt subsidies. The child tax credit will be paid out, as it is now, through wages, but doing so will not require any tax filing, save to verify that what is reported to the government matches what is distributed to workers. Setting it to $1000 per child per month makes it adequate to provide what the Department of Agriculture estimates to be the actual cost of raising a child. None other than Milton Friedman suggested a negative income tax and both Republican and Democratic presidents have enacted and expanded the Child Tax Credit. 

This can be called a Pro-Life measure, not because it elects Republicans, but because it distributes enough money to families, including single mothers, to end the need to resort to abortion, or even contraception, for economic means. It is part of what Catholic Social Teaching calls a fair wage.

The fair wage is the essence of the Seamless Garment of Life as discussed by Cardinal Bernardin.  The Center urges the National Right to Life Committee to make adoption of these recommendations a scored life issue.  Failure to do so proves the point of NARAL-Pro-Choice America that abortion restrictions would be all about controlling sexuality.  If the Minority wishes to prove NARAL wrong they can adopt these recommendations.

The most important factor in moving people out of poverty is an adequate wage for work.  Ideally, this should come from

The market cannot provide a fair wage for families., as there will always be more desperate employees who can be taken advantage of to force wages lower for everyone else.  A minimum wage protects those employers who would do the right thing by their employees if not for their competitors.

A $15 per hour minimum wage is currently being demanded by a significant share of the voters.  Perhaps it is time to listen.  If the marginal productive product of these employees is more than this rate, job losses will not occur – of course, the estimates of this product can be easily manipulated by opponents who believe that managers provide much more productivity than people who actually work, so such estimates should be examined critically.  Internally, people usually have the correct number, but are loath to share it if doing so hurts their political point. A higher minimum wage puts the burden on employers and ultimately customers for fair base wages, rather than subsidies to low wage employers.

In some industries there are plenty of low wage workers who are not as productive as the wage is high (although this makes one wonder whether such industries are worth supporting in the economy).  For these employees, paid education should be available – and by pay we mean tuition and wages.

Workers that are less than literate at a tenth grade level deserve full remedial education, with pay at minimum wage levels.  This can be paid for in a variety of ways under our model.  The usual model is for state governments to provide this education – and in our model the educational institution will also provide case management and stipends and would be funded by the NBRT/Subtraction VAT.  There are other options as well.

Employers could provide remedial education and payroll as an offset of their NBRT obligations.  They could also contribute to a third party provider, such as Catholic Charities and their related education systems, again offsetting their NBRT with the contribution (a full credit for both tuition and stipends).

Other workers need vocational training.  This should be provided through employers.  Training costs would be NBRT deductible, but not creditable, because ideally new workers should pay back the employer with a service requirement in much the same way that military academy students are required to serve some period in uniform, with a student loan program to fund those new workers for whom the employment situation does not work out. 

Training stipends would not be repayable nor would they be creditable or deductible, as allowing tax advantages for such wages at this level would invite no end of mischief in deducting or crediting the value added of mostly productive employees who are also receiving training.  In this case, preventing the gaming of the training stipend will keep the NBRT lower than it otherwise would be.

Some employees require college educations to advance.  The first two years of college would be grouped with the last two years of high school and would be provided by the state (including parochial high school and college), by employers directly or through a third party provider or through contributions to a public or private school. 

Students would receive a stipend and both tuition and stipend would be fully creditable against the NBRT.  Labor provided as a supplement to the employer would be fully taxed as other value added.  After the second of school, employees would be paid for the remainder of college and graduate school along the same lines as vocational training. This is good for both the working class and those with the ability, but not the means, to enter the professional class, especially those who are overlooked because of family earning history or the color of their skin.

Working and low lever professional class workers demand lower salaries because of the uncertainly of unemployment. Paying for education at all levels ends this uncertainty, leading to demands for higher wages over and above the statutory minimum. People are poor as much from fear of losing what they have as from their skills and education deficits. The paid training programs here stop that uncertainly.

Aside from child supplements and education, the NBRT would cover health care, with offsets for purchasing third party insurance for workers and retirees or proving direct care for them with internal medical staff and even facilities. The NBRT will also consolidate taxation to any new Public Option and all of Medicare and, Medicaid, Veterans Health Care and the Affordable Care Act.

Covering retirement will also be part of the NBRT Employee-ownership is the ultimate protection for worker wages.  Our proposal for expanding it involves diverting an every-increasing portion of the employer-contribution to the Old Age and Survivors fund to a combination of employer voting stock and an insurance fund holding the stock of all similar companies. 

At some point, these companies will be run democratically, including CEO pay, and workers will be safe from predatory management practices. This is only possible if the Majority quits using fighting it as a partisan cudgel and embraces it to empower the professional and working classes. It is in our power to make low wage work and family poverty a thing of the past.  Indeed, doing so is the primary reason the Center for Fiscal Equity was created.  We are not proposing hand-outs but a hand up with adequate rewards for taking it.