Is the Middle Class Safe From Tax Increases?

Whether in the form of higher taxes, reduced entitlement benefits, or both, the middle class will pay.

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We’ve heard a lot about taxing the rich during this election year. Implicit in this battle cry is that the middle class will be insulated from any pecuniary pain. The Senate has already voted to extend the Bush tax cuts for the middle class, a maneuver that is sure to fail in the House because it doesn’t cover the top two tax brackets. Nevertheless, politicians seeking election are going the extra mile to convince the vote-heavy middle class that they will not need to sacrifice as our country struggles to address a bevy of fiscal challenges.

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Let’s cut to the chase—it’s a lie. The inconvenient truth, to borrow an expression, is that the middle class will be called upon to address everything from our deficit and debt, to the unsustainable path of social security and Medicare. Whether in the form of higher taxes, reduced entitlement benefits, or both, the middle class will pay.

Here’s why:

Taxes

Smart, well-intentioned people can debate the fairness of our tax code all day long. Currently, the top 20 percent of wage earners pay almost 70 percent of the federal income tax. The top 1 percent earns about 17 percent of the country’s income and pays about 37 percent of the income tax. Is that unfair? I don’t think so.

But let’s assume it is. And let’s further assume that our government lets the Bush tax cuts for the top two tax brackets expire. And let’s also assume that the government even adopts the Buffett tax, which as currently framed would raise taxes on capital gains and dividends.

The sad reality is that these increased taxes would be but a drop in the proverbial bucket. Instead of a roughly $1,000,000,000,000 annual deficit, we’d be looking at a deficit of roughly $900,000,000,000. Sure, it’s a good start. But in terms of the fiscal challenges facing our country, taxing the rich to solve our problems is like putting a band-aid on a broken leg.

And after taxes on the rich are raised, the middle class becomes the canary in the cave.

Entitlement Spending

Now, let’s move on to the spending side of the equation. One idea often floated is that if spending must be cut, let’s slash defense spending and foreign aid. Unfortunately, the facts make crystal clear that our government’s spending spree comes predominately from one source: entitlements.

According to a recent Wall Street Journal article, in 1960 defense spending accounted for roughly 50 percent of the country’s total outlays. Today it’s less than 25 percent. In contrast, entitlement spending in 1960 represented about 25 percent of our budget. Today it has grown to more than 50 percent.

And it gets worse. Entitlement spending over the next few decades will grow exponentially. It is anticipated that entitlement spending will double as a percentage of GDP by 2050. That is, if Social Security, Medicare, and now Obamacare are left unchanged, entitlement spending will bankrupt our country.

And that brings us back to taxing the rich. I personally believe that tax fairness is the least of our concerns. Rather, as President Reagan so aptly put it, “The problem is not that people are taxed too little, the problem is that government spends too much.”

But what if we did raise taxes on the rich? As we in the middle class ponder that possibility, we should be asking ourselves one very important question: Then what?

DR is the founder of the popular personal finance blog The Dough Roller, and the credit card review site Credit Card Offers IQ.