Tax Reform and the American Middle Class

Abstract

This essay examines how concern for the economic plight of the middle class should influence debates over federal tax reform. It begins with an overview of data on two key developments in American economic life over the past quarter century. The first is the deteriorating economic position of the middle class, a long-term trend illustrated by stagnant income growth, job polarization, and more limited economic opportunities as compared to earlier eras. The second development is the declining federal tax burden of the American middle class, including historically low average tax rates and relative tax shares, not just for the federal income tax but for all federal taxes combined. The juxtaposition of these two empirical developments presents policymakers with a dilemma in crafting tax reform proposals, especially those designed to address the country’s long-term fiscal imbalance through increased revenues. One approach would be to address these challenges exclusively through increased tax burdens on the wealthy while maintaining (or continuing to reduce) middle class tax burdens. While the impulse to pursue such a strategy is understandable in light of the economic vulnerability experienced by middle-income households, this approach also carries with it several costs, including a likely erosion in the fiscal viability of federal spending programs designed to provide income security for low- and middle-income households. In recognition of these costs, the essay considers an alternative strategy of increasing middle class tax burdens (as well as those of higher income households) with an eye toward ensuring the long-term fiscal viability of federal social safety net and other programs aimed at promoting economic mobility. This latter approach calls for less progressive taxes (perhaps even regressive taxes) to support more progressive spending programs.

Keywords: federal tax reform, middle class tax burdens, middle class decline, economic mobility, income distributions, tax reform proposals