Wake Up Middle Class!

With Obama’s plan to let the Bush Tax cuts expire in 2010, there has been an onslaught of media attention concerning his budgetary decisions. Phrases like “socialism”, “re-distribution of wealth”, and “tax hikes” are being associated with President Obama’s fiscal policies to discredit his approach. Obama has been open and direct concerning who his tax policies are targeting. The interesting part of the situation? There has never been such an uproar from the middle class fighting for the benefits of the wealthy.

Now to be clear I have little issue with the wealthy, or their personal incomes. Athletes, actors, stock brokers, and executives are all paid based on market conditions. I do believe that the wealthy are the largest benefactors of governmental regulation. We live in a mixed market economy, not a free market. The government regulates trade, blocks monopolies, and protects intellectual property. Almost all of the bailout money went to save the shareholders of large corporations and free up credit markets which have the largest impact on the wealthy.

The richest Americans have been the largest recipients of tax cuts over the past 30 years. Starting with Jimmy Carter’s administration, the highest tax rates have been cut in half to present day levels (70% to 35%). The wealthy have also seen the largest jump in income. From 1992 to 2004 upper class income rose from 111,000 to 154,000 (+39%). Over the same time period median wages only increased from 39,000 to 43,000 (+10%). So, over the past 30 years the wealthy have seen their taxes decrease by 50%, and their incomes increase by 39%. (Inflation adjusted for all above examples)

What many Americans do not realize is the vast redistribution of wealth over this period. Whenever tax rates are cut disproportionately, tax burden shifts among classes. Regarding the 2002 and 2003 tax cuts, families making $60,000 saw their tax payments drop by $1,000. In contrast, the wealthiest 1% saw their annual tax bill drop by $58,000. This resulted in a dramatic swing in tax burden to the middle and lower classes and redistributed wealth to the upper class.

President Obama’s plan is to close the gap on the federal deficit by allowing the Bush tax cuts of 2002 and 2003 to expire. This would increase the tax bracket of the wealthiest (single taxpayer making more then $357,000) from 35% currently, to 39%.*** This would return some of the tax burden back to the wealthy, and redistribute the wealth back to the middle class. Before the middle class rejects Obama's policies, they should remember upper class Americans never asked for the Bush tax cuts, and certainly didn't need them.

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***Now, before you drop your jaw regarding these figures remember this is a bracket, and tax brackets can be misleading. A family of four with household income of $365,000 claiming $100,000 in deductions actually pays about 17% in income tax. In comparison, an average family of four with income of 150,000 and deductions of $30,000 falls into a 25% bracket, but only pays about 12% in tax. An average family of four with income of 70,000 and no deductions falls into a 15% bracket, but only pays about 5% in tax.