News Analysis: Middle Class Malaise Complicates Democrats’ Fiscal Stance

Many Democrats have derided the expiring tax cuts as irresponsible since President George W. Bush signed them a decade ago. Yet the party is united in pushing to make the vast majority of them permanent, even though President Obama could ensure their expiration at year’s end with a simple veto.

That decision reflects concern over the wage and income trends of the last decade, when pay stagnated for middle-class families, net worth declined and economic mobility eroded. Democrats who generally would prefer more tax revenue to help pay the growing cost of Medicare and other programs are instead negotiating with Republicans to find a combination of spending cuts and targeted tax increases for higher incomes.

If the two parties fail to come to a deal by Jan. 1, taxes on the average middle-income family would rise about $2,000 over the next year. That would follow a 12-year period in which median inflation-adjusted income dropped 8.9 percent, from $54,932 in 1999 to $50,054 in 2011.

The income and wealth trends of the last decade also create a longer-term dilemma for the party. By advocating the continuation of most of the Bush-era tax cuts, Democrats might find themselves confronting deeper-than-comfortable cuts to spending programs that aid the poor and middle class down the road.

“The goal is not just to make the tax code more progressive, but also to obtain adequate revenue to finance progressive spending programs,” said Peter Orszag, a vice chairman at Citigroup and a former White House budget director. “Making the tax code more progressive but locking into a vastly inadequate revenue base is not doing the notion of progressivity overall any favors.”

According to calculations by the independent Tax Policy Center, if Congress did nothing and all tax increases took effect at the end of the year, the hit would be broad but the brunt of it would fall on high-income households. Taxpayers in the bottom quintile of the income distribution would see a $412 bigger tax bill. For the top 0.1 percent, the average increase would be $633,946.

Only a small handful of policy voices on the left are making the case for the tax cuts to fully expire. In part, that is because the economy is still growing slowly, and tax increases have the potential to weaken it. But it is also partly because of structural changes in the economy.

“This is about math and values,” Senator Max Baucus, a Montana Democrat and the chairman of the Finance Committee, said in an e-mail. “Our first priority needs to be extending tax cuts for the middle class. At a time when we need to cut our debt and are asking everyone to chip in, we simply can’t afford to continue extending all of the tax cuts for the wealthiest Americans.”

The Congressional Budget Office has found that between 1979 and 2007, the top 1 percent of households saw their inflation-adjusted income grow 275 percent. For the bottom 20 percent, it grew just 18 percent, and federal tax and transfer programs also did less and less to reduce income inequality over that period.

The mounting concentration of wealth is even more dramatic. A recent Economic Policy Institute study found that between 1983 and 2010 about three-quarters of all new wealth accrued to the wealthiest 5 percent of households. Over the same period, the bottom 60 percent actually became poorer.

Such figures are why some Democrats argue that even if the economy were to return to Clinton-era growth rates, its poor and middle class could not stomach a return to Clinton-era tax rates, at least not yet. Moreover, it has led Democrats to expand the “middle class” to encompass the vast majority of taxpayers, with families earning as much as $300,000 a year unlikely to see their taxes go up.

“The causes of the massive rise in inequality that we’ve seen that have caused stagnation for the middle class — stagnation at best — for the past 20 or 30 years are not likely to abate,” said Alan B. Krueger, the chairman of the White House’s Council of Economic Advisers. “If they’re caused by globalization and skill-biased technological change, they’re likely to continue or accelerate.”

Last week, President Obama visited the Virginia home of Tiffany and Richard Santana, a high school teacher and an employee at a car dealership, to make the case. “They’re keeping it together, they’re working hard, they’re meeting their responsibilities,” Mr. Obama said of the Santanas. “For them to be burdened unnecessarily because Democrats and Republicans aren’t coming together to solve those problems gives you a sense of the costs on personal terms.”

Mr. Obama’s argument for raising revenue from high-income households and keeping taxes low on middle-income households long predates the recession or his time in the White House. Aides say the position stems in part from his belief that long-term economic changes have rewarded the rich and punished many others.

But limiting tax increases to just a small fraction of households might mean raising too little revenue over the long term to finance the programs that Democrats also fiercely want to preserve — Social Security, Medicaid and Medicare, education, supports for lower-income working families and infrastructure, among others, some policy experts on the left say.

“It’s perfectly reasonable for the White House to begin collecting more revenue from folks who have done by far the best in pretax terms,” said Jared Bernstein of the Center on Budget and Policy Priorities, a former economist for Vice President Joseph R. Biden Jr. “But ultimately we can’t raise the revenue we need only on the top 2 percent.”

Article source: http://www.nytimes.com/2012/12/13/us/politics/middle-class-malaise-complicates-democrats-fiscal-stance.html?partner=rss&emc=rss