The GOP Tax Bill: 'What Happens When There is No Longer a Middle Class?'

01 Dec 2017 11:43 AM | Mike Lillich (Administrator)

By Oren Levin-Waldman

First published online in the Yonkers Tribune

The Republicans have now passed their version of a tax reform bill. It collapses seven brackets into four and eliminates many deductions, as well as cuts corporate tax rates. Those living in high tax blue states like New York, New Jersey, and California will be hit particularly hard with the loss of state and local tax reductions. Although the senate version is slightly better for the middle class than the House version, the non-partisan Congressional Budget Office (CBO) estimates that by 2027 even the Senate version would end up hurting the middle class.

I have noted many times in this space that the reason that rising income inequality is a problem is because it speaks to the disappearance of the middle class. If one wants to see what the consequences are of a diminishing middle class, one need look no further than the GOP tax bills. The unfortunate reality is that these bills hurt the middle class because the middle class no longer has a voice in Congress to speak on its behalf.

One of the major adverse impacts of income inequality is that it may adversely affect individuals’ ability to participate in the democratic process on the same footing as equals. Those lacking in wealth and income often don’t enjoy the same access to political and policy officials as those who possess wealth and income. With a greater concentration of wealth at the top, those at the top are in a better position to use their wealth toward the attainment of their political and other ideological objectives. Moreover, as members need to raise even larger sums of money just to get elected, it is only inevitable that they will court wealthier donors.

This clearly will impact how members of Congress respond to different groups. Many studies show that members of Congress tend to be much more responsive to affluent constituents than to non-affluent constituents. Indeed, members were found in many cases to be non-responsive at all to poor constituents and those in the middle.

The wealthiest Americans tend to exert more political influence than those who are less fortunate. They also tend to be much more active in politics than the typical citizen. We often see the gap between the policy preferences of the wealthy and those of other citizens when it comes to social programs and income support. And we are seeing it now with the tax bills. Eliminating deductions for state and local taxes, as well as capping those for property taxes, will fall hardest on the middle class.

Meanwhile, the wealthy will see their overall taxes decline because taxes on estates, corporate earnings will be less. Those affluent who are pushed into a higher tax bracket may still have enough deductions to effectively pay less. Even if the typical working class family takes the standard deduction of $24,000, the loss of these key itemized deductions still pushes many into a higher tax bracket.

The only ones who will claim victory if this bill, or even a compromise bill, is passed, following the Senate’s passage of a different bill, will be the Republican party and the wealthy whose interests they have always served. And while the Democrats in Congress are quick to fault this bill for doing nothing for the middle class and poor, it isn’t as though they really offered an alternative that speaks for the middle class.

Then again, why would we expect them to? They too court the wealthy donors and are no more responsive to the less affluent than are the Republicans. If nothing else the absence of a middle class and its impact on congressional behavior does illustrate the continuing relevance of Anthony Downs’ characterization of the American political system written sixty years ago.

Downs was clear that government as an entity serves its own interest and that individual members of government, whether as members of the Legislative, the Executive, and even the Judiciary, serve their own respective interests. Those who are elected have as their primary goal their own reelection. And those who are appointed still seek to retain power and will cozy up to those who are seen as being essential to maintaining it.

This means that members of Congress will pursue policies that serve the interests of the wealthiest members of society. From time to time they will offer something to the poor as a way of purchasing their quiescence so that they can continue to serve the interests of the wealthy. Arguably, exempting incomes below a certain threshold is one way of purchasing the poor’s quiescence. It isn’t as though the Democrats have shied away from this strategy, rather they have only countered that the quiescence purchase in this tax bill isn’t generous enough.

Who, then, is speaking for the middle class? At least the poor get something, even if it pales in comparison to what the wealthy get. Because the middle class no longer has voice, and it really cannot have voice because it is almost non-existent, we get policies that inevitably will favor the wealthy.

Perhaps the cautionary tale is that the Democrats with their politics of resistance will end up doing more to aid and abet the wealthy than their rhetoric would suggest. Of course the Senate version will seek to maintain some of the deductions that the House version eliminates, but that only ensures higher tax rates. A bill that truly served the interests of the middle class would set four low tax rates with absolutely no deductions.

We all know that this will never happen, not because it isn’t economically viable, but because it assaults the very Washington swamp that keeps all members of Congress, regardless of political party, in power. The current tax code is one designed for social engineering rather than the simple generation of revenue. This has long been the case, and the so-called tax reform bills will be no different. Many interest groups exist to lobby for special treatment through the tax code. These same groups make contributions and have political action committees (PACs) in place to do their bidding.

At the end of the day when we stop to consider the consequences of a disappearing middle class, it isn’t only that we get uneven policy like the tax proposals currently swirling around Washington, we fail to drain the swamp. It would almost be funny if it weren’t pathetic that Donald Trump who campaigned on draining the swamp really doesn’t get it.

He thought the swamp was comprised mainly of bureaucrats who because they are protected by civil service rules cannot be removed. Well there may be some of that but the swamp is also made up of the vast array of interest groups that only reinforce Downs’ argument that politicians’ self-interests always come first. Until we can find a way to restore the middle class, we will never be able to penetrate the iron triangles in Congress that prevent any serious reforms. We certainly won’t get policies that benefit the middle class.

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