Help the Middle Class?

middle class

You always hear politicians from both parties talking about how they can help the ‘Middle Class’.  This is a good tactic on their part because most people think they are in the middle class.  The problem is that few politicians actually help the middle class.  Let’s first of all define middle class.  The median household income for a family of four in the U.S. is $51,940 per year.  Pew Research  has defined middle class as household income from $46,960 to $140,900.

Hillary Clinton’s Plan to ‘Raise American Incomes’

I am going to pick on Hillary Clinton for my blog post, but I could pick almost any 2016 presidential candidate from either party and make the same point.  Let’s look at Hillary Clinton’s plan to raise the income of the Middle Class.

New College Compact – Federal grants to states to pay for 4-year public college; reduce interest on student loans.

  1. The federal government will only subsidize colleges in states that increase their own funding of state colleges.  States will need to increase tax rates in order to come up with this extra cash.  It’s not like it is just sitting around waiting to be invested in higher education.  Who do you think will pay that tax increase?  You got it, the Middle Class.
  2. While it sounds great that interest rates will be reduced on student loans; and no student will need to make any payments beyond 20-years; and graduates will not be required to pay more than 10% of their post-graduate income;  Someone will pay for all of these goodies.  Who do you think will pay for the increased risk of financial institutions and universities?  You got it, the Middle Class.
  3. Although it is not clear, the government will not pay for everyone’s college, just those the government deems to have a low enough income to qualify.  With this condition, low income students will get free college, wealthy students will be able to pay for their own college, and the Middle Class will, once again, be left out of the resulting benefit of such subsidies.
  4. Currently, approximately 50% of U.S. college graduates are finding jobs that actually require a college degree.  This means that either colleges are failing to prepare students for the ‘real world’ or our work force simply doesn’t need the amount of college graduates.  As we increase the amount of college graduates (supply), the salaries commanded by these graduates will be reduced if the demand for such graduates is not present in the current economy.  So even though you now have a college degree, you cannot get a job that pays much more than if you had no degree.

Profit Sharing Tax Credit – A tax credit to companies who establish a profit sharing plan with their employees.

  1. Companies can already establish profit-sharing plans for their employees and not be taxed for proceeds to such plans.  This program will provide a 2-year 15% tax credit on the amounts being paid into the plans.  Hillary Clinton claims that she will close other tax loop-holes currently enjoyed by these same companies in order to pay for this additional tax credit.  So, after two years, the company will be paying a higher net tax rate once the tax credit evaporates.  The reality is that profit sharing plans are simply a portion of an employees compensation that is ‘at risk’ .  In other words, if the company makes a profit, then employees share in that profit; if the company loses money, employees get nothing.  Most employers will simply hold employee wages down or reduce wages and exchange part of their base wage for this ‘at risk’ amount which may or may not materialize.  In the end, this effort will probably do nothing to help or hurt the middle class.  But it will make the tax code that much more complicated:(

Public Investment in Infrastructure – Invest close to $1 Trillion per year in needed infrastructure improvement projects.

  1.  Hillary doesn’t specify the amount.  I took the $1 Trillion from Bernie Sander’s proposals and have also written a blog post on the need for infrastructure improvement in the U.S.  I actually agree with both Hillary Clinton and Bernie Sanders on this one.   I believe both increased taxes and/or an increase in deficit spending is warranted to improve the U.S. infrastructure.  Of all of the spending that is termed ‘investment’ I believe that such an investment in infrastructure will improve national assets and provide more efficient operation of our economy eventually yielding higher incomes and thus higher tax revenues.

Increases in paid employee benefits – Government subsidies for childcare, increase in minimum wage, and paid family leave; expand social security benefits.

  1.  The economy is a zero-sum game.  When an employer is forced to pay for benefits that they had not previously offered, they can choose one of two paths: 1) make less profit; and/or 2) charge more for their products and services to consumers.  Since profit is the reason a business is in business in the first place, companies must increase the cost of their products and services.  Guess who pays for these products and services?  You got it, the middle class.
  2. Such moves sound great, but will result in unintended negative consequences for the American working class.  Employers will discriminate against women who are of child-bearing age in an effort to avoid paying for family leave.  Multi-national companies will continue their pilgrimage to other countries seeking low-cost employees. And companies that had traditionally hired entry-level low-cost employees will start looking for higher skilled employees and automating low-skill tasks.  Once again, the middle class will take the brunt of these unintended consequences.

Tax the Rich – Enact the Buffet Rule that ensures people who make more than $1 Million in a single year pay at least 30% of their gross income in taxes.

  1. The total amount of revenue raised by this tax increase is between $20 Billion to $50 Billion in added revenue assuming that wealthy people do not seek tax shelters outside of the U.S.  The next assumption will be that this added revenue will somehow make it to the middle class in some form of government spending.  The reality is that government spending will be spread across a broad spectrum of people.  The poor will get increases in entitlements.  Wealthy government contractors will get larger payments.  And the middle class will get a small piece of this pie.

The History

With all of the political promises over the many decades to help the middle class, you’d think that the middle class should be doing quite well.  The reality is that the middle class in America is almost extinct.

Income inequality

The chart above shows how various average incomes in the U.S. have fared over the last 68-years.  You can see that although there has always been an income gap, the gap had been relatively small from 1947 until 1975.  In the last four decades, the gap has widened tremendously.  I believe there are three causes to this widening:

  1. The highest marginal tax rate on those making over $250,000 per year dropped from 70% to 33%.  This tax reduction was prompted by Ronald Reagan in the 1980’s in a tactic that is termed ‘trickle down economics’.  The theory was that if you allow wealthy people to keep more of their income, they will invest it in companies which employ American workers.  Instead, most of the wealthy have invested in multinational companies who are hiring non-American workers.
  2. The U.S. left the gold standard in 1971 which allowed for unrestrained debt, deficits and increased inflation.  Even though inflation has been reported at record lows in recent years, wage increases are even less than inflation creating a decrease in wealth by middle and lower class Americans.  Wealthy investors make their money on capital gains and investments in government debt, real estate and other items that are a hedge against the damage created by our fiat currency system.
  3. Middle class workers are not keeping pace with updating skills and education.  I made a comment above that only 50% of college graduates are landing jobs that require a college degree, so how can I now say that workers need to be more educated?  Industry desperately needs educated workers.  The problem is that most college students are pursuing degrees that do not fit our industrial need.  In addition to job skills, workers need financial and business skills to become employers themselves.

What do we do?

It seems like we have tried everything we can, and presidential candidates are promising to try even more government intervention to help the middle class.  The reality is that the middle class needs the government to simply get out of their way.  The more complicated the tax code and the more hoops companies need to jump through, the more confusing the workplace becomes for us all.  Here are my suggestions to actually help the middle class:

  1. A simple gradually increasing income tax rate on all income with no deductions. (Top marginal rate of 50%)
  2. Elimination of the welfare trap that penalizes people who want to earn more to join the middle class.
  3. Industry directed higher education that ensures college students are trained for the ‘real world’ instead of the ‘academic world’
  4. Increased investment in needed government infrastructure projects
  5. Elimination of mandatory employer benefits of any kind including minimum wage, and health insurance

Many will claim that I would not be helping the middle class out at all with these initiatives.  However, I want to remind you that overall government debt has steadily increased from 48% of our gross domestic product (GDP) in the 1970’s to over 100% of GDP in recent years.  This increase in debt and government spending has benefited the wealthy investors and has hurt the middle and lower class families in the U.S.

trend of national debt as a percent of GDP

So when you hear any politician claiming they will help the middle class with another government program, hold on to your wallets and purses.

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