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The President’s Middle-Class Economics

By: Andrew Lundeen

In his 2015 State of the Union address, President Obama laid out his vision for how to help the middle-class, dubbing it middle-class economics. His plan includes taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increases of $320 billion to pay for around $200 billion in new or expanded tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s. Unfortunately, his policy prescriptions would continue years of slow economic growth and flat incomes for the middle-class.

At the core of his $320 billion tax increase is a bump in the capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. Capital gains taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. rate to 28 percent. According to our Taxes and Growth model, this tax increase would shrink the economy by 0.8 percent in the long run, lose over 130,000 jobs, and cost an American family that makes $50,000 a year about $345 in annual income.

The president hopes his tax credits will provide relief for the American family–and they are sure to provide some–but the real issue taxpayers face today are stagnant incomes. Our analysis shows that tax credits do little for growth, because they have limited impact on a person's incentive to work.

Instead of a tax increase that hampers investment and a tax cut that does little to lower the tax cost of working, the president would be wise to focus on policies that grow the economy. Currently, U.S. businesses face some of the highest tax burdens in the world and a tax code more competitive than only France. The same goes for saving and investment, which is double taxed at rates exceeding the average in the developed world. The situation isn't much better for workers, with the median worker losing 31.3 percent of his or her income to taxes.

If the president hopes to truly make life better for the middle-class, he should focus his efforts on these areas. Tax reform that addresses these issues would lower the tax rate on all businesses, allow businesses the full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. of capital investments, and lower marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s on all workers. These changes would boost investment, create jobs, lift incomes, and raise living standards for all Americans.

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