The President’s Middle-Class Economics
January 22, 2015
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 tax increases of $320 billion to pay for around $200 billion in new or expanded tax credits. 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 tax 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 expensing of capital investments, and lower marginal tax rates on all workers. These changes would boost investment, create jobs, lift incomes, and raise living standards for all Americans.