Given healthy economic growth, falling unemployment and a booming stock market, it might seem hard to blame the economy for President Obama's stinging defeat in the midterm elections last week. Yet, as David Leonhardt observes in the New York Times, there's strong evidence that the average voter isn't enjoying the fruits of the recovery.
The fact remains that incomes for most Americans aren’t growing very fast and haven’t been for years. Median inflation-adjusted income last year was still $2,100 lower than when President Obama took office in 2009 — and $3,600 lower than when President George W. Bush took office in 2001. ... We’re living through the great wage slowdown of the 21st century, and nothing presents a larger threat to the Democrats’ electoral fortunes than that slowdown.
From the average worker's perspective, it's actually been worse than described here. Yes, workers haven't received a raise in years, and they can blame their employer for that.
But they can also blame the government -- not just for failing to foster an economy with growing wages, but for cutting their disposable income. It's not the number at the top of the paycheck that we care most about, after all, but the number at the bottom -- the money we have to take home and spend on our lives.
In 2013, most Americans had a good bit less money, after adjusting for taxes, than the year before. That's because in 2013, a huge tax increase affecting ordinary workers took effect, raising the employee payroll tax from 4.2 percent to 6.2 percent. A worker earning $50,000 a year saw disposable income decline by $1,000.
It was the first time the payroll tax had increased since 1990, and previous payroll tax hikes had been smaller.
Why average workers are paying more in taxes
The payroll tax increase took effect after a long period during which Americans became accustomed to paying less in taxes. Obama first cut payroll taxes in 2011, but that replaced a similar tax reduction that took effect in 2009. And President George W. Bush had offered tax refunds in 2008, even before we knew we were in recession.
All these measures were designed as temporary stimulus. But it's not clear how much of a difference that should make. Most workers probably became used to paying less in taxes. When 2 percent of their take-home pay disappeared at the beginning of 2013, it very likely felt like a tax hike.
Obama did little to try to prevent that from happening. In the fiscal negotiations that followed the 2012 election, he made a token effort to save the payroll tax cut, but privately, administration officials said it was time for them to reset. The payroll tax, after all, goes to fund the Social Security trust fund. White House officials are sure to point out that at the end of 2012, Obama also was crusading to preserve the George W. Bush tax cuts for the middle class, while fulfilling his promise of ending them for the rich.
He largely succeeded at those twin goals, but it doesn't make the increase in payroll taxes any less painful. The payroll tax figures as a much bigger source of taxation for the middle class than for the rich. Payroll taxes only apply to the first $117,000 of income. For someone earning $1 million a year, the annual payroll tax would max out at just over $2,000, or 0.2 percent of income. For someone making $20,000 a year, it would equal $400, or a full 2 percent of income.
Wages and the election
It's hard to draw a direct line between the increase in payroll taxes, the stagnation of middle-class wages or even the continual decline in middle- class wealth and last week's election outcome. Structural factors were at play, as was an electoral map unfavorable to Democrats, as was luck.
Democrats might have hoped that to whatever degree that tax hikes and stagnating wages hurt their chances, the expansion in health insurance coverage to millions of Americans might have helped. The Affordable Care Act, which is financed by levies on the wealthy, represents, after all, a redistribution of income from the wealthy to the poor.
Yet with the health law still pretty unpopular (even if Americans support the individual provisions), it's unlikely that expansion helped Democrats politically. Most people gaining coverage under ACA were, by definition, low- and-moderate income, a group that by a 54 to 43 percent margin were already likely to vote for Democrats.
Some political advice for Democrats
Leonhardt's advice to Democrats (and to Republicans, for that matter) is to consider pursuing a middle-class tax cut, which would immediately boost the disposable income of average workers. This is how other countries, besieged by similar levels of market inequality, do it. And compared to proposals like early childhood education or infrastructure spending, it would do it much faster, on a much broader scale.
To backfill the missing tax revenues that would result from a middle-class tax cut, the government could borrow money at the ultra-low rates investors are currently willing to lend at. But given the long-term fiscal problems facing Washington, that seems fanciful. Leonhardt suggests that "any such tax cut could be paired with a tax increase for top earners, who — even after the expiration of some Bush-era tax cuts — still face lower rates than they have for most of recent history."
It's hard to see Republicans going along with such a plan. When they controlled half of Congress, they were strongly allergic to any plan that increases the overall level of taxes paid by the wealthy. Now that they will be fully in control in January, it's not clear why they would change their strategy.
That doesn't make the policy any less sensible. Given what the polls show, and our recent economic history, it would likely be a winning political strategy for Democrats to pursue tax cuts for the middle class, financed by tax hikes on the wealthy. Unfortunately for Democrats, though, the party seems unlikely to be unified around this point over the next two years.
Still, it wouldn't be surprising for Congressional Democrats to pursue such a strategy. Their singular goal is winning back the Senate in 2016, while making progress in the House. One could easily see Hillary Rodham Clinton and any challengers, who will be under pressure to address the issue of wage stagnation in a fresh way, take up the policy.
But there's a good chance that Obama will turn his eyes elsewhere in the next two years, given the policy's dark fate in the next Congress. The more likely areas for significant economic cooperation are expanding trade and an overhaul of corporate taxes, which might involve cutting rates while eliminating corporate tax breaks.
Both trade and rewriting the corporate tax code might be sensible policies, too. But neither carries the simple political appeal of a middle-class tax cut. And neither policy generates much enthusiasm among Democrats, particularly in the Senate, who have little interest in helping Obama burnish his legacy after this year's experience.