Kirk J. Stark is the Barrall Family Professor of Tax Law and Policy at the University of California at Los Angeles School of Law. Eric M. Zolt, the Michael H. Schill Distinguished Professor of Law at UCLA, served in the Office of Tax Policy at the Treasury Department from 1989 to 1992.
Amid the partisan rancor surrounding the framework for tax reform developed by GOP congressional leaders, there is one area of remarkable consensus: lower taxes for the middle class. The political logic is not hard to understand. The middle class continues to struggle, and, with midterm elections just around the corner, both parties need the support of middle-class voters.
But missing from the tax debate is an appreciation that lawmakers have already crafted a tax-friendly regime for middle-income taxpayers. The result is a more progressive tax system that raises less revenue. Unless Congress is willing to dramatically cut major entitlement programs and eschew new social programs to address poverty and declining economic mobility, we need more tax revenue from the middle class, not less.
Middle-class tax burdens are at historic lows. The Congressional Budget Office reported in 2016 that the average federal income tax rate for the middle class — here meaning the middle 60 percent of the income distribution — declined from 7.8 percent in 1979 to 3.4 percent in 2013. Focusing on all federal taxes (not just income taxes), the average tax rate dropped from 19.2 to 13.8 percent over the same period. With these lower tax rates, the share of taxes paid by the middle class has also declined. The middle class paid 35 percent of income taxes in 1979 but only 16 percent in 2013, while its share of all federal taxes fell from 43 to 30 percent.
Tax burdens on the American middle class are low not only by historical standards, but also in comparison with other developed countries. Data from the Organization for Economic Cooperation and Development reveal that American families with children face substantially lower average income-tax rates (in some cases, less than half) than similar families in other developed countries. And this is before factoring in consumption taxes, which represent a large share of middle-class tax burdens in most countries, but not in the United States.
How did we get here? To be sure, some of the decline in middle-class tax burdens results from its declining fortunes. The middle 60 percent of households accounted for 49 percent of all pre-tax income in 1979 but only 43.4 percent in 2013. Meanwhile, the share of pre-tax income going to the top 1 percent increased from 8.9 to 15 percent. Even without changes in the tax code, such skewed income growth would have reduced the middle-class share of taxes paid.
But the current tax structure is also the product of a host of pro-middle-class policies. This is not a well-thought-out, comprehensive strategy, but rather a series of uncoordinated changes in our tax laws. Some of the changes, such as expansions in the earned-income tax credit, were designed to help poor families but also benefitted many middle-class households. Others, such as the child tax credit, were expressly crafted to benefit the middle class.
Still other cuts, such as the 2001 rate reductions, provided political grease for the "tax cuts for everyone" strategy that dominates U.S. politics. This approach appeals to both parties, since Republicans favor small government while Democrats favor tax progressivity. But it also undercuts the government's ability to pay for its core responsibilities.
The middle class faces significant economic challenges and increased vulnerability, such as income stagnation, declining wealth and decreased job security. It is also grappling with dramatic increases in housing costs, medical care and education. The Big Six tax-reform framework responds to these challenges by reducing the already low federal tax burden on the middle class even further. The nonpartisan Tax Policy Center estimates that the framework would result in an average tax cut of $660 per household for members of the middle 20 percent (as well as an $8,500 cut for households in the top 20 percent and $130,000 cut for the top 1 percent).
While this modest increase in middle-class disposable income might be helpful, it would do little to fund government programs that alleviate economic insecurity. What the middle class needs is not meager tax cuts but a muscular commitment to robust public institutions designed to benefit middle-income individuals. The higher taxes could come from our current income tax (from tax increases on the middle class and the wealthy) or a broad-based consumption tax (such as a VAT or carbon tax).
How a country raises revenue strongly influences how the money is spent. Countries with more comprehensive social programs impose higher taxes on the middle class. Paradoxically, then, we may need less progressive taxes to fund more progressive spending programs.
So enough of the middle-class tax cuts. It is time for a new fiscal strategy.