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The Common Sense Reason the Middle Class Must Pay More Taxes, Not Less

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The Common Sense Reason the Middle Class Must Pay More Taxes, Not Less

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To properly fund infrastructure investments, tax credits, training and education, and seriously tackle the federal budget deficit, we will need the top 20 percent of Americans to pay more in taxes.

Sound harsh? Politicians seem to feel so: Even Democrats promise their "middle class" constituents making $250,000 or more that they need not worry about higher taxes. And yet they — let's be honest, we, given that the average for the top 20 percent of households with more than $200,000 in yearly income — can afford it.

I call this the "Me? I'm Not Rich!" problem. The more money people get, the more they think they would need to get in order to quality as "rich." That is why "tax the rich" rhetoric from the left (and occasionally the right) currently fails; nobody thinks the increases should include them.

In the U.S. currently, the median household income is slightly less than $60,000 a year. Almost half (46 percent) of those making more than $100,000 a year think you need at least $500,000 a year to count as "rich," compared with 18 percent of those bringing in less than $30,000 a year. Indeed, many people who themselves are, by any reasonable definition, rich, see themselves as ordinary middle-class folk, as demonstrated by the interviews conducted by Rachel Sherman for her new book, "Uneasy Street: The Anxieties of Affluence."

This perception forces progressives to focus their attention on an ever-narrower slice at the very top of the distribution: not just the top 1 percent, but the top 0.1 percent or 0.001 percent.

Tax reform, then, is like a low-fat diet: a great idea … for someone else, tomorrow. Promises of a simpler, fairer, more efficient tax code generally do little more than keep politicians and pundits on both sides of the aisle busy.

Treasury Secretary Steve Mnuchin, for instance, recently said that if President Trump's plans were enacted, most people would be able to fill out their taxes on "a large postcard." He has also predicted most wealthy Americans would see some sort of a cut. Meanwhile, fresh from yet another stinging health care defeat, some Republicans feel increased pressure from the White House to produce a successful tax reform plan.

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But even without the intractable wrangling that has come to define Congress, tax reform will never succeed if millions of objectively well-off Americans — liberal and conservative — continue to insist they are "not that rich, not really." That willful ignorance, in turn, makes them much more resistant to paying higher taxes, especially if that means removing precious tax breaks.

Examples of this dynamic are plentiful: take January 2015, when President Barack Obama proposed removing the tax benefits available for the college saving plans known as 529s. Those plans disproportionately help affluent families, with almost all of the benefit going to those at the top of the income distribution. But the negative reaction of the mathematically rich — the liberal rich, just as much as the conservative rich — was so virulent that Obama had to ditch the idea, fast.

We can and should tax the top 1 percent, and the top 0.1 percent, more than we do today — but we can't simply confine tax reforms to rich people who acknowledge the privilege of their wealth. One obvious reform is to remove some of the "upside down" deductions that primarily help America's affluent, including the ones on mortgage interest, state income taxes and local property taxes, which have a disproportionate impact on the tax burdens on the top 20 percent of households.

To be clear, I am not simply proposing a massive tax hike on the upper middle class; after all, even tinkering with their deductions has resulted in significant political pushback.

But it is important, even for Democrats, to face facts. From 1979 to 2013, real incomes for families in the bottom 80 percent rose by just 41 percent, after taxes and transfers; those in the top fifth saw a gain of 88 percent during the same period. This math indicates that the U.S. government could collect more than $1 trillion a year more in taxes from the top 20 percent of American households each year and they would still enjoy the same income growth as the majority of their fellow citizens. (Such a program would, notably, allow the Treasury to wipe out the federal budget deficit in six months.)

As our political leaders once again discuss the (limited) prospects for tax reform — as well as the need to address both the nation's debt and the nation's infrastructure — it is important to recognize that there is a pretty large group of Americans doing pretty well, and much better than the moniker "middle class" would suggest. Whether they admit it is, of course, another issue.

Richard V. Reeves is a Senior Fellow at the Brookings Institution and author of "Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do About It" (2017).

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