The Survival of the Middle Class Depends on Taxing Billionaires

A protest sign reading “Save the Middle Class” Image by jentakespictures purchased at iStock

Sadly, in today’s America, only a few workers earn enough market income to live any meaningful version of the American Dream. What exactly does the Dream entail? For most Americans who work full-time jobs, it holds expectations for some reasonable version of a middle-class standard of living, a decent retirement, adequate healthcare for their families, and the ability of their children to get the post-secondary education they need to compete in today’s economy. Needless to say, this way of life is dying, which should concern every American because this nation's future depends on the middle class's survival.

I’m a retired public finance attorney. During my 40-year career, I leveraged tax preferences, commonly called loopholes, to help wealthy clients keep as much money as possible. In many cases, I also helped them make more money. However, after decades of observing the effects of legal tax avoidance on people at every socioeconomic level, I believe that almost all tax preferences are damaging our country’s future and eroding the middle class. At this stage in life, I want to share some of my hard-won knowledge with the next generation, and that knowledge happens to be an insider’s understanding of the American tax system.

Massive legal tax avoidance, made possible because of the proliferation of tax preferences, is a policy problem that’s over 50 years in the making. With few redeeming economic or political effects, legal tax avoidance has widened the income and wealth gap between the very wealthiest and everyone else, and has encouraged favor-seeking politicians to sell out the public interest for personal benefit. Only by understanding how tax preferences threaten their economic standing will enough citizens muster the political will to fight for the changes necessary to protect their families’ futures.

Before I get into the changes in taxation that I believe we need to enact to salvage the American Dream, let’s look at some of the reasons why our Dream is becoming a relic of the past:

Wage Suppression

The market wages of an ever-growing number of workers have been (and are continuing to be) suppressed by two inexorable economic forces — globalization and automation. Globalization enables capitalists to replace American workers with high-quality, cheap foreign labor from almost anywhere in the world, and automation enables capitalists to replace American workers with technology. Only those relatively few, extremely talented workers who have extraordinary skills are able to escape the wage suppression resulting from globalization and automation. Workers who have extraordinary skills can be easily identified because they’re the ones who earn well above average pay and whose pay in real terms rises faster than the annual GDP growth rate.

Plenty of Dead-End Jobs

Under prevailing economic conditions, there’ll be plenty of jobs, but most of them will be low-wage, dead end service jobs. Increasing worker income by curtailing either globalization or automation would cripple capitalism’s ability to increase national income and wealth, but increasing worker income by making taxes more progressive and expanding social insurance benefits, if done properly, would not.

Maldistribution of Income and Wealth

While capitalism creates more income and wealth than any other economic system, it doesn’t always distribute it in a way that’s economically and socially sustainable. If left alone, capitalism tends to excessively concentrate income and wealth in capitalists at the expense of workers with ordinary skills. Depriving workers who lack extraordinary skills of a decent share of capitalism’s abundance both slows growth by reducing their ability to consume what can be produced and breeds their resentment because of their belief that they’re getting a raw deal.

Too Little and Too Much Income

For at least the last 40 years the following trends have dominated America’s economy:

· As measured by real per capita income and wealth, America (as a whole) has become much wealthier.

· Capital income has captured an increasingly larger share of national income at the expense of labor income.

· The wages of workers in the bottom 60 percentiles (in terms of average wages) have stagnated; the wages of those in the bottom 60 to 90 percentiles have grown slightly; and the wages of those in the top one percentile have exploded.

· The wealth share of those in the top one percentile has grown substantially while that of those in the bottom 90 percentiles has barely increased.

If either most workers have too little income to consume what capitalists can produce or capitalists have too little investment capital to produce enough to satisfy consumer demand, then growth slows and social discontent rises. Put in Biblical terms: “What profiteth a capitalist to produce goods if no one has money to buy them, and what profiteth a worker to have money if no goods are being produced?” Social discord among workers results primarily from too many having too little rather than too few having too much.

What Needs to Happen Instead

Maximizing growth and avoiding worker resentment arising from their receiving too small a share of national income depends on striking the right investment/consumption balance of how national income should be divided. Slow growth and worker discontent are the enemies not only of a healthy and growing middle class but also of capitalists who want to maximize sustainable growth.

Maximizing sustainable growth and avoiding worker discontent depends on advancing two goals simultaneously:

· National income must be properly allocated between investment and consumption.

· Sufficient income must be provided to those full-time workers whose market income is insufficient to permit them to live some reasonable version of the American Dream.

Striking the right balance is not something that one politician, political party, or branch of government can achieve alone; it will take the will of the American people to change the tax code for the better. This is a tall order to say the least, considering the staggering complexity of this problem. I wrote my book to close the knowledge gap on taxation so that Americans will find the will to press for change — “Payback: Why the Top 1% Must Invest in the Rest and How it Can Renew America.” The book is free to all who seek an honest assessment of the problems we must solve to save our great nation.

Essentially, Payback is “a fire bell in the night” that calls for a revolution in taxation to preserve the American Dream for those willing to work for it. As an author, my goal is to spark a discussion that will eventually find its way into the mainstream media in the hope that it will start a serious debate about what kind of tax policy America needs for the future. Payback isn’t beach reading for anyone, including policy wonks; instead, it’s an in-depth effort to go where few have gone in considering fresh and novel ideas regarding tax policy, free of partisan jabs and bumper-sticker solutions.