Tax time fast approaches and, with it, the need for an honest re-evaluation of who is in the middle class and who pays most of the income taxes.
Perhaps no other public policy area is more clouded by “myth conceptions” than our federal tax system. That’s why last week’s latest “Tax Watch” study from the nonpartisan Tax Foundation is a timely breath of fresh air, and should be required reading on Capitol Hill and in every news bureau.
For example, did you know, this year, a record 44 million Americans will file tax returns but not have to pay any income taxes (because of growing deductions and credits that have effectively removed them from the tax base)?
Did you know, as a result, the richest 20 percent of taxpayers — those making more than $68,000 a year — will pay 82 percent of all federal income tax revenue, also a record?
These are among the little-known facts about American taxation that Scott Hodge, the Tax Foundation’s president, includes in his eye-opening report. Mr. Hodge offers another compelling tax fact: “Despite the charges of critics, President Bush’s tax cuts further reduced the tax burden of low- and middle-income taxpayers, and shifted the tax burden onto wealthy taxpayers.”
Mr. Bush has named a bipartisan commission to examine the tax code and develop proposals to make it simpler, less expensive and more conducive to economic growth and investment.
But here’s the dilemma the commission faces, says Mr. Hodge: “If the goal of fundamental tax reform is to expand the tax base and lower rates, how do you craft a tax reform plan that (1) doesn’t raise taxes on the 44 million Americans who now pay nothing, and, (2) doesn’t ‘cut taxes for the rich’ who now pay everything? There is no easy answer.”
This, of course, raises the interesting and rarely asked question (at least in the news media) about who makes up the rich in today’s economy? If you believe Democratic leaders, who continue to say Mr. Bush’s tax cuts favored the rich, you might think the country is awash in millionaires.
But the taxpayer profile put out by Mr. Hodge’s group shows a growing number of taxpayers in today’s two-income family economy have left the statistical middle class and have become, well, sort of rich. In other words, says Mr. Hodge, “Today’s middle class isn’t what it used to be.”
The day when the typical married, single-earner household dominated the tax base is long gone. It has been largely displaced in U.S. tax demographics by a wealthier income stratum of 32 million dual-income, married working couples.
“With two incomes, today’s typical families no longer reside in the statistical middle of the income scale (those earning roughly $25,500 to $42,000 per year). On the contrary they are the rich, at least statistically by IRS standards,” the Tax Foundation reports. These taxpayers pay most of the income taxes and, thus, received most of Mr. Bush’s tax cuts.
Few in the Washington news business understand the dramatic income changes in today’s changing economy. We keep seeing stories on the nightly news about “the disappearing middle class,” as if these taxpayers fell into an abyss of poverty.
However, the Tax Foundation’s analysis shows these people are not disappearing, but most have risen to a higher income level.
“By most accounts, the middle 20 percent of income earners today no longer squares with traditional notions of a middle-class America,” according to the tax study:
“Today, only 18 percent of married couples fall in the statistical middle of the income distribution, while more than two-thirds are found in the top two income groups. The largest share of married couples — 35 percent — earn enough to be in the top 20 percent of taxpayers, which begins at about $68,000.”
Contrary to Democratic rhetoric, almost 90 percent of richest taxpayers are married, and most are working couples, IRS data show. Their numbers have shot up more than 7 million in the last 15 years and now are 67 percent of working-age couples.
Individually, their incomes are typically middle class. But when couples incomes are combined, they are pushed into a much higher tax bracket and they become the so-called “rich.”
The Tax Foundation dramatically illustrates this: “A young factory worker earning $17 an hour — or $35,000 per year — clearly falls in the statistical middle. But if she married a man earning the same income, their combined income of $70,000 thrusts them up into the wealthiest 20 percent of Americans.”
All this has huge political implications for the anti-tax-cut Democrats, who may be losing their core middle-class base as dual-earner couples (who pay 69 percent of all income taxes) are increasingly drawn to the GOP message of broadening the tax base and lowering rates.
So the next time you see a news report about “the disappearing middle class,” remember: The middle class hasn’t lost ground, it has moved up to a higher income level, and, unfortunately, a higher tax bracket.
Donald Lambro, chief political correspondent of The Washington Times, is a nationally syndicated columnist.