We’re more than five years out of the Great Recession, but many Americans are still struggling to earn a competitive wage, despite signs that the economy is all but recovered.
The people who should be feeling the recovery by now — America’s middle class — simply aren’t. According to a Pew study released last fall, 56 percent of Americans believe that their incomes are falling behind the cost of living. That’s almost the exact same number as reported falling behind in October 2008, the height of the financial crisis.
The discrepancy between the statistical recovery and the actual recovery has been the focus of plenty of books, articles and reports over the last year. And the results are, for lack of a better word, scary.
The gap between the rich and the poor in the United States has soared since the 1980s. And some economists believe that economic inequality in the U.S. is nearing its breaking point.
Targeting the Troubled
In the past, talking points on economic inequality have primarily been the domain of politicians who veer left of center. However, with the election season soon to be upon us and more and more Americans feeling the burden of tightened purse strings, members of both political parties are targeting economic inequality with vigor.
The latest effort comes by way of Republican Senators Marco Rubio and Mike Lee. This month, the two conservative Senators authored a tax plan designed to “empower the American people to succeed in a revived free market.”
The dynamic duo set out to simplify the U.S. tax code, providing tax cuts for almost every segment of the population: families, businesses, middle-class, wealthier Americans.
In the words of James Pethokoukis, an economic policy scholar at the American Enterprise Institute, the new plan is “sort of the Oprah Winfrey theory of tax cuts… This is ‘You get a tax cut, you get a tax cut.’”
The Tax Cut to End Tax Cuts
This isn’t Lee’s first rodeo. The Senator from Utah released an earlier version of his current plan in 2013 explicitly designed to simplify the tax code and provide benefits to parents.
To do so, the Senator proposed a tax rate of 35 percent on the highest earners in the nation and a massive tax credit for children with families. For you playing along at home, that’s a reduction from the current (2015) tax rate of 39.6 percent on members of the highest income bracket (single filers earning more than $413,200 per year and married filers earning $464,850 per year).
This year’s plan expands on that premise. Now, instead of simply dropping the tax rate for the top tax bracket, the Senator proposes also cutting capital gains and dividend income taxes completely. Those two types of tax cuts overwhelmingly benefit those with the means to invest or, according to research by the National Bureau of Economic Research, the top 2 percent of Americans.
Encouraging Business Growth
The plan proposed by Senators Rubio and Lee would also cut the corporate tax rate to 25 percent from 35 percent and end the taxation on foreign income for American businesses.
Doing so, the pair insists, would encourage business growth and reduce the number of businesses moving abroad to countries with significantly lower tax rates. This is no doubt in response to the flurry of American businesses, such as Burger King, who moved their headquarters abroad last year.
It’s tough to argue with their logic. Companies will be much more interested in staying in the U.S. if it’s cheaper for them to do so. However, the Rubio-Lee tax plan actually does very little to ensure that companies have incentives to stick around.
Corporations in the United States already pay significantly less than 39 percent of their profits in taxes (that’s what the tax rate jumps to when state taxes are included). That’s because, just like you, companies are able to claim all different types of tax breaks and incentives at the end of each year. According to the Government Accountability Office, the biggest corporations can pay as little as 12.5 percent at the end of the day.
The discrepancy between the actual tax rate (known as the “effective” tax rate) and the actual rate is caused by the complexities of the tax code that allow businesses to deduct expenses ranging from business travel to equipment depreciation.
Allowing businesses to deduct certain expenses, such as raw materials, from their taxes isn’t a bad practice. Doing so allows businesses to stay competitive and keeps prices low by ensuring that consumers are only taxed on the final product that they purchase. However, when major corporations get so good at manipulating the tax code that they’re able to pay no federal taxes at all, it’s a good sign that the tax code is far more complicated than it ought to be.
And that’s where the Rubio-Lee plan ultimately fails. Instead of promoting competition, the plan lowers the corporate tax rate while introducing even more complications into the tax code.
It’s no secret that America’s tax policy is desperately in need of change. The Rubio-Lee proposal, despite its intentions of “restoring the American dream and bringing it into reach of more people than ever before,” fails spectacularly in either helping the ailing middle class or reforming the tax code.
In fact, as Danny Vinik writes in the New Republic, Lee and Rubio have created a plan that would “balloon the deficit and… leave out low-income and non-traditional families,” while grossly benefitting the wealthiest Americans.
And, while the plan does provide some benefits to middle-class Americans, the New York Times’ Josh Barro raises an equally salient point: when the time comes to offset the budget deficit caused by the new tax proposal, who stands to lose the most? Businesses who can (and will) continue to lobby for tax breaks or the households that have seen their wages stagnate and are too busy working to notice what’s going on in Washington?
It bears mentioning that Gallup released a study at the beginning of March that found that U.S. citizens believe the government is our country’s No. 1 problem, followed closely by the economy and jobs. I would hypothesize that it’s efforts like this one, repeated on either side of the political spectrum that draw the ire of the public. That is, the spectacular ability of our representatives to develop legislation that transparently favors the vested interests of the few while providing lip service to the many.