Middle Class America & The Government

It’s not uncommon to hear that “we are losing the America we used to be,” and that we are evolving into this socialist nanny state where hard work and innovation are punished and failure is rewarded. That we are doing away with the ethic that made America the place of opportunity that it is/was/is ceasing to be.

The problem with this as that it ignores some glaring historical contradictions. The golden age many of these people refer to came about after the creation of a strong social safety net (which has slowly eroded and has become underfunded), a string labor union movement, and a tax increase on the rich that would sound Marxist in today’s political newspeak. The late 1970’s and early 1980’s actually starts a trend away from this paradigm, and with it we see a period of union busting, lowered taxes on the top income earners, and slowly eroded social safety net. There also appears to be a change in the American ethos. What used to be understood as “there go I but by the grace of God” has become to seen as subsidies for “welfare queens” and the enabling of an “entitlement mentality.”

What does the data show? It shows that a viable middle class makes its debut after the implementation of said nanny state.

Paul Krugman on the Middle Class

Conversly, the virtual disappearance of the middle class has coincided with a reversal of that trend. As taxes have been lowered on the rich, more government spending has been compensated for by printing/borrowing money, leaving us with the glaring debt problem we now face. Union busting (which gained traction under Reagan) has effectively neutered Unions, leaving them less able to leverage fair wages for employees. Not surprisingly, as the production of the American worker has increased, his/her wages haven’t kept pace. More and more of the increased wealth goes to the likes of CEOs and hedge fund managers.

This is what the decline of the top marginal tax rates and income for the top .1% looks like historically. Note the corresponding trend in the US National Debt.

In other words. Historical data would appear to suggest that a strong government (while obviously not perfect) allows for a more honest playing field, allowing for the very bootstraps some need in order to pick themselves up. Small, inept governments allow for much stronger power grabs and results in a population consisting of a very small wealthy elite surrounded by rampant poverty, with little chance to move up. What many laissez faire free market proponents assume would result in newfound individual liberties and an increased pursuit of one’s own dreams would actually look more like the pre-New Deal America, where the wealth was owned by a small elite regarded as Robber Barons and the rest of America had very little chance to move up. At least, that’s what the data suggests.International comparisons tell the same story

For all the talk of the runaway government and a large tax burden, the United states has among the lowest tax burden and taxes as a percentage of GDP. Among these countries, the US also has the highest wealth disparity and among the lowest social mobility and worst infant mortality rates, average lifespans, and literacy rates.

wealth disparity oecd states france canada england germany

Wealth Disparity - United states vs canada britain france germany

Social mobility - United states france canada england germany

The reason it seems as if tax rates are so high to many is because:

Unfortunately, what should be common knowledge appears to be hidden from today’s political discourse. So what we’re left with is a large segment of our population railing against the the policies that made a middle class American possible to begin with (and mistakenly calling it socialism). This has led to the creation of the recent Tea Party movement.

According to a recent poll by The Economist;

Tea partiers are much more concerned about government spending than are other Americans. The budget deficit is their number two issue, behind only the economy (38% say the economy is their most important issue, 23% name the deficit). Forty percent of Americans overall cite the economy, 17% name health care (mentioned by only 11% of tea partiers), and only 8% say the deficit is the country’s most important issue.

And yet Forbes recently sent interns to survey Tea party protesters, and they appear to have an inflated view of taxes and size of the federal government.

The Misinformed Tea Party Movement

In short, no matter how one slices the data, the Tea Party crowd appears to believe that federal taxes are very considerably higher than they actually are, whether referring to total taxes as a share of GDP or in terms of the taxes paid by a typical family.

Tea Partyers also seem to have a very distorted view of the direction of federal taxes. They were asked whether they are higher, lower or the same as when Barack Obama was inaugurated last year. More than two-thirds thought that taxes are higher today, and only 4% thought they were lower; the rest said they are the same.

As noted earlier, federal taxes are very considerably lower by every measure since Obama became president. And given the economic circumstances, it’s hard to imagine that a tax increase would have been enacted last year. In fact, 40% of Obama’s stimulus package involved tax cuts. These include the Making Work Pay Credit, which reduces federal taxes for all taxpayers with incomes below $75,000 by between $400 and $800.