Tax Cuts for the Middle Class

Jack Kemp
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Posted: Sep 16, 2008 4:10 PM
Tax Cuts for the Middle Class
This column is co-authored with Peter Ferrara, who is director of entitlement and budget policy for the Institute for Policy Innovation, and formerly served in the Reagan White House

Barack Obama says he supports a tax cut for 95 percent of all Americans. He is referring here to his proposal for a $500 refundable income tax credit for all workers, except those in the top 5 percent of income earners. These folks, for some reason, are to be singled out for "special treatment" -- i.e., tax increases -- unless, as he told ABC anchor George Stephanopoulos last week, "the economy remains weak." So apparently even Obama recognizes that his tax increases would be economically harmful.

Because Obama's tax credit does not reduce marginal tax rates, it will not benefit the economy. It provides no added incentives for work, savings, investment or business expansion. Because it's refundable (meaning workers get it even if they have little or no income tax liability), for many it will involve just another check from the government, rather than a reduction in tax liability. In those cases, it would not be a tax cut at all, but a transfer payment and a direct drain on tax revenues.

McCain proposes to double the personal exemption for each dependent from $3,500 to $7,000, for all families regardless of income. For middle-class workers in the 25 percent tax bracket, this $3,500 increase would reduce their tax liability by $875 for each child. While this tax cut also does not involve a reduction in marginal tax rates, it will promote working families with children.

But McCain also proposes marginal tax rate reductions that do promote economic growth and encourage investment. Because America today suffers from the second highest corporate tax rates in the industrialized world, McCain would help restore American competitiveness by reducing the federal corporate tax rate from 35 percent to 25 percent. This would benefit the middle class and workers by creating new jobs, at better wages, while strengthening the dollar.

It may even raise rather than reduce revenues. According to a 2007 study by the Treasury Department, Ireland -- with a 12.5 percent corporate tax rate -- raises almost 50 percent more revenue on a comparative basis than the United States does with a 35 percent rate.

McCain would also hold the top capital gains tax rate and dividend tax at 15 percent. Both of these would provide a much-needed boost for the value of stocks, which are now held by more than two-thirds of all Americans.

McCain further proposes to phase out the Alternative Minimum Tax, which would otherwise burden 25 million middle-class families. This will save middle-class families $2,700 each year on average, an overall middle-class tax cut of $60 billion per year. McCain's tax plan includes other provisions that would boost our economy, as well, including the expensing of new investment in equipment, machinery and technology.

Obama, by contrast, has proposed to raise marginal tax rates for almost every federal tax -- the individual income tax, the capital gains tax, the dividends tax, the payroll tax, the death tax, etc. He would further increase corporate taxes through such measures as the windfall profits tax on oil companies.

These marginal tax rate increases would dramatically discourage savings, investment, business expansion and job creation. Such tax increases would consequently slow the economy even further and reduce jobs and wages for working people and the middle class, while simultaneously weakening the dollar.

Republicans should promote additional middle-class tax cuts through fundamental reform of our confusing, contradictory and confiscatory tax code. Rep. Paul Ryan, R-Wis., proposes to allow workers to choose a flatter tax system with a standard deduction of $25,000 for couples ($12,500 for singles), plus a personal deduction of $3,500 per family member (exempting the first $39,000 for a family of four).

A 10 percent tax rate would then apply to the next $100,000 for couples ($50,000 for singles), with a 25 percent rate above that. Currently, a 15 percent tax rate starts at $15,650 for couples ($7,825 for singles), with a 25 percent rate starting at $63,700 for couples ($31,850 for singles). Ryan's plan, which McCain has praised, would promote a powerful economic and investment boom, while creating jobs and good wages for millions.

Finally, the biggest middle-class tax cut of all would be allowing workers the freedom to choose personal accounts for Social Security, which McCain has also praised. These accounts should grow eventually to replace the entire payroll tax for those who choose them, with the accounts financing all the benefits now paid through the tax.

To the extent workers make this choice, this would eliminate payroll taxes on working people and the middle class, now the highest tax they pay. Instead, working people would be paying into their own personal store of family wealth, opening up broad new vistas of opportunity.