ECONOMIC CONSULTANTS Jeffrey Bell and John Mueller broke a taboo when they met in mid-September with the National Commission on Economic Growth and Tax Reform, better known as the Kemp Commission. They raised the issue of the middle class squeeze, the stagnation of average Americans’ wages for the last two decades. Bell said, “The workers are getting screwed.” The commission’s honchos — Jack Kemp, Ed Feulner of the Heritage Foundation, economist Alan Reynolds, staff director Grace Marie Arnett — listened in silence. Given their aversion to discussing the erosion of workers’ pay, they also responded coolly to the suggestion that a fiat tax might make a bad situation for the middle class worse.
Conservatives are in a state of denial about the income of middle class Americans. It’s plainly declined. True, real income rose slightly during the heyday of Reaganomics (1983-1990), more for entrepreneurs than working families. But it dropped sharply in the 1970s and is sinking again in the 1990s. Conservatives rarely broach this subject, and when they do, their purpose is invariably to say the decline is exaggerated (soaring fringe benefits aren’t counted as income) or merely a misinterpretation of economic statistics.
They never endorse the concept of a middle class squeeze — that’s taboo. But that’s what Bell, who worked in the Nixon, Reagan, and Kemp presidential campaigns, and Mueller, a former economist for Kemp, did.
The Kemp panel may yet heed their warning. Mueller is to testify before the full commission on September 26, arguing that the flat tax proposals of House Majority Leader Dick Armey and Senator Richard Lugar of Indiana would produce a middle class tax increase. Thus, they “would actually worsen the existing disparity” that forces workers, who earn two-thirds of gross national income, to pay four-fifths of all federal taxes, Mueller wrote recently. And that makes the proposals “exceedingly unattractive in political terms.”
This is important. Many Republicans, particularly Senate Majority Leader Bob Dole, want the commission to draft a popular GOP tax reform plan for 1996. If the plan hikes taxes on the middle class, however, Republicans should repudiate it. But what’s worse, they might embrace it, leaving themselves vulnerable to Democratic attacks.
Republicans wouldn’t be on the verge of putting themselves in this fix if they acknowledged the stagnation in middle class wages. Why don’t they? One reason is the middle class squeeze is a staple of Democratic rhetoric. Labor Secretary Robert Reich says over and over: “For a decade and a half, ordinary families have been working harder and gettirg less.” President Clinton makes the same point. And when asked last April about a fiat tax, Clinton said Studies show Republican proposals “will raise taxes for people with incomes under $ 200,000 and lower taxes for people over $ 200,000, like my wife and myself, which would be unfair.” Bell says Clinton is correct.
There are two more reasons why conservatives refuse to accept the m iddle class squeeze. They regard it as an attack on Reaganomics. Indeed, Democrats have used the issue of declining income exactly that way. They’re wrong to blame Reaganomics as the culprit, but right to cite the squeeze as a real phenomenon.
Conservatives also see the idea of a squeeze on workers” pay as a challenge to capitalism itself. It’s not. It’s a problem caused by the tax system. Mueller insists the squeeze stems from the fact the poor pay little in taxes ( government benefits aren’t taxable) and the rich get tax relief (investment income is taxed at a lower rate). The upshot is the middle class pays more.
A flat tax like Armey’s will only, make this worse, says Mueller, by making investment income non-taxable. Since middle class Americans have little of this income, they won’t benefit. And since the rich and businesses have such income and will benefit, the tax burden will fall more heavily yet orthe middle class. To avert this, Bell and Mueller have proposed two versions of a 19 percent flat tax on all gross income above the poverty line.
One would give working families a cut in their combined income and payroll taxes, but the well-to-do and businesses would pay more by losing their lucrative deduction for depreciation on investment property. The other is a worker-friendly variation of Armey, in which the biggest change is to jettison the business deduction on investment property.
Corporate lobbyists will besiege the Capitol if Republicans try to toss out cherished deductions. But the middle class will rejoice. Not so with the Armey plan, on which the Kemp Commission appears to look favorably. Even if the commission endorses Armey, Dole isn’t likely to. Bell and Mueller presented their case on September 14 to Dole’s advisers. “It’s inconceivable that Bob Dole would support a tax increase on any individual,” says consultant David Smick, who accompanied Bell and Mueller and is a prominent Dole suporter. Also, the nascent Dole-Kemp friendship would shatter. Dole expects Kemp to come up with a tax plan he can champion. The last thing Dole wants is a plan that tightens the squeeze on the middle class.
by Fred Barnes
