Too large to be left out

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Article Highlights

  • We can't solve our budget problems just by soaking the rich or by gutting programs for the poor

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  • Any sensible budget solution will require us to cut spending on middle-class entitlement programs

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  • If we as a society like big government, then the broadly defined middle class should be willing to chip in

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The fiscal future remains highly uncertain as President Obama and Congressional Republicans scramble to strike a compromise on the budget. But one thing is certain: any fair and growth-friendly solution to our budget crisis will leave less money in the pockets of the middle class through tax increases, entitlement cuts or both. With the two political parties classifying everyone except the poor and the richest 2 percent as middle class, the group is simply too large to be left out of the fiscal solution.
"If we as a society like big government, then the broadly defined middle class should be willing to chip in."

To begin, any sensible budget solution will require us to cut spending on middle-class entitlement programs like Medicare and Social Security. There is widespread agreement that these programs are on an unsustainable path, and the sooner we take steps to bring them under control the better. While that's technically not a tax increase, cuts in entitlement spending will reduce the disposable incomes of middle-class Americans in much the same way as tax increases.

Political realities also make clear that a budget deal is likely to involve higher revenue. A pro-growth approach to raising revenue would spread the burden over both middle- and high-income households. Confining the entire tax increase to the top 2 percent will require marginal tax rate increases on the investment, entrepreneurship and innovation that drive long-run growth. In contrast, reducing tax expenditures – like the mortgage interest deduction and the child tax credit – is good for growth. But reducing these sorts of tax expenditures in a way that raises substantial revenue will require an increased burden on the middle class.

Moreover, there's a serious political problem with allowing 98 percent of American households to vote for higher benefits for themselves while asking the remaining 2 percent to foot the bill. Personally, I like my government small. But if we as a society like big government, then the broadly defined middle class should be willing to chip in. Indeed, the large welfare states of Western Europe are funded by high taxes across the board, not just on the rich.

We can't solve our budget problems just by soaking the rich or by gutting programs for the poor. The broad middle class will have to step up and be part of the solution. It's not an idea that wins votes, but it's the truth.

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About the Author

 

Sita Nataraj
Slavov
  • Economist Sita Nataraj Slavov specializes in public finance issues dealing with retirement and the economics of aging. Her recent work has focused on whether retiree health insurance encourages early retirement, the impact of widowhood on out-of-pocket medical expenses among the elderly and the optimal time to claim Social Security. Before joining AEI, Slavov taught a variety of economic courses at Occidental College: game theory, public finance, behavioral economics and econometrics. She has also served as a senior economist specializing in public finance issues at the White House's Council of Economic Advisers. Her work at AEI will focus on Social Security and retirement issues.


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    Email: sita.slavov@aei.org
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