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Taxes Matter to the Middle Class — But They Won’t Save It

Posted on Sep. 10, 2020

For a guy who spends much of his professional life writing about taxes, Jim Tankersley doesn’t seem to put much store in the power of tax. Or at least he thinks he doesn’t.

In his new book, The Riches of This Land: The Untold, True Story of America’s Middle Class, the New York Times tax and economics reporter tries to explain the rise and fall of America’s middle-income workers. Along the way, he stops to explain how taxes have figured into that story. Near the end, he even endorses a few tax policy reforms that might help revive middle-class fortunes.

But Tankersley never puts tax at the center of his narrative. Typically, he describes misguided tax policies as part of the problem — a symptom of dysfunction in a political system that overvalues the contributions of capital and undervalues the importance of labor. The real solution to the plight of America’s beleaguered middle class is more cultural than economic, Tankersley contends. It’s about changing hearts and minds rather than government programs.

And yet tax never quite disappears from Tankersley’s story. After 15 chapters of stimulating and provocative discussion about America’s middle class and its declining fortunes, tax makes a surprise reappearance near the end — reminding us (or me, at least) that tax is never very far away from any social issue.

Defining the Middle Class

Tankersley’s central argument is simple: The popular narrative of middle-class declension — beginning with the great postwar boom and continuing through the struggles of the 1970s, 1980s, and beyond — isn’t exactly wrong, but is certainly incomplete. In particular, it tends to ignore the racial and gender diversity of America’s middle class, focusing narrowly on the fortunes of white male workers and ignoring the fate of female and minority workers who shared the middle rungs of the nation’s economic ladder.

More to the point, Tankersley argues (drawing on a wide range of economic data) that the diversity of the middle class was one of the principal reasons for its economic success — and the broader success of the United States. Economic success for immigrants, women, and Black people is essential to the overall health of the American economy, which is why postwar social progress for minorities and women helped deliver economic progress for the nation as a whole, Tankersley contends.

“For too long, our leaders told stories about civil rights and gender equity that were far too narrow. They sounded like victories for one group — not victories for all groups,” Tankersley writes. “Too many Americans have not been taught that their stories are everyone’s stories, their victories are everyone’s victories. It is a strange idea — that the liberation of the oppressed actually helps the longtime oppressor — but the evidence is clear, in the people and in the math.”

Dueling Statistics

Tankersley’s argument about shared prosperity is both fascinating and compelling. As a description of the boom years, I suspect it will also be broadly uncontroversial. But once he turns to the decades of middle-class decline, he enters more contentious territory — not least because that decline itself is a matter of some dispute.

In a nod to that dispute, Tankersley offers a brief detour into the “middle-class stagnation wars,” in which opponents battle over the current status and future prospects of American workers. “A cottage industry has sprung up in telling stories with numbers about the middle class,” Tankersley writes. “There are people who will tell you it is dead, and there are people who will tell you it has never been better off, and they all come in wielding stats and charts to support their arguments.”

This sort of statistical duel is familiar to anyone who works in or near Washington. And as Tankersley notes, it’s not exactly a disinterested, scholarly debate. Rather, it’s a political contest, shot through with motivated reasoning. “The competing sides are stacking the numbers not as an effort to learn what’s really happening to workers, but instead to justify the economic policies they would like to see government officials adopt,” he writes.

Broadly speaking, Democrats (or “progressives” for those who prefer ideological to partisan labels) tend to offer gloomy numbers, thereby bolstering the case for policies that would make it easier to form unions, for instance. Republicans/conservatives, with a predilection for lower taxes on businesses, investment returns, and high-income individuals, tend to champion numbers that tell a happy story about rising middle-class fortunes.

Tankersley is not wrong in that description of the battle lines (which brings to mind the old saying, attributed to the economist Ronald Coase, that if you torture the data long enough, they will confess). But Tankersley himself is no bystander in this debate, either. Instead, he aligns himself rather decisively with those taking the most pessimistic view of both past and future.

No matter how you massage the numbers, all the news ends up being grim, at least for anyone who isn’t perched atop the economic pyramid, Tankersley argues. “Nearly every serious study, regardless of methodology, confirms a devastating story about the middle class since the 1970s,” he writes. “Which is to say, they all show the American economy delivering far less for middle-class workers than it used to, and far less than those workers had grown to expect in the years after World War II.”

Without wading into this overheated debate, let me offer the view of a political historian: Whether or not members of the American middle class are objectively worse off today than they were a generation (or two) ago, many certainly believe they are. In a recent poll from NPR, the Robert Wood Johnson Foundation, and the Harvard T.H. Chan School of Public Health, roughly half of Americans said it’s harder to earn a middle-class income today than it was when they were children.

Predictably, that gloomy assessment was most popular among lower-income poll respondents. But the difference between rich and poor respondents wasn’t huge: That response ranged from 47 percent among those in the top 1 percent of earners (defined as those making more than $500,000 annually) to 50 percent among higher-income earners ($100,000-$499,999) to 49 percent among middle-income earners ($35,000-$99,999) to 56 percent among lower-income earners (less than $35,000).

In other words, while think tank economists will certainly continue to debate the fortunes of the American middle class, roughly half of all Americans — of every income level — are convinced that things are looking pretty grim. (This survey is hardly the only one to reveal such anxieties; broadly speaking, polls tend to suggest that while Americans remain fairly optimistic about the future, they also detect a real precariousness in their economic status.)

That political reality hasn’t escaped the notice of American politicians, who have been trading on middle-class anxiety for decades. The 2016 presidential election occasioned much hand-wringing about the declining fortunes of U.S. workers without a college degree, especially in battleground states of the Rust Belt and Midwest. But Donald Trump was hardly the first politician to harness such worries to his electoral ambitions. And he won’t be the last — indeed, Joe Biden is doing it right now.

Think tank economists will almost certainly continue their empirical battle over the “facts” of middle-class income and economic status. But without suggesting that those economic facts don’t matter, it’s important to recognize that political facts matter, too. Many middle-income Americans believe they are suffering, and for political purposes, that may be the most salient fact of all.

Of course, some might object that Americans have been misled by all the talk about inequality, income stagnation, and manufacturing job losses. But such arguments are deeply problematic, trading on some version of the “false consciousness” theory that used to animate a specific kind of Marxist analysis. In my reading of history, people aren’t so easily bamboozled or hoodwinked.

People (and voters) sometimes make political choices that seem hard to understand, inconsistent with their objective material interests. But those choices often make sense when evaluated using a different, nonmaterial logic. And material interests are themselves not exactly devoid of subjective bias: What looks economically irrational to an outside observer can make economic sense to an actual voter.

My point is this: When half of all Americans say they are anxious about their declining economic status, we should take their anxieties seriously. It can be tempting to spend time (and ink) trying to show them why they are wrong to be so scared, but those explanations are condescending and (in my experience) pointless. People react to their lived experience, not to think tank white papers.

Forays Into Tax Policy

Taxes pop up regularly throughout Tankersley’s narrative, but they get a few sustained treatments. The first and arguably most important can be found in a chapter on Trump’s 2016 presidential campaign. Candidate Trump wasn’t much interested in policy details, focusing instead on broad strokes and powerful optics. (Tankersley recalls, for instance, that Trump’s initial tax plan was just four pages long and featured a special one-page return for anyone with zero tax liability that simply declared, “I win.”)

Trump’s campaign aides were none too eager to add specificity to this plan — details encourage accountability, which no campaign wants to invite. But at the same time, details can be helpful if you’re struggling to be taken seriously, which was one of Trump’s problems as a candidate. So in October 2016, they invited Tankersley to a special meeting with two of Trump’s key economic advisers, Wilbur Ross and Peter Navarro.

Neither Ross nor Navarro was deeply involved in developing Trump’s tax proposals (which came from the pen of economist Arthur Laffer), but they were happy to defend them. Indeed, the duo had prepared a sweeping memo — Navarro called it “the whole chessboard” — intended to justify and explain the entirety of Trump’s economic vision. The chessboard document, released in late September 2016, argued that Trump’s blend of tax cuts, deregulation, and trade restriction would jump-start the economy, create jobs by the millions, and produce a cascade of new federal revenue (which would offset the cost of the tax cuts, as well as added spending for defense, infrastructure, and other national priorities).

Ultimately, Trump delivered on almost none of these promises, Tankersley concludes; the pandemic certainly made things worse, but Trump’s economic program was already failing before COVID-19 reached American shores. “Few of the predictions that Navarro and Ross (and by extension Trump) made in 2016 came to pass during those first three years,” Tankersley writes. Instead, the budget deficit ballooned, thanks to a combination of tax cuts and continued high spending. The trade deficit, which Trump promised to shrink using new tariffs, continued to increase — even as tariffs contributed to a slowdown in international trade. Perhaps most damning, economic growth never came close to the supercharged levels Trump had promised during the campaign, Tankersley contends. “While Trump succeeded in enacting much of his agenda, the policies he pushed as president failed to transform the economy,” he says.

Tankersley is particularly dismissive of Trump’s tax policies. The administration greatly overestimated the effect of reductions in corporate tax rates on corporate investment. “Trump and his team never stopped promising that an avalanche of corporate investment would flow from the cuts,” he writes. “Lower tax rates, they said, would entice companies to build new factories in the United States and shut down the ones they had built overseas.” Tankersley argues that none of that happened: Investment increased, but only modestly and only for a short while.

To be sure, economic growth was reasonably healthy during Trump’s first three years in office. But Tankersley attributes that growth to expansionary fiscal and monetary policy. “The simplest way to describe the economic results of Trump’s first three years in office is this: in order to keep wages rising and unemployment falling, he borrowed revenues from future taxpayers and pressured the central bank to lower interest rates in order to stimulate an economy that was well on its way to experiencing the longest expansion in American history,” he writes.

That stimulus-driven growth delivered transitory gains for middle-income workers, who saw some meaningful wage gains amid a tight labor market. But the boom did nothing to redress long-term problems in the economy; problems that had hobbled the middle class — and the nation’s economy more broadly — since the 1970s remained unsolved, Tankersley contends.

No Simple Solutions

Near the end of his book, Tankersley offers some ideas on how the fortunes of the beleaguered middle class might be revived in the years ahead. As befits someone steeped in the think tank and academic literature, he offers a quick tour of white papers and policy proposals, drawing ideas from both ends of the political spectrum. And like the good reporter he is, Tankersley is transparent about the ideological valence attached to many of those ideas.

“A lot of conservative economists agree with Kevin Hassett [who gets an extensive profile in the book] that corporate taxation holds middle-class incomes down,” Tankersley writes. “A lot of liberals say we should tax high earners significantly more and use the proceeds to invest in poor and middle-class Americans through direct transfers of income or expanded benefits like free college.”

Tankersley gives a nod to Melissa S. Kearney of the University of Maryland for a proposal to reduce the tax penalty on secondary earners (typically women) in two-income households. (He doesn’t identify the proposal, but it may well be this one from the Hamilton Project.)

Tankersley goes on to embrace even more sweeping tax proposals, including both a financial transactions tax and a carbon tax. Both levies would help correct for damaging externalities, including a “bloated financial system” that slows economic growth and carbon emissions that speed global warming, he contends. He also calls for equalizing the tax treatment of labor and capital income (or at least some forms of capital income), arguing that policymakers should “stop rewarding the legacy beneficiaries of elite white privilege, some of whom can now coast on the wealth they’ve amassed at others’ expense.”

Those are big — and controversial — ideas. But ultimately, they aren’t a big part of Tankersley’s plan for saving the middle class. That task will require changes that don’t line up neatly on the bullet points of a Washington policy agenda, he argues.

“The big change we need is attitudinal,” he writes. “We need a national commitment to helping each other succeed and get ahead. We need to stop ourselves and others from discriminating by race and gender. To stop vilifying the people who don’t look like we do.”

Attitudinal change, of course, is not easy. Or uncontroversial. Among other things, it would require those with privilege to acknowledge their unearned advantages. “Elite whites should acknowledge that they have benefited disproportionately from the economic changes of the last forty years, on top of the ingrained advantages that elite white men have enjoyed for centuries,” Tankersley writes. “If they are interested in helping lift others up to enjoy similar advantages in order to optimize the performance of the economy and keep delivering gains for people like them, they should be willing to pay higher taxes, to fund investments in human-capital accumulation for everyone else.”

But wait! There they are again — taxes. Even in a passage underscoring the more important, more fundamental “soft” levers of socioeconomic change, taxes come rushing back. Their reappearance recalls a famous quotation from economist Joseph Schumpeter — an observation on the ways in which the arcana of taxation can illuminate fundamental truths about a nation and its government:

The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare — all this and more is written in its fiscal history, stripped of all phrases. He who knows how to listen to its message here discerns the thunder of world history more clearly than anywhere else.

Implicitly, at least, Tankersley seems to recognize this fact about taxation. If Americans hope to remake their society — to revive their long-beleaguered middle class — they must change the way they think about themselves and their fellow citizens.

But along the way, they will almost certainly have to change their taxes, too.

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