The GOP's Income Inequality Opportunity

Obama's failures leave GOP with an opportunity to capture independent majority.

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Say what you want about it, but the Occupy Wall Street movement does have one thing right: It's made headlines pointing out the income inequality of the last three decades. According to a Congressional Budget Office study that came out in October, income grew for the top 1 percent of households by 275 percent over the last 30 years, while the middle 60 percent of households saw their income grow by just under 40 percent. "We Are the 99 Percent" resonates with a lot of voters in the middle.

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That's where the White House is making a strategic mistake. Its only response to stagnant incomes among the middle class is to punish success and tax the 1 percent at the top. The White House is proposing payroll tax cuts financed by higher income taxes on million-dollar incomes, and New York Sen. Charles Schumer told the New York Times recently that the Democrats' plan is to continue to push financing energy and infrastructure spending with more taxes on the top earners during debates over upcoming bills. "We're going to keep at it through the winter and spring," the senator said.

[See a collection of political cartoons on Occupy Wall Street.]

Yet Stanford University professor of economics Michael Boskin pointed out recently that the United States already has one of the most progressive tax systems in the world, in which that top 1 percent pays 38 percent of federal income taxes, while 51 percent of Americans pay no federal income tax at all. We also have the second-highest corporate income tax rate, when combined with state taxes, of any advanced economy. Going much higher isn't really an option. According to Boskin, "If we remain on our current spending trajectory, we'll see increases in income and payroll taxes not just on the 'rich,' but on all taxpayers, eventually driving marginal tax rates over 80 percent at the top and over 70 percent on many middle-income working couples. This, clearly, is a recipe for economic disaster."

House Budget Committee Chairman Paul Ryan recently dug into the numbers in that October CBO study and found that it wasn't federal income taxes that increased income inequality, but entitlement payments that were the problem. In fact, Ryan points out that by taking income away from the shrinking pool of young taxpayers to finance Social Security and Medicare payments to the growing number of increasingly affluent retirees, entitlements have created more disparity than tax policies have.

[Read about the 'Occupy' movement, from Wall Street to Main Street.]

And when you think about the fact that the payroll tax cut the White House is proposing would reduce money coming into Social Security, that hastens the transfer of wealth between generations. Why? Because as the tax cut for younger workers reduces revenue, nothing is reducing the continued benefit checks to the expanding number of retirees. The middle-class workers who are paying in less today will be left with a bankrupt system tomorrow. This is one reason why Erskine Bowles, co-chair of the president's deficit reduction commission, said America faces "the most predictable economic crisis in history."

The Democrats in the Senate and in the White House, in their single-minded pursuit of even more progressive tax policies, have forgotten all about creating middle-class economic growth. Senate Democrats have gone over 900 days without enacting a federal budget. And the White House has walked away from the proposals put forth by the deficit reduction panel led by Bowles and Alan Simpson. There is no Democratic plan for addressing middle-class income stagnation, averting the looming crisis posed by massive deficits, unleashing entrepreneurship, or saving the entitlement programs that have become such a part of working-class life in America.

[Check out political cartoons about the budget and deficit.]

What the Democrats are missing when they punish success is that most people in the middle class want to be successful, too. As Ryan notes, there is tremendous income mobility over time. It wasn't the same people hovering at the top and the bottom over those 30 years in the CBO report; most had moved up the income ladder. Different people define the American Dream differently—getting a college education, owning one's own home, or starting a business all come to mind—but everyone wants the opportunity for a better life for themselves and their children, no matter what their income level is. While Democrats are busy arguing over smaller pieces of a shrinking pie, most families want to make sure a bigger pie is in the oven.