Those in Congress looking to lower the tax burden for America's middle class are likely to make things worse for the nation's working families, independent tax experts warned the Senate Finance Committee.
"While it is tempting for lawmakers to try to do more for working families through new tax and spending initiatives, Washington can actually do more for them by doing less," said Tax Foundation president Scott A. Hodge.
Making the Tax Code more progressive - the approach favored by many Democrats for lightening the burden on the middle class - isn't an option because the tax system is already too progressive, Hodge argued. Citing Tax Foundation research, he said that the households in the top 20 percent income bracket currently pay an average of $48,390 more in taxes than they get in government services. Meanwhile, those in the lowest 20 percent receive $31,032 more from the government than they pay in taxes.
Hodge's testimony came at the kickoff of a recent series of Senate hearings into the financial challenges facing America's middle class - an exercise that may set the stage for congressional reconsideration of the Bush tax cuts.
Part of the problem is the demographic shift in American middle-class families, Hodge said, noting that the stereotypical family of four can no longer be considered middle income. "The majority of families with children now populate the wealthiest 40 percent of Americans, in part because of the growth of dual-earner households," he said.
But while Senate Democrats were hoping to portray the middle class as struggling as a result of tax cuts, witnesses at the hearing suggested just the opposite. Brookings Institution researcher Gary Burtless told Congress that despite the belief that middle-income Americans are becoming worse off, the truth is that between 2000 and 2006, real disposable income per person rose 1.4 percent a year, and real personal consumption per person increased even faster, at 2.1 percent.
If misconceptions about the tax burden on the middle class encourage Congress to raise federal income tax rates back to 2000 levels, the result could actually reduce receipts, Hodge warned. "One could make the case that boosting the top rates would, at the margin, discourage high-income people from marrying, encourage Baby Boomers to retire early, and encourage entrepreneurs to reform their businesses as traditional C corps," he said. "All of these consequences would cause a reduction, not an increase, in overall tax revenues."
If Congress wants to help the poor, Hodge said, it should consider cutting the corporate tax rate. Tax Foundation researchers found that Americans with incomes in the bottom 20 percent pay an average of only $171 in personal income taxes, but shell out $271 in higher prices resulting from corporate income taxes.
"This profound finding suggests that cutting the corporate income tax will do more to help low-income Americans than any additional cuts in the individual income tax," he said.
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