The middle class, defined by the range of its average income, has always been the most vulnerable group in a society, despite contrasting conventional views. When it comes to avoiding systemic risks, they are much more vulnerable compared to the super wealthy and those in extreme poverty. The degree of their vulnerability varies in different countries largely due to different institutions and distribution of political power.
In a democratic country with a strong rule of law, the middle class performs relatively better than their counterparts in countries under authoritarian rule. The United States once had a powerful middle class that dominated the distribution of wealth. In a working paper of National Bureau of Economic Research, Emmanuel Saez and Gabriel Zucman studied the wealth distribution in the past 100 years using capitalized income tax data. One of the most striking pieces of empirical evidence in their paper is that the wealth concentration in the United States appears to be a U-shape in the past 100 years, suggesting that recent years’ rise of wealth inequality is from the top 0.1 percent wealth share. Unfortunately, the bottom 90 percent wealth share has steadily declined since the end of 1980s.
The anger of middle-class Americans resulted in the first African-American president, and the subsequent movements of Occupy Wall Street and the Tea Party, reflecting the frustrations of middle class from both the left and right. In the three recent general elections, all candidates have courted middle class Americans wholeheartedly with beautiful rhetoric and promises. But once candidates were elected, they just found that the middle-class Americans were the ones easy to rip off. But now, most middle-class Americans don’t seem to care about public policy, because they don’t realize how vulnerable their finance and health status could be, as in the great recession in 2008.
The greatest threat to middle-class Americans are the business cycle and financial crisis. This is because the source of income for middle-class Americans is largely from wages. The value of their net worth, usually consisting of real-estate property and small portions of financial assets, could vanish in a short amount of time in a financial shock. The most horrible part is the unemployment resulting from the business cycle. Unemployment dampens the heart of their income source, evaporating their net worth even more quickly. The wealthy, of course, are also impacted by financial crisis risk. But they have enough resources to go through a crisis safely, by diversifying their sources of income. The poor, who already have few assets, are not sensitive to these risks. In addition, government programs are able to take care of them most of the time.
A tilted tax policy has no hope of easing the risk that middle-class Americans are facing. As Mitt Romney released his tax information during the last election, one can see that the average tax rate is effectively lower for the wealthy than for middle-income people. Middle-class Americans have no smart, legal way to evade some taxes, whereas the wealthy can always hire good lawyers to conduct a best strategy.
Politicians usually sell their friendly tax policy to middle-class Americans by waging a war between classes. That is a fatal mistake. Being hostile to the wealthy does not mean the middle class will be better off, and conducting a middle-class-friendly tax policy does not mean making it harder for big businesses to survive. A hostile tax policy toward the rich, like what Bernie Sander proposes, only causes the exodus of the wealthy and worsens the business environment. According to a report from the New World Wealth, France topped the list of outflow of millionaires in 2015[KM3] , partly an outcome of President Hollande announcing an aggressive marginal income tax for the wealth after he took office. A government can force the rich to pay high taxes, but the rich can also choose to leave. Those in the middle class can’t.
William McGurn pointed out in his opinion in the Wall Street Journal that middle class Americans are not satisfied with the value their tax dollar provides with regard to education, healthcare, etc. Instead of making many promises, why can’t political candidates start with a simple income tax policy that is friendly toward middle-class Americans? If they cannot, in the meantime, how about thinking about using tax dollars wisely to provide satisfactory public services to meet the middle class’ needs?
