The Great Wage Slowdown and How to Fix It

With a new Congress just elected, this is a good time to reflect about what changes should be made in public policy. Our biggest economic problem is to speed up growth in order to provide more and better paying jobs.  In addition, a faster growing economy would bring in more tax revenue which would help pay our bills and reduce the deficit.
CaptureA column in today’s New York Times, “The Great Wage Slowdown, Looming over Politics,” by David Leonhardt, proposes a cut in the marginal tax rate for the middle class as a way of boosting their incomes.  As can be seen in the above chart, median household income has been flat since the year 2000, and even lower since the 2008 recession.  Mr. Leonhardt goes on to say that any tax cut for the middle class should be balanced by a tax increase for the wealthy.
It so happens that I proposed such a plan several months ago as a way of boosting the economy and reducing inequality at the same time. The idea is to enact broad-based tax reform whereby tax rates are lowered for all, offset by shrinking tax deductions.  The 64% of taxpayers who do not itemize deductions will receive a big tax cut.  But these are the very middle-class wage earners with stagnant incomes.  So they will likely spend their tax savings, thereby giving the economy a big boost.
More specifically:

  • Individual tax deductions total about $1 trillion per year.
  • Let’s suppose that these deductions are cut in half to $500 billion per year.
  • Let’s further suppose that half of this amount, or $250 billion per year, is cut from the taxes of the 64% who do not itemize deductions.
  • If these 64% spend just 2/3 of their new income (instead of saving it or paying off debt), this will total $170 billion which is 1% of GDP.
  • This would increase the rate of growth of GDP from the 2.2% average, since the end of the Great Recession, to 3.2%. This represents an enormous boost to the economy and would return average GDP growth to about its 3.3% average since 1947.

    Mr. Leonhardt suggests that presidential contenders in 2016 would greatly benefit from proposing a tax rate cut for the middle class. Here’s a specific plan they can use!

2 thoughts on “The Great Wage Slowdown and How to Fix It

  1. Jack, I would like to see both state and the federal governments reduce the taxes on Social Security income as well as the taxes on monies withdrawn from IRA type accounts, especially from Money Market accounts. I think these two actions would have a positive impact on both disposable money for mature purchasers as well as increase the demand for many products that mature buyers may put off. I would apply such a tax reduction to those who have an annual taxable income of less than $150,000.

  2. I think it would be preferable to just cut tax rates across the board for everyone, offset, of course, by limiting deductions which primarily benefit the wealthy. Then all middle-income and lower-income wage earners and retirees alike would have more money to spend. All together this would give the economy a big boost.

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