Painful truth of debt crisis: We must raise taxes, even on the middle class

The United States has a debt crisis, but almost no one is willing to point out that the best way to solve the nation’s financial problems may be to raise taxes. Not just on the rich, but on the middle class as well.

The political risks in this approach are significant. Americans hate taxes. And we have come to expect low individual tax burdens almost as a matter of right. But, as President Obama pointed out recently, although we may not like taxes, we do like the “stuff” our tax dollars buy.

In fact, we like almost everything the modern state provides. We like that the federal government helps us to buy homes through the mortgage interest tax deduction; we like that Social Security provides us, and our parents, with economic security in our old age; we like that the federal government helps local communities pay for public education and helps us to send our children to college. Indeed, according to a recent Harris Poll, large numbers of us oppose any cuts in federal spending for retirement security, education, or health care. Significant minorities even favor increasing spending in these areas.

Federal government's hidden role

But few of us think we should have to pay for any of this. Indeed, many of us don’t even know that the federal government has played – and continues to play – a major role in ensuring the economic and social security of the vast majority of Americans – poor, rich, and middle class alike.

For this, we can thank New Deal and post-World War II liberals.

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The reason that many Americans don’t think they have to pay for what government does is that the politicians and policymakers who wrote the American social compact decided to hide its costs. Even Franklin Roosevelt – a liberal president with huge Democratic majorities in Congress – rejected any effort to expand the federal income tax base to pay for his New Deal. The architects of the Social Security system – rightly referred to as the cornerstone of the American welfare state – often disingenuously claimed that the program would use “premiums” and not taxes to pay for Americans’ retirement security.

Myth of tax-and-spend liberal

On closer examination, the tax-and-spend liberal turns out to be a myth.

Throughout the postwar period, liberal politicians and policymakers avoided higher taxes like the plague. President John Kennedy promised to take the nation to the New Frontier at the same time as he slashed corporate taxes. Lyndon Johnson even launched the Great Society and the War on Poverty after pushing a massive, across-the-board tax cut through Congress.

Rather than relying on higher taxes to pay for social and economic security, postwar liberals used the tax revenues automatically generated by economic growth; earmarked payroll taxes, like those paid for Social Security and Medicare; and hidden tax spending to underwrite the American welfare state. For more than 75 years, this middle-class welfare state has provided not only social security, but also economic opportunity and individual mobility to the vast majority of American citizens.

Much of this work was done through the federal tax code. Instead of using tax dollars directly to do such important and popular things as promoting homeownership or providing workers with health insurance, the federal government has instead relied on tax expenditures – special exemptions, deductions, and rates written into the tax code – to subsidize important social priorities. The tax law that allows taxpayers to deduct mortgage interest in order to reduce their tax bills – a provision that will cost the federal government more than $130 billion this year – is only the best-known example of this tax spending.

In fact, the federal government loses more than a trillion dollars in tax spending each year. And while some of these tax breaks benefit the wealthy, corporations or special interests, many of the biggest tax benefits go to ordinary American families.

Economic security depends on governmental support

Because these benefits are provided through the tax code, however, many of us don’t recognize the extent to which our own economic security depends on governmental support. Hiding the federal government’s role in underwriting the American Dream, and providing assistance to the majority of Americans only indirectly – through policies like loan guarantees and certain kinds of tax spending – has allowed most middle and working-class Americans to see themselves not as the beneficiaries of any state largesse, but rather as the overburdened victims of the tax code. Since the mid-1970s, the American right has benefited from these policy choices by translating Americans’ hostility toward taxes, and our ignorance of what the government actually does for us, into a rejection of the state itself.

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Postwar liberals and their conservative successors promised Americans that they could both have the economic and social security ensured by government programs and pay very little in taxes. Neither liberal nor conservative versions of “tax cut and spend” can meet our present crisis. It’s time for Congress and the country to admit the truth. If we want all the “stuff” the government provides for us, hidden and not, we’re going to have to pay for it.

Molly Michelmore, PhD, is an assistant professor of American history at Washington & Lee University and author of “Tax and Spend: The Welfare State, Tax Politics and the Limits of American Liberalism” to be published next year.

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