The "Abolish the Middle Class" Tax Cut
September 29, 2004

Maria Tomchick

Congress has passed the fourth tax cut bill in as many years under the guise of "tax cuts for the Middle Class"--but there's very little in the bill to help the middle class, and nothing for the poor.

Two-thirds of the bill's tax relief will go to the richest 20% of households, according to the Center on Budget and Policy Priorities. Only 10% of the tax relief will help the middle 20% of households. And poor Americans completely lost out this time around: Congress ditched a proposal to preserve child tax refunds for millions of poor families, while simultaneously adding $13 billion in corporate tax cuts to the same bill.

The bill passed both houses with bipartisan support. In the House the vote was 339-65, and in the Senate only three legislators voted against it. In an election year, the Democrats easily caved in to their corporate campaign contributors and warnings from political pundits that a vote against tax cuts would hurt the Democratic party at the polls.

The most disturbing thing about the bill is that Congress chose not to pay up front for the tax cuts. Amendments to close corporate tax loopholes died with little debate. Instead, the bill will add nearly $146 billion to a record budget deficit, predicted to reach $422 billion by the end of this year. As many economists have pointed out, the massive federal budget deficit will eventually have to be paid, and tax increases are the easiest way to do that.

But there are other ways to tackle a budget deficit, and none of them are good for the middle class. For the poor, they are particularly onerous. Consider the Republicans two favorite tactics: cuts in funding for state and local governments and cuts in social spending.

The National League of Cities recently released a survey of financial directors from 288 cities around the nation. The result: 63% of the cities surveyed were having a harder time in 2004 meeting their financial needs than in 2003, and 61% expected the trend to continue through 2005, in spite of stock market increases in 2003 and 2004 and burgeoning corporate profits. Everyone is familiar with state budgets shortfalls around the country--California being merely the worst, but not the only, example.

The post-dotcom recession in 2001, followed by three years of increasing unemployment, have hit state and local governments hard. Since the Reagan years, the federal government has continued to push social and infrastructure spending down from the federal level to the local level without providing any money to pay for these projects. This latest federal tax cut, just like the three prior ones, will not bring the promised economic stimulus that could help bring more employment, higher wages and more tax collections into state and local coffers. States and municipalities will have to increase taxes, thereby negating any "tax relief" impact for middle class and lower class families, particularly in states that don't have a graduated income tax, but rely instead on regressive sales taxes and property taxes that put a heavier burden on middle and lower income families.

Meanwhile, cuts in social spending will be unavoidable, considering the conservative bias in both political parties for corporate welfare at the expense of social welfare. As Yves Engler pointed out in a recent ZNet commentary, whenever social welfare programs are cut, working people are less likely to press for better wages and benefits at work. If one fears being fired and falling through the increasingly porous social safety net, one is less likely to rock the boat at work, speak out, ask for a raise, protest healthcare cuts, etc. Social spending cuts are a hidden tax on the middle class and the poor, ensuring that wages remain stagnant.

In addition, there's a systemic problem with deficit spending: interest payments. Anyone who's had to pay off a mortgage can understand that a $150,000 house paid for over 30 years will cost almost $300,000 when the last mortgage payment is made. The additional amount is accumulated interest. The federal budget deficit will involve massive amounts of interest payments made not to the middle class, not to the working poor, not to the unemployed, but to wealthy investors, financial institutions, and foreign investors in the form of interest payments on US government bonds and notes. The federal deficit figure of $422 billion is only the beginning; it doesn't reflect years or decades of interest payments, which will come, of course, from middle class and lower class taxpayers.

Enjoy your $1,000-per-child tax credit on April 15th. Try not to think about how much you're going to pay for it later.


Sources: "House Passes Middle-Class Tax Cuts," Martin Crutsinger, Associated Press, 9/23/04; "Would Extending the "Middle-Class" Tax Cuts Benefit the Middle Class?" Center on Budget and Policy Priorities, 9/21/04,; "Corporate taxes melting away; Many profitable firms in past 3 years were able to skip paying," Tom Abate, San Francisco Chronicle, 9/23/04; "Bid to Save Tax Refunds for the Poor Is Blocked," Jonathan Weisman, Washington Post, 9/23/04; "Forbes List Has Most Billionaires Ever," Madlen Read, AP, 9/23/04; "US Cities Are Mired in Fiscal Woes," Ray A. Smith, Wall Street Journal, 9/21/04, see also (National League of Cities) for the full report; "How Do the Bush Tax Cuts Affect YOUR State," Citizens for Tax Justice,; and "The Social Wage," Yves Engler, ZNet Commentaries, 9/24/04, see for info on how to receive ZNet Commentaries.