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US Committee Considers Middle Class Tax Burden

by Mike Godfrey,, Washington

18 March 2014

The new Senate Finance Committee Chairman, Ron Wyden (D – Oregon), has held a committee hearing to consider measures to provide fiscal support to the middle class in the United States.

"Our challenge as a Committee is to come together on a bipartisan basis to build new pathways into a thriving, educated middle class," Wyden stated, pointing out that, "for decades, median earnings have remained stagnant while the costs of home ownership and education have skyrocketed. Changes in the economy at home and abroad have left millions of workers and families struggling to get ahead."

Wyden discussed policy areas to sustain and expand the middle class, such as improvements to education; a renewed focus on promoting saving; and a strengthening of the social safety net.

In particular, he stressed that tax reforms "should create a tax code friendlier to the middle class – one that gives everyone a chance to get ahead." He suggested increasing the standard deduction, treating investments and wages in a more equitable manner, and improving how tax incentives are targeted so they help those who need it most." He said: "Tax policy must encourage innovation and entrepreneurship so small businesses can grow and succeed."

In his testimony, Leonard Burman, Director of the Urban-Brookings Tax Policy Center, recommended that the recommendation from the House of Representatives Ways and Means Chairman Dave Camp (R – Michigan) to consolidate tax incentives for higher education "is a good idea, and similar to many other proposals being proposed both inside and outside Congress."

"The current panoply of [education] incentives is bewildering and poorly targeted," he added. "Consolidating them in a revamped refundable American Opportunity Tax Credit, as Camp proposes, or rechanneling the tax expenditure into better targeted direct subsidies, would improve the tax code and expand access to higher education."

With regard to the encouragement of savings, he said that one obvious approach would be automatic enrollment in retirement plans that have been shown to significantly increase participation, and President Obama's proposals to encourage employers to offer simple low-cost retirement plans with auto-enrollment features (called MyRAs). This "seems like a promising approach, but is only a partial solution," he said.

"A more ambitious plan," Burman said, "would be … Universal Savings Accounts intended to provide a new subsidized savings vehicle that would have bipartisan appeal. A USD300 refundable tax credit would be automatically deposited into a retirement account for low- and moderate-income households. They would also be eligible for a dollar-for-dollar match up to a maximum total contribution of USD1,000 per year. The automatic contributions would phase out at higher income levels."

Finally, Burman observed that "the tax system has played a mixed role with respect to the middle class. On the one hand, federal tax burdens on middle class families have moderated over time. Moreover, the progressive income tax is now an important part of the safety net, automatically reducing tax liabilities or even providing subsidies through refundable tax credits like the Earned Income Tax Credit (EITC) when households fall on hard times."

"On the other hand, especially generous tax treatment of the 'carried interest' earnings of takeover specialists has contributed to downward pressure on wages and has cost many workers their jobs," he said. This "loophole," which allows the income from a carried interest in private equity fund profits to be treated as capital at a preferential tax rate, should be eliminated, he concluded.

TAGS: individuals | Finance | tax | investment | business | private equity | pensions | tax incentives | entrepreneurs | retirement | tax credits | education | United States | tax reform | individual income tax | Tax

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