Friday, 12 June 2015

Saving the middle-class?

The idea that the middle-class is getting a raw deal is not exactly new. Liberal pundits and politicians have been beating that drum for some time now in an effort to attract votes from a segment of the population that has historically leaned toward more conservative policies. Envy, it seems, is as powerful a motivator today as it has been throughout history.

But what is the “middle-class” really, and do government programs designed to help this allegedly maligned group, actually help.

Policy-makers on both sides of the political divide like to talk about the middle-class in terms of income as though it were a simply and precisely defined group. The reality, however, is far more complicated than that.

Consider, for instance, the middle-aged, single bus driver making $80K a year plus benefits. Is he a member of the middle-class? What about the married couple with a combined income of $150K? Are they middle-class? What if that couple has 3 children and are able to boost their family income to $200K? Are they middle-class even though their annual per capita income is $40K? The analyst searches in vain for some objective rule to apply. All he can do is define what he considers middle-class for the purpose of his analysis.

What about the retired couple who have managed to build a nest egg of a few million dollars over the course of their working lives? With what banks are paying in interest these days, their annual income could be as low as $50K. Are they middle-class? Many would say no, but what if they’re living mortgage-free and supplementing their income by withdrawing $50K from their principle every year?

What then?

The point is this: there are as many income-based definitions of middle-class as there are people who perceive themselves members of the group and economists whose careers are spent studying it. And that number will be sure to grow in proportion to the number and size of benefits available to those who qualify.

If there is no way of determining who is and who is not middle-class in terms of income, or even more broadly, in terms of personal wealth, how do we decide?

Well, actually, there is a generally accepted definition of the term, but it has nothing whatsoever to do with personal income or wealth.

Middle-class is one of the names given to the social group between the nobility who historically owned land, and the peasants who worked it. Sometimes referred to as the bourgeoisie due to its urban character (the term bourgeoisie derives from the old French word burgeis meaning “walled city”) the middle-class – initially composed of merchants, artisans and professionals – grew over the centuries to include civil servants and other so-called white collar workers and their families as urbanization expanded and accelerated.

Members of the middle-class were the original capitalists. With the passage of time, some were able to accumulate enough wealth to rival the economic status of the aristocracy, though not their social or political status. Others were barely able to make a living. Rich or poor, however, all remained members of the middle-class because what qualified them as such was not the size of their income and wealth, but its source.

Is the middle-class shrinking? If one defines middle-class in terms of size of income - as most economists do today - the answer depends on how narrow the criteria are, a factor that can easily be manipulated to obtain a pre-determined outcome. If, on the other hand, one defines middle-class in terms of source of income, the answer is a resounding no. In fact, the middle-class has never been larger.

Do government programs to help the middle-class, actually help?

Once again, it depends on how you define middle-class. Consider targeted tax cuts. If you define middle-class in terms of size of income, targeted tax cuts will help, but only because cutting the taxes of those whose incomes are within any prescribed range would be beneficial to… well - those whose incomes are within the prescribed range. For example, if middle-class is defined as those whose annual incomes are between $40K and $100K, obviously cutting taxes on incomes between $40K and $100K will help the middle-class. It’s surprising how many people will fall for this statistical slight of hand.

Of course, even if you define middle-class strictly in terms of source of income, targeted income-based tax cuts would be still be beneficial for two reasons: first, although some of the recipients of the targeted cuts will not be members of the middle-class, most will; and second, regardless who receives the tax cuts, the increased spending associated with those cuts will almost certainly benefit the middle-class.

But cutting taxes for a select group of earners won’t help outsiders get into the “club”, that is, it won’t result in an expansion of the middle-class (as defined by source of income). To do that, you have to remove those things that impede growth.

What are some of these impediments?

For starters, there are payroll taxes. Not the taxes deducted from employees’ pay-cheques and remitted to government, but the taxes and fees that employers must pay in addition to what they deduct and remit on behalf of their employees. In Ontario, this can be as much as 30 percent of an employee’s earnings. To put that into perspective, at that rate a company paying an hourly wage of $25 would have to pay the government $7.50 for every hour that an employee works in addition to what the employee is paid, or $300 per week for every employee working 40 hours. That makes labour – in Ontario at least – one of highest-taxed commodities traded in the economy… in some sectors, the highest-taxed. This is a powerful disincentive to small and medium-size businesses owners - the backbone of the middle-class - hiring more workers and paying them higher wages.

There are many other taxes not related to payroll that business owners must pay whether or not their business makes a profit. These include municipal property taxes and service fees, as well as license fees and permits from all levels of government. And then there are the costs associated with regulation and red tape. Not all regulation is bad, but much of it is, and all regulation - good or bad - adds to the cost and complexity of doing business. All of these inflate prices, reducing demand for middle-class goods and services which, in turn, means fewer middle-class jobs and lower pay. And it's low income earners that higher prices hurt the most.

This latter point seems to always be overlooked when considering raising the minimum wage. The real reason why low-income workers have difficulty making ends meet is not because their wages are too low, it's because their cost of living is too high, the result of exorbitant taxation and excessive regulation that conspire to drive the price of consumer goods and services up, well beyond their true market value.  Raising the minimum wage is a ham-handed and counter-productive attempt by politicians to solve a problem that they are largely responsible for creating in the first place.

But I digress…

Finally, no discussion about helping the middle-class would be complete without mentioning the deleterious effect some government programs and policies have on middle-class “culture”. For instance, by fostering - implicitly and explicitly - the erroneous belief that one cannot make one's own way in life without its guidance or assistance, government undermines the sense of independence and self-reliance that has been a vital characteristic and motivating force of the middle-class throughout history. Politicians of all philosophical persuasions are complicit in this.

And then there is the assault on church, marriage and family. Economists and politicians may be reluctant to talk about this, but that doesn't make the subject any less important. These are not abstract social or legal constructs as some would have us believe – they are institutions around which middle-class society has traditionally been organized, and through which middle-class values have been transmitted from generation to generation. The systemic attack on these institutions and what they stand harms the middle-class and the economy as a whole, What's more, it cedes to government a degree of authority over society that , ironically, liberals in particular have historically been opposed to.

To summarize then – if politicians really want to help the middle-class, particularly low-income earners, they should do three things:

First, they should aggressively and permanently cut taxes and fees unrelated to profits for small and medium-sized business, especially payroll taxes;

Second, they should reduce the number of costly, and often pointless, regulations under which small and medium sized businesses are being slowly crushed; and

Finally, they should stop attacking middle-class values and institutions.

Put another way – and speaking as a bona fide member of the middle-class – if politicians really want to help us they should get off our backs, get out of our pockets, and leave our families, schools and churches alone.

Now that’s a recipe for success.