"Middle-Class Millionaires"? Dissecting a Democrat's Misguided Move

Once again a Democrat's letting the Right set the terms of the debate. This time it's House Minority Leader Nancy Pelosi, who's undercutting her party's tax policy in an odd way: by redefining "middle class" so that it includes people making a million dollars a year.

Pelosi's proposal would be great for millionaires - and bad for everyone else.

It hurts the nation economically by depriving the government of revenue when it should be providing more stimulus funding. It also muddies her party's messaging, and reinforces the unpatriotic idea that taxes are punishment rather than a fair exchange. Nancy Pelosi is better than this.

How good is her proposal? Let's take a closer look.

The Upper Upper Upper Upper Upper Middle Class

President Obama has proposed ending the Bush tax breaks. That would, among other things, raise the tax rate from 35 percent to 39.6 percent for income above $250,000. But since he's keeping taxes where they are for income below $250,000, that would preserve a tax break for millionaires too!

After all, you can't earn a million dollars unless you earn $250,000 first.

Nevertheless, Minority Leader Pelosi sent a letter to her Republican counterpart, House Speaker John Boehner, demanding an immediate up-or-down vote on a very different proposition: letting the tax cuts expire for income above a million dollars.

To make matters even more confusing, Leader Pelosi described the proposal as an "extension of the middle-class tax cuts." While opinions differ on what constitutes a middle-class income, this appears to be the first time in history that a million-dollar income was characterized as "middle class." The average personal income in the United States as of the last survey was $39,959 and, as Suzy Khimm [1] explains, the more meaningful measurement is the median income, which was $26,363.

In other words, Pelosi's proposal gives its "middle class tax break" to people who make up to 25 to 37 times as much as those in the national "middle," depending on how you calculate it. And its greatest tax advantages go to the 235,000 people [2], or about 0.1 percent of the people filing tax returns, who earned a million dollars or more per year.

Who Gets the "Middle-Class" Tax Breaks?

We made some rough calculations to estimate the tax breaks that people would receive at different levels if Pelosi's plan were adopted instead of Obama's. Our admittedly crude estimates suggest that person earning $251,000 would receive a $45 benefit using Pelosi's plan rather than the President's.

But a person earning $1,000,000 or more would get a $34,500 tax break under her "middle class millionaire' proposal.

That includes billionaires, who would still get at least $34,500 more in tax breaks under Pelosi's plan than Obama's.

Where Are the Democrats?

Leader Pelosi is giving away most of her party's position before the negotiations even begin - and that position was arguably too weak to begin with. The highest marginal tax rate under Republican President Dwight D. Eisenhower was 91 percent. It was 70 percent when Ronald Reagan took office. Yet all her party's asking for is a return to a rate for millionaires and billionaires that's less than half of what it was under Eisenhower.

A smart and aggressive Democratic Party would be telling the American people, who overwhelmingly support higher taxes on the rich, that billionaires should pay far more than they're asking for now. A smart Democratic Party would be explaining that taxes like these built the Federal highway system and made our country strong - under Eisenhower.

Where are the Democrats who'll fight to restore the kind of progressive taxation that made this country strong?

Talking About $250,000 - but helping billionaires

The Republicans have been smart about suggesting that the Obama Administration is planning to "raise taxes on people making more than $250,000." But the effect of letting the Bush tax breaks expire at this level is minimal for people who are near the $250,000 level.

The Center for Tax Justice calculates that people who earn $250,000 to $300,000 will only pay $98 more per average under the Obama plan, while those earning $400,000 to $400,000 would pay an average of $1098 more. Those earning $750,000 to $1,000,000 would, however, see an average increase of $23,766.

People earning $20,000,000 or more would, on average, lose $1,797,414 in tax breaks under the Obama plan. That's what this is all about for Republicans: protecting the highest earners. (Although even they will retain a variety of savings under the Obama plan, since it preserves the Bush tax cuts at lower income levels.)

Where are the Democrats who will explain that, instead of undercutting an already tepid proposal?

Muddy Messaging

What impression will Pelosi's move leave with voters? For one thing, it's going to show them that Democrats don't have their act together on economic policy. The President says one thing about the tax cuts, she says another, and Senate Majority Leader Harry Reid isn't saying much at all these days.

It also sends the message that Democrats, who have staked their ground on defending 'middle class tax cuts,' are so out of touch with ordinary voters that they think millionaires are middle class.

And it destroys the one clear message Democrats had been sending on taxes: They don't want to tax rich people, but we know they must pay their fair share.

The Millionaires' Tab

The Pelosi proposal also costs a lot of money - $366 billion over ten years, to be precise. Ending the Bush tax breaks for earnings of $250,000 and more as the President has proposed would bring in $899 billion in revenue over that period of time. ut, as the Center for Budget and Policy Priorities [3] has shown, Pelosi's proposal would only bring in $463 billion. And as the CBPP rightly notes, this lost revenue will increase the political pressure to make even more extreme cuts in the coming years.

Worse, it meets the Republicans far more than halfway before the negotiations even begin. How's that worked out for Democrats so far?

Fair Share

The Democrats' "fair share" message on taxes plays well - and it should. The President's proposal to increase taxes on earnings over $250,000 only affects about 2 percent of earners - and, as we've seen, it has very little effect at the lower end of that 2 percent group.

Instead of caving to Republican rhetoric, we would have expected Leader Pelosi to counter it. The message is a simple one, and it's been used by centrist Democrats from Clinton to Obama: From whom much is given, much is expected.

And the Obama proposal isn't that much to begin with. $45 from someone making $251,000? $34,500 from people earning a million dollars or more? Instead of undermining these increases, Nancy Pelosi should be explaining why this is a small price to pay to the nation that has permitted some people to become so prosperous.

Paying taxes isn't a punishment. It's an acknowledgement of privilege.

What's going on?

We've long admired Nancy Pelosi's tenacity and brains. As Speaker of the House she faced a press corps -- and often fellow Democrats, in the White House and elsewhere - who tried to marginalize her as 'extreme' or 'ideological." But she kept right on leading her majority in passing bills that reflected the view of the American majority, and often of most Republican voters, much more accurately than the falsely-labeled "centrism" and "bipartisanship" that resisted her.

Nowit's time to reverse roles. The Senate and then the White House must stand firm against a compromised proposal from House Democrats. That hasn't been the usual Washington drill lately.

The bills passed under Speaker Pelosi would have led to a much better economic and political climate had received strong Presidential backing and been passed in the Senate. Nancy Pelosi's been a smart and tough fighter for the right policies. That's why it's so baffling and disappointing to see Rep. Pelosi, now the House Minority Leader, suddenly acting in the same misguided manner as her Democratic critics.

First it was her embrace of the misguided Simpson/Bowles plan, which suddenly placed her in the austerity camp just as those policies are decimating Europe's economy. Then came this pre-emptive capitulation over the longstanding Democratic position on the Bush tax cuts, which was already weaker than it should have been.

Tactical Foul

Political insiders tell me that this move, like the Simpson/Bowles comments, reflect a tactical decision to make the Republicans appear 'unreasonable' by offering reasonable-seeming compromises. Apparently the idea is to show voters that Republicans just aren't reasonable people, which will supposedly drive them into the Democratic camp.

If so, that's exactly the kind of thinking that led President Obama to offer one misguided compromise after another. How'd that work out? Republicans were soon driving the political dialog, even when Democrats held the White House and both Houses of Congress. And Democrats were blamed for bad results, not praised for the cleverness of their tactics.

It was a "tactic," we're told, to create the Presidential Deficit Commission. It was a 'tactic' to sacrifice the public option in health reform. It was a "tactic" to offer a "grand bargain" during the debt ceiling crisis. It's a "tactic" for the White House to brag about all the spending cuts the President has made. And it's a "tactic" for Nancy Pelosi to offer these cuts to the GOP.

If there's anything Democrats are even worse at than communicating, it's "tactics."

We've seen this kind of thing from Democrats over and over - but not from Nancy Pelosi. Failed Democratic tactics keep hurting their party, and they keep failing the economy. Let's hope the Minority Leader changes her tactics and sees the light before it's too late.