How Obama Could Champion a Real Middle-Class Agenda

Soaking the rich is not a good way to help the middle class


King Obama
SS&SS / Foter / Creative Commons

MSNBC liberals were delighted that President Obama's State of the Union address delivered a bold poke in the eye to the new Republican Congress by issuing a call for a sweeping tax-and-spend plan to aid middle-class Americans. 

But there is nothing bold about trotting out tired old class warfare tropes that have not a snowball's chance in hell of passing.

If Obama wants to be truly bold, he ought to look for fresh ideas to advance his middle-class agenda — regardless of where these ideas come from. This is especially the case since, as The Wall Street Journal has pointed out, the after-tax middle-class household income fell by 1.9 percent during Obama's so-called economic recovery — despite a 25 percent increase in payment transfers. What's more, some of the president's tax hikes will actually hurt the middle class. For example, his plan to raise capital gains and dividend tax rates from 23.8 to 28 percent won't just affect billionaires; it will affect literally half of the population that owns direct or indirect stocks. 

So what should Obama do to help the middle class without jacking up taxes? Here are four reforms he ought to consider:

1. Give parents tax breaks for K-12 school choice. During the State of the Union, the president reiterated his call to throw more federal money at cramming more four-year-olds into pre-K, even though evidence from Head Start and other similar programs shows no enduring educational gains. In addition, he wants to triple the childcare tax credit and create a new tax credit for families with two working parents. This is a cheap attempt to woo working moms (who tend to vote Democratic) and diss stay-at-home moms (who tend not to). Moreover, as Washington Examiner's Tim Carney tweeted, a mom who needs a sitter for her toddler so she can homeschool her five-year-old wouldn't be entitled to the credit, but one who needs to go out for her shift at Starbucks would be. Where's the justice in that?

But the bigger problem with the Obama plan is that it doesn't tackle the real worry of middle-class parents: a substandard K-12 system. Despite a doubling in inflation-adjusted per-pupil spending since the early 1970s, student achievement is flat at best.

Uncle Sam foots the bill for about 12 percent of total education spending in this country. It would be far better to give parents tax breaks — credits or deductions — of this amount to use toward schools of their choice, public or private, so that their children aren't held hostage to their zipcode.

2. Lower college costs by reducing regulation. President Obama wants to pay for two years of free community college for everyone. That sounds great — except that he wants to fund it by taxing the 529-style education savings plans that middle-class families rely on. Under current law, parents can invest money tax free in these accounts and then use it toward their kids' college education. Under the Obama plan, these plans would be taxed even if the money is withdrawn to pay for college. In other words, he'll take money from middle-income families who are doing the responsible thing and saving for their kids' education, and give it to other middle-income parents who are not.

A fairer way to help parents would be to do give them relief from soaring tuition costs. (College tuition has ballooned four times more than general inflation over the last four decades.) The main culprit, identified by Stanford University's David Grusky, no crazy Adam Smith-devotee, is America's highly cartelized higher-education industry, which has created an artificial scarcity of college slots. Strict accreditation requirements — written by the colleges themselves through six government-authorized regional accreditation agencies — have made it very difficult for competitors to set up shop, causing college tuition to shoot up.

The glacial pace with which these agencies anoint online educational courses has stifled innovative, low-cost options to traditional colleges, something that even President Obama has criticized. Relaxing — if not jettisoning — the chokehold of these agencies on the higher ed marketplace will offer parents far more equitable relief.

3. Extend employer health insurance tax breaks to individuals. President Obama triumphantly declared that more Americans have health coverage now, thanks to ObamaCare. What he didn't say was that his law will cause many Americans to lose their existing coverage after their insurance companies cancel plans that the law doesn't consider up to snuff — or their employers decide to drop coverage and pay fines instead. These people will need to buy coverage from the ObamaCare exchanges, where, contrary to what the president claimed, prices are shooting up. Indeed, according to eHealth Price Index, the average unsubsidized premium for a family last year was $663 — a 56 percent increase over the previous year.

To add insult to injury, these ObamaCare refugees will have to purchase coverage with their after-tax dollars because the federal tax code offers only companies — not individuals — a tax deduction on insurance. This was always a travesty, but is even more so under ObamaCare's lopsided rules. Any champion of middle-class families worth his salt should demand an end to such discriminatory tax treatment.

4. Roll back barriers to entrepreneurship and self-employment. The president bragged that on his watch, the unemployment rate has dropped to 5.6 percent — lower than what it was before the financial crisis. What he didn't say was that the labor participation rate — or the percentage of people working or looking for jobs – has dropped from 66 percent to 62 percent because many Americans have become too discouraged to keep looking.

One way to offer them relief: Make it easier for them to go into business for themselves. If the president wants to use his bully pulpit for anything, he should chastise cities that are trying to clamp down on companies such as Uber to protect existing taxi cartels. Uber is not only an immense boon to commuters, but also offers an easy way for underemployed professionals, housewives, and other struggling middle-class folks to supplement their income by signing up as drivers.

Beyond that, President Obama would do middle-income Americans a world of good if he stopped acting as the regulator-in-chief. Heritage Foundation estimates that just in his first term, regulatory burdens on Americans increased by nearly $70 billion. "[T]hat magnitude of regulation is likely unmatched by any administration in the nation's history," noted Heritage analyst Diane Katz.

Federal regulations—combined with local licensing and zoning rules — are the biggest impediments to urban entrepreneurship, a crucial driver of middle-class mobility. President Obama ought to order a review to scrub at least those federal regulations that don't meet a meaningful cost-benefit test.

But of course, none of this will earn President Obama kudos from Rachel Maddow and her ilk. So don't wait on one foot for that to happen.