Middle-class tax hike.

NEW YORK IRONICALLY, the closest thing to a truth-teller these days in Washington is Ways and Means Chairman Dan Rostenkowski. No matter that he may soon come under indictment for converting postage stamps to cash. On the question of how to pay for health-care reform, as well as other new or enlarged entitlement plans surfacing in Congress, Rosty has been brutally honest in calling for broad-based increases in taxation.

Equally surprising is the general silence emanating from the alleged anti-tax party, a/k/a the Republicans. Should there be passage of major bills on health care, welfare, job training, and crime, then Americans will for the third time in the last four years be burdened by another "largest tax increase in peacetime history." What's more, to finance these massive expansions of government intrusion, the middle class is being set up for a tremendous pummeling through higher payroll-tax burdens.

Few policy-makers may realize it, but as a result of repeated payroll-tax increases in the 1970s and 1980s, middle-class wage-earners shoulder a higher tax burden today than they did in the 1960s. The overall marginal tax rate (income, FICA, earned income tax credit) for the $30,000 earner measured in constant 1991 dollars, has increased from 20 per cent in 1985 to 30.3 per cent by 1994. For a $50,000 earner, the tax rate moved from 25 per cent to 43.3 per cent. That means that instead of taking home 75 cents on the added dollar earned, the earner keeps only 57 cents, a whopping 24 per cent cutback in after-tax purchasing power.

Meanwhile, a successful upper-end earner making $200,000 (also 1991 dollars) saw a decline in his or her marginal tax-rate from 50 per cent in 1965 to 43 per cent in 1994, which increased after-tax incentives to work, save, and invest by 14 per cent. These tax changes are a function not of income-tax policies, where rates were slashed by President Reagan in 1981 and 1986, but of payroll-tax policies. In 1977, President Carter signed a bill that raised Social Security taxes by $227 billion, proclaiming that the system would be made sound through 2030. By 1983, however, in order to keep the program solvent (supposedly until 2065) President Reagan had to raise Social Security taxes another $165 billion.

Now, the latest trustee reports suggest that Social Security will go bankrupt in 2029, the Medicare trust fund will run dry by 2001, and a fund to pay benefits to disabled workers will be exhausted next year. That is why Mr. Rostenkowski has proposed another set of payroll-tax increases to shore it up, along with paying for Clinton's health-care package and Labor Secretary Reich's job-training package. Rosty's truth-telling also includes lower benefits for new retirees and a cutback in cost-of-living adjustments.

In short, we keep raising payroll taxes to fund entitlements that keep going bankrupt. Perhaps this is the ultimate defiance by the professional political class of economic and political sense. For the middle class is growing increasingly cantankerous.

A study done by former Treasury economists Gary and Aldona Robbins, now at Fiscal Associates in Arlington, Virginia, shows that the average tax rate on labor--including the federal income tax, state and local income taxes, and the OASDHI tax--has moved upward from about 20 per cent in the mid Sixties to about 34 per cent currently. Primarily driven higher by rising payroll-tax rates, which have moved from 6 per cent to over 15 per cent, while income subject to payroll taxes has risen from $4,800 to $60,600, the Robbinses' calculation of the economy-wide weighted-average tax burden implies an average wage of roughly $28,000 in current dollars, surely the middle-class zone.

Not only has the middle class suffered; businesses have as well. Remember, a good many U.S. firms are small family-owned enterprises that are not taxed at corporate rates. IRS statistics show that 45 per cent of all business income was reported by unincorporated firms earning between $20,000 and $60,000 annually. When their employees are taken into account, according to Wall Street economist John Ryding, 44 million middle-class returns were affected by the average marginal tax-rate hike from 20 per cent to 34 per cent over the past thirty years.

By raising the cost of employment and lowering the return to labor, rising payroll taxes have steadily blunted job opportunities. Mainstream economists nowadays suggest that a 6 per cent unemployment rate is the "natural" rate. Yet in the 1960s, at much lower payroll-tax rates, unemployment averaged 4.6 per cent while yearly inflation averaged only 2 per cent. A recent article by Columbia University economist Edmund Phelps argues that a study of 17 OECD countries suggests that "big increases in payroll and personal income taxes in most countries have been mass jobkillers."

The middle class deserted George Bush, flirted with Ross Perot, and settled for Bill Clinton in 1992 out of a desire to change all this. Where's the change? In effect, the Clinton Democrats are set to give the middle class something it doesn't want and the economy desperately doesn't need: more government mandates, more controls, more bureaucracy, more welfare, and more payroll taxes.

Polls show that 60 per cent of voters do not want a health package this year. Alas, Republicans seem to imagine that they have to produce some kind of health package or perish, attacked by the Democrats as, well--"nattering nabobs of negativism."

The Republicans are fighting yesterday's war--a sure-fire way to become yesterday's men. The Reagan Democrats and others who make up the middle-class swing vote are now deeply suspicious of the formula of more entitlements and higher taxation. On social issues they want traditional values such as individual responsibility, thrift, hard work, abstinence, virtue, and faith. On the economy they want reduced entitlement spending and lower tax burdens. Not heeding the call, the Clinton Democrats are poised to walk off the cliff. Will the Republicans follow them?