The Shrinking Middle Class

Today’s show is focused on the consequences of the shrinking middle class. If you go back to the 1960’s and 1970’s it was possible for a single income family with blue collar employment to join the ranks of the middle class. Today, the number of two income families has grown and families are finding it harder than ever to make ends meet. The shrinking middle class has enormous economic and social consequences. It’s has given rise to a new wave of socialism as the average person feels like they’re getting the short end of the stick. 

The Organization for Economic Cooperation and Development defines the middle class as comprising households with incomes between 75% and 200% of the median.

Across member nations, the proportion of the population who are in the category has fallen over the last 30 years, from 64% to 61%. Today the middle class makes up 50% of the population. 

That definition of middle class doesn’t really tell the full story. It neglects family size and local cost of living. The fact is there has been an continual erosion of our purchasing power over the years. Those on fixed incomes are the ones who are losing the most.

We can learn a lot from history. We are facing a growing class warfare where those with less blame those with more for their situation and for exploitation. 

I don’t believe that entrepreneurs are to blame for the plight of those who are struggling. Entrepreneurs and business owners struggle too. The vast majority of them suffer setbacks on a regular basis. Only a few manage to rise above water to build sustainable businesses and sustained wealth.

The problem with the tax the rich approach is that it works to a point. Once you reach a threshold of pain, the ultra-rich have the financial means and the incentive to organize their affairs in a manner that legally minimizes their tax liability. 

Many will simply relocate to a lower tax jurisdiction. 

There is no question that people who have succeeded in business have attracted envy, admiration, and most importantly jealousy. It’s that jealousy, combined with the genuine hardship that many families are experiencing that has fuelled the latest round of anti-rich sentiment.

Increasingly, newly elected left leaning politicians want wealth taxes, dramatically higher income taxes, corporate taxes, surtaxes, and so on. 

The amount of economic activity has been a larger contributor to tax revenue than the actual tax rate. As individual investors we don’t control the political climate, nor do we control the tax rules.  Entrepreneurs generate economic activity, they give people employment, they create better living spaces for families to grow and thrive, and they should be rewarded for taking those risks along the way. 

The tax code does not tax you on your income, it taxes you on the manner in which you receive your income. Pay close attention to not only your income, but how it comes to you. Be prepared for lots of changes to the tax rules in the coming years as governments become increasingly desperate and creative for ways to pull more revenue.