That is indeed the $250,000 question of the moment. Or $500,000 question. Or $1 million question. As Washington scrambles to come up with some sort of compromise about what to do about the Bush tax cuts that expire at the end of 2010, the one consistent piece of rhetoric that everyone can agree on is that the middle class should be spared a rise in their tax rate. Only problem is, we've yet to figure out exactly who counts as middle class.
President Obama has resolutely insisted ever since he was on the campaign trail that families with income below $250,000 were middle class in his book. And when you're President and say that often enough, it becomes the framing mechanism for the entire debate. Until you start to lose your mojo on Capitol Hill that is. Even before the mid-term elections, a few Democrats started floating $500,000 as a better cut-off for the middle class that would be spared a tax hike. Then just this week, a cadre of Democrats no doubt still stinging from their shellacking in the mid-terms have decided that the Bush tax cuts should be extended for families with income below $1 million. At that level, the Dems figure they will have an easier time getting a deal with the newly empowered Republicans.
So what is the right definition of middle class? $250,000? $500,000? $1 million? Not even close. Try $50,000 or so.
Strictly by the Numbers
According to the Census Bureau, median household income in 2009 was $49,084. Before any coastal dwellers start yelping, let's take a look at regional differences:
Median Household Income
- West: $53,833
- Northeast: $53,073
- Midwest: $48,877
- South: $45,615
In fact, as President Obama increasingly began to point out this year as the clamoring against the $250,000 cutoff intensified, his definition of middle class was never anywhere close to the middle, as it would in fact impact just the top 3 percent of households. There is no math that can explain how the top 3 percent represents any sort of middle.
For a more honest definition of middle class, you only have to look as far as the President's own Middle Class Task Force. Among its main agenda items was a sharp increase in the Child and Dependent Care Tax Credit for families making under $85,000 a year, while providing smaller increases for most families with income below $115,000. The task force also pushed to extend the full Saver's Credit for families earning less than $65,000 and providing a limited credit for families with income below $85,000. Scan through those numbers again: Not a one is anywhere close to $250,000.
Stuck in the Middle
It's not surprising that Washington has a hard time deciding the politically expedient definition of middle class, but it's not as if there's any better clarity among the masses either. In an April 2008 survey conducted by the Pew Research center, four in 10 Americans with income below $20,000 said they were middle class, while one-third of those making more than $150,000 defined themselves as middle class. Exactly.
In a recent online request for definitions of middle class, one of the pithier summations was Too poor to be rich; too rich to be poor. And that seems to me to get closer to what's going on with the recent debate in Washington and among the LA-S.F.-NY-Boston set that will be quick to tell anyone willing to listen exactly how hard it is to "get by" on $250,000 a year. That $250,000 is indeed five times the median national household income means it is clearly in no way anywhere in the vicinity of middle class. But nor is it irrefutably rich, either.
While President Obama points out that his $250,000 cut-off would impact just the richest 3 percent of American households, the fact is that two-thirds of income gains from 2002-2007 ended up in the pockets of just the top 1 percent of households. And among the top 0.1 percent, income tripled during that stretch. I am not suggesting any tears be shed for the 2nd and 3rd percentile, but clearly there's a bifurcation of riches within the top 3 percent.
So What Constitutes Rich?
And that's why we are seeing the shift away from the $250,000 cutoff for extending the Bush tax cuts. There is no question that $250,000 isn't middle class. But the problem is that ever since the mid 1980s our tax code has treated someone with taxable income in the low six-figures the same as someone making in the low seven or eight figures. Today's top 35 percent income tax rate applies on every dollar of taxable income above $373,650. As New Yorker columnist James Surowiecki so perfectly laid it out, our current tax code doesn't differentiate between LeBron James and LeBron James' dentist.
It wasn't always this way. In decades past we have had anywhere from a dozen to two dozen tax brackets that did a better job differentiating between the haves and the haves-even-more.
Getting the Tax Ball Rolling
And that brings us back to the recent maneuvering in D.C. Regardless of the "middle class" rhetoric, extending the Bush tax cuts for the top 3 percent will cost $700 billion in foregone revenue. In purely financial terms that is unaffordable given our problematic deficit. But nothing in D.C. is purely financial, so instead of doing the fiscally right thing, it looks like the only rate increases we might see in 2011 would be on incomes above $1 million.
Number cruncher Nate Silver, at fivethirtyeight.com, estimates that if the millionaires were hit with a 3 percent tax surcharge it would bring in $256 billion over 10 years. And a 5 percent surcharge would bring in $427 billion over 10 years. Not chump change, but nor is it going solve a $1.3 trillion deficit that without serious fiscal belt-tightening will keep expanding. If we can't figure out how to grow our way out of the deficit, everyone making less than $1 million -- regardless of what you want to call yourself -- will eventually need to buck up to the fact that higher taxes will be necessary to help close the gap.
Photo courtesy of Flickr user irsein
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