Washington's Definition of Middle Class

I saw this proposal in Lori Montgomery’s article on fiscal cliff talks yesterday:

Fresh tax revenue, generated in part by raising rates on the wealthy, as Obama wants, and in part by limiting their deductions, as Republicans prefer. The top rate could be held below 39.6 percent, or the definition of the wealthy could be shifted to include those making more than $375,000 or $500,000, rather than $250,000 as Obama has proposed.

As commentators from Marty Feldstein to CAP have pointed out, 250K is not middle class. And $375,000 and $500,000 certainty aren’t. While some in New York and San Francisco are right to argue that they face higher local prices (see Moretti’s paper on Real Wage Inequality ) and higher national taxes as a consequence (see Albouy’s paper on the unequal geographic burden of taxation), many chose to live in these expensive cities and I don’t think local price level differences are large enough to make 250K in nominal income fall in the 33-66 ban in real terms.

At the national level, the 90th, 95th, and 99th percentiles of income including capital gains are 108K, 150K, and 350K respectively as of 2010 based on data from Emmanuel Saez’s top income database. Unless you count the 67th-97th percentiles as middle class, then it’s hard to justify using 250K as a threshold and it’s even harder to justify going north of that as proposed in the Washington Post.

I should say that in the midst of a jobs crisis, I still favor erring on the side of fiscal support rather than contraction in the short run, but we will need to raise revenues and lower spending at some point and this distortion of the meaning of middle class is not helping.

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