Wednesday, October 17, 2012

Middle Class Income and Aren't We All In This Together?

What's the proper definition of middle class when it comes to earned income? Or is the question better asked as how many people can we classify as middle class for the purpose of securing the maximum number of votes for our guy?

In any event, let's allow a few facts to interrupt the politicians and decide for ourselves what middle class income means. It certainly doesn't mean income of $250,000 and above, and that level of income doesn't automatically make somebody a millionaire or billionaire either.

Politically middle class seems to be a Humpty Dumpty world where "When I use a word, it means just what I choose it to mean - neither more nor less."

Is $250,000 a middle-class income? has the facts:

"The number that both Obama and Romney use to define the “middle class” might be too high.

It seems as though no one reads the Census annual publication Income, Poverty, and Health Insurance Coverage in the United States for anything but the number of people in poverty. The parts I find most interesting are those pertaining to the level and distribution of income. The numbers go to the heart of conversations about the “middle class” and the “rich.”

Both President Obama and Governor Romney have adopted household income of $250,000 as a meaningful demarcation point for defining the middle class. In the case of the President, he proposes to retain the Bush tax cuts for households with less than $250,000 and eliminate the tax cuts for those above that threshold. Governor Romney in a recent ABC interview offered the same definition of the middle class: “Middle income is $200,000 to $250,000 and less.”

Where does this concept of $250,000 as the appropriate cutoff come from? According to the data in the Census report shown in Table 1 below, which presents the thresholds for being in different parts of the income distribution, the median household in 2011 had an income of $50,054. A household with an income of $143,611 was at the 90th percentile point, or in the top 10th of the income distribution. A household with an income of $186,000 was at the 95th percentile, or in the top 5 percent. The table does not even show households with $250,000, but they must be in the top 97th or 98th percentile.

Household Income at Selected Percentiles, 2011

Percentile Dollar Limit
10th $12,000
20th $20,262
50th (median) $50,054
80th $101,582
90th $143,611
95th $186,000

The thresholds must be interpreted with caution because households include old and young, urban and rural, coastal and midland, and small and large. But it is very hard to understand how anyone could think of $250,000 as the middle. It seems like both candidates have a mental picture of the very rich and everyone else.

The “very-rich-versus-everyone-else” framework may come from data on the share of income earned by various households. Here the Census data show that those in the top quintile – the highest-earning 20 percent – earn more than the bottom four quintiles combined (see Table 2). That is, the top 20 percent receives more income than the bottom 80 percent.

Shares of Household Income by Quintile, 2011

Quintile Share
Lowest quintile 3.2
Second quintile 8.4
Third quintile 14.3
Fourth quintile 23.0
Highest quintile 51.1

And a recent study by Emmanuel Saez shows that within the top quintile the distribution is also very skewed, so that the top one percent receives about 20 percent of total income.

Thus, while the $250,000 threshold makes no sense in describing the middle class, it seems like a relevant divide for defining where the money is. Nevertheless, dividing the nation’s households into the “wealthy” and “the middle class” doesn’t seem like a useful exercise. It pits the majority of Americans against the top 1 or 2 percent. It suggests that the majority of Americans should not be called upon to solve the nation’s fiscal problems. It violates the notion that we are all in this together. Yes, the rich can contribute more, but we can all contribute something."

Summing Up

The middle class income level is $50,000. Getting into the top 20% of earners means $100,000. $186,000 gets a person into the top 5%.

Thus, the real question gets down to who's going to pay what part of the entitlements and other government spending programs?  The top 1%, the top 5%, the top 10%, the top 50% or everybody who can afford to pay, even if it's a small amount?

And even if we all pay, how can we ever expect to be able to afford this current level of government and entitlements spending in a consistently slow growing, government run and high unemployment economy?

So just maybe we're being asked all the wrong questions by government officials.

Maybe the right question is how do we grow the economy.

And accordingly, it's not the "middle class" against the fat cats after all.

Maybe 100% of We the People are in this tax, government spending and entitlements thing together --- or at least should be.

Thanks. Bob.

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