From a recent Wall Street Journal article:
Bruce H. Lee, president of a real-estate company, and his wife, a schoolteacher, together earn more than $250,000 a year. Their accountant told them to prepare for higher taxes on their capital gains and dividends as well as a possible rate increase.
Mr. Lee lives in Kensington, Md., a Washington suburb, and said his income doesn’t stretch very far in a major metropolitan area. He doesn’t enjoy the perks of a superrich lifestyle, such as a vacation home. He is prepared to cut back on discretionary spending, mainly vacations and eating out, when his tax bill goes up.
“Why they’ve singled out this $250,000 number is beyond me,” he said. “I feel like it’s an attack on the middle class.”
Bruce Lee certainly may “feel” like it’s an attack on the middle class but let’s go to the numbers. Median household income in the United States in 2011 (the most recent year reported by the US Census Bureau) was $50,054. So, the Lee’s earn at least 5X what the median household does. But that doesn’t provide the killer blow to Lee’s “feeling.” This, from the Congressional Research Service, does:
Of the 121,084,000 households with income in 2011, only 2.3% had incomes of at least $250,000.
Of course, as that CRS report points out, “there is no official government definition of who belongs to the middle class, and the terms means different things to different people.” However, it is absolutely absurd to imagine that someone in the top 2.3% is “middle class” – at least in terms of earnings (more on this below). And this is even borne out by a VERY generous conclusion from income data married to social class identification surveys. As the CRS report concludes, doing so yields the following conclusion: “the middle class may refer to households with income levels in 2011 that ranged from $38,521 (the bottom of the middle quintile, 20%, of households) and extended into the top quintile (households with income of $101,583 or more)—perhaps including households with incomes somewhat over $200,000.” Here is the distribution of annual household income based on 2010 estimates:
Now one (perhaps Prof. David Henderson of the Naval Postgraduate School given what he’s written before on income vs. wealth) might insist that it is hard to know if Mr. Lee isn’t really in the middle class given that income can fluctuate and household income figures don’t take into account actual wealth. Moreover, one could argue that blunt household income doesn’t take into account the cost of living where one lives. Let me take these on one at a time.
In terms of the first, Henderson and others have a point. If I’m a below average football player and make the league minimum ($390,000/year for a rookie), I could make a lot this year but then see a rapid decline in income for the rest of my career should I be cut from the team after one year. It is unlikely that the one year high salary would matter too much to my lifelong wealth depending on what I did with it. However, in the case of Mr. Lee and many others, the high income is likely to be the product of high human capital that will continue to see high returns on investment for some time (assuming that capital doesn’t become obsolete due to creative destruction, et al). My guess is that Mr. Lee has had a high income for a long time and will continue to do so. This year over year advantage over the median household will only make his relative position better. Thus he is probably not only high income but wealthy (or soon to be so) – and thus hardly middle class. Or – if he’s spent a lot of that high income – he’s not middle class in terms of past consumption. This should not be forgotten when looking at classes, since it is hard to believe that the family who makes 50K a year with savings of 10K and expenses of 40K (including taxes) is in the same class as the family that makes 250K a year with savings of 10K and expenses of 240K (including admittedly higher taxes) even though their wealth will technically be the same (assuming those consumption goods aren’t real capital). The latter family has probably taken winter trips to Vail, summer trips to Montana, and consumed a heck of a lot more on things that the first family can’t afford (like the SAT prep courses, technology, and other things for the kids).
In terms of the geographic cost of living issue, this is also a bit of a red herring. While Mr. Lee certainly has to spend more on basic things like housing than someone in Topeka, Kansas, he probably gets a lot of consumption value for that extra cost. He is closer to a lot more high paying jobs, the school system is probably better than many others around the country, and he is close to a lot of amenities. This is why the house costs so much in the first place — it is highly desired by others! But even worse in terms of relative gains, Mr. Lee can use his relatively high salary to buy a relatively expensive house — in Kensington, MD, the average sales price is $515,000 according to Trulia — and live in it until he decides to move or retire. At that point, he can take the product of his high salary – which is partly a product of geography too – that he has captured in his house and move to a lower cost of living area and live like an absolute king. Again, this is not what the truly middle class can do.
So rather than feeling too glum about the attack on the Middle Class, Mr. Lee ought to feel great that he’s
f&^king rich among the highest income earners in the US. Congratulations! Assuming he is providing value to his clients and isn’t involved in rent-seeking (or the beneficiary of rent-seeking behavior), he should be very proud of himself. Of course, it is a shame that the government is trying to tax his productive behavior so highly. And I feel glum that the government not only attacks creators of real value but enriches the parasites that have grown up around government. But let’s not allow our “feelings” to cloud our thinking about whether we are really part of the middle class!