On Thursday, October 2nd, @BarackObama tweeted, “When the middle class thrives ... America thrives. When it doesn't, America doesn't.” —President Obama.
I could not agree more. For reasons to numerous to list here, one of America’s strengths has been a large, stable middle class. Yes, geography has played a key role. Abundant natural resources and the ability, for much of our history, to simply “go west young man, go west” also played an important part of our country’s success.
But for this post, I want to focus on the role of the middle class and the President’s tweet (I am not fooled. I understand that it was an intern working in the office of a secretary to a secretary, working as an aide to an assistant to an advisor to the President who actually posted the comment – at least I hope POTUS is not sitting at a keyboard writing tweets. If he is, then we are all twits.)
More than just his tweet, however, I want to ask whether the middle class is thriving today. To determine that, I also want to include a discussion of the incomprehensible insanity called the Internal Revenue Code and demonstrate its negative impact on that same middle class.
What does it mean to “thrive?” The Webster-Merriam on-line dictionary defines thrive as “to grow or develop successfully.” Synonyms include boom, expand or flourish. These suggest that anything that is thriving must be growing larger, becoming greater, or getting bigger.
Before we determine whether the middle class is thriving, we should try to reach some definition of middle class. And the truth is that task will be difficult if not impossible to accomplish. It is no longer clear, if it ever was, what it means to be “middle class.” Who are these people?
I grew up in a family of four, including my older brother and sister and our dad, who was divorced. We lived in a rented, run-down, old farm house. We always had just one used car that dad, employed as a tool & die maker, drove to the factory each day. We lived outside of a small Tennessee town, with a dog, one car, one television and one phone – on a party line. By comparison with most households today, we were, to use an old southern expression, dirt poor.
The odd thing is that I never felt poor. I always thought we were a middle class family.
Today, my wife and I earn a respectable income. All of our children attended college with all but one graduating and one attaining an MA degree. We are within two years of owning our home outright with two cars parked in the driveway and four television sets located throughout. We have very modest savings set aside for retirement. I guess I consider us to be among that class of Americans commonly referred to as middle class but I don’t rightly know.
So, let’s ask the question once more. What constitutes a middle class household?
The federal poverty line tells us what it is to be poor. According to 2014 Health & Human Services guidelines, a U.S. household with four people earning $23,850 or less is considered poor. It seems obvious that a family at that income level doesn't need an economist to tell them if they are poor. It is equally clear that a hedge fund manager earning several hundred million dollars does not need a psychic to tell him he is wealthy. But we do need something or someone to tell us what it means to be middle class.
According to 2014 data provided by the U.S. Census Bureau, used by the Department of Justice in bankruptcy determinations, the median household income for a family of four is $75,219. It is not clear to me what that really means because supporting a family of four in one of the five NYC boroughs on that income is considerably different than for a family of four living outside of Lawrenceburg TN. As an aside, that same census data reflect that median income in TN approximates $63,000 while median income in the New York City tri-state area approximates $99,000.
Regardless, we have to use something, so let’s just consider median household income for the 50 states as our starting point. However, few things in life are that distinct. When discussing income distribution, we often use terms like “upper middle income” and “lower middle income.” Using the median income as the beginning point, increased or decreased by $25,000 increments, we end with this.
- Poor Less than $25,000 per year
- Lower middle class More than $25,000 and less than $50,000
- Middle class More than $50,000 and less than $75,000
- Upper middle class More than $75,000 and less than $100,000
Nah! That doesn't seem quite right. Even our tax code considers a family of four making less than $50,000 unable to be self-sustaining. For 2014, the eligibility limit for adjusted gross income (AGI) for the Earned Income Tax Credit (EITC) is $49,186 (family of four with two eligible children.)
Therefore, let’s use $50,000 increments, ending up with the following income ranges instead.
- Poor Less than $50,000 per year
- Lower middle class More than $50,000 and less than $100,000
- Middle class More than $100,000 and less than $150,000
- Upper middle class More than $150,000 and less than $200,000
These ranges seem reasonable, again allowing for variations for different geographical regions. However, this distribution places families at the median income level within the lower middle class.
For the remainder of this post, let’s assume you and I are in the middle class. When we now consider the impact of the Internal Revenue Code, the lyrics from a song by Gerry Rafferty and Joe Egan and performed by their band, Stealers Wheel, as well as the Jeff Healy Band, aptly describe our plight.
Clowns to left of me, jokers to the right,
Here I am, stuck in the middle with you
Using the mid-point of the above income ranges, let’s look at the total 2013 (yes Margaret, I changed years) federal tax burden (income and payroll taxes) paid by a family in each income range. For this example, we will consider a married couple, with two children, ages 10 and 12, both of whom live with their parents. Each couple files jointly using the standard deduction with one wage earner.
Category Total Income Federal Tax Liability
- Poor $25,000 ($5,006)
- Lower middle class $75,000 $9,929
- Middle class $125,000 $23,776
- Upper middle class $175,000 $38,269
Using the data in the above table, take a guess which family pays the highest effective marginal tax rate. For this question, I define effective marginal tax rate as the increase in tax liability divided by the increase in income.
I’ll give you a hint. The lower middle class family is bearing the brunt of the burden. They effectively paid $14,935 more federal tax on additional income of $50,000. For those of you keeping score, that approximates 30%. In theory, a family should not incur a 30% marginal rate until income exceeds $223,000.
As an example, if a family of four comprised a two worker household, with each spouse earning a $175,000 salary, our tax code would assess federal taxes approximating an effective tax rate of 30% of their total income, even with the social security wage base limit.
There are too many permutations to consider in this blog, but the problem our tax code creates for the middle class is magnified by the often more favorable tax treatment bestowed on a family much higher up the ladder. Given that the wealthiest Americans generally earn much of their income from passive activities and capital gains, they are often rewarded with an effective tax rate less than 25%, often less than 20%.
What is the net of all of this? Those least fortunate among us, when considering the Internal Revenue Code, pay little or no taxes. Those at the lower end of the middle class effectively pay the highest marginal tax rates. As a group, the middle class on average pay the highest effective rates. Our tax code puts middle class taxpayers squarely between a rock and a hard place. I don’t know about you, but let me the hell out of here!
The title of this post is truncated from the more common expression, “stuck between a rock and a hard place.” But that is not an accurate description of the situation in which many Americans find themselves. Middle class Americans are not stuck in the middle class.
Unlike years past, when the middle class was not only the largest segment of our population, this income group was also the most stable. We did not create paupers and billionaires at the same rate as we change our socks. Once a family attained the relative comfort and security of a middle class life, it was generally able to maintain that status.
Not so today. As reported in the U.S. News & World Report, the Pew Research Center found that the number of people who consider themselves middle class has fallen from 53% in 2008 to 44% this year. They further found that 25% of people referred to themselves as lower-middle class or poor in February 2008 compared with 40% today. The missing element is the wealthy. By subtraction, 22% might have considered themselves well-off in 2008 while 16% might likely consider themselves wealthy now.
Bottom line, by any measure, the middle class is shrinking. It seems inaccurate to equate that statement with “thriving.” A variety of reasons contribute to this reality but it is true. State lotteries create millionaires every week, almost daily. The fortunes of the stock market and changing technology create billionaires almost overnight. Vagaries of the job market coupled with personal misfortune frequently drop families below the median income threshold.
However, in addition to life’s fortunes and vicissitudes, we find the ever present IRC plugging steadily along, exerting maximum pressure on the middle class. In large measure because of that pressure, it is difficult for average, hard-working Americans to work their way up the income ladder absent good fortune.
The tax code provides a helping hand to those not yet reaching for a higher rung. But the IRC penalizes those just starting to climb the lower rungs, stepping on hands as they determinedly grasp the next, and then the next rung. As one nears the higher steps, our tax code pulls alongside in a helicopter, drops a lift chair, and hoists one to the top.
If the President is serious about his tweet, then he should begin now to fix our tax code. And I don’t mean using the threat of IRS or Treasury regulations to combat corporate inversions. I mean truly addressing the complexity and inequity in our tax code! All of it!
In the infantry, I was taught to avoid getting stuck in the middle. Getting caught in crossfire was not habit-forming. Well, I’m getting out of here.
Live long and prosper!