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Friday, June 17, 2005

Where Forth Art Thou, Middle Class?


Get ready. Two Americas may not be enough.

The Rich, the Poor, and the Middle Class - or, in Western terms, The Good, The Bad, and The Ugly.

It's no great revelation that American politicians try to push messages that resonate with the "Middle Class". You can barely turn on any political show without hearing how the "Middle Class" is struggling. Republicans say the way to help them is to cut everyone's taxes. Democrats say the way to help them is to expand the social safety net. But who are they really talking about?

The problem is that just about everyone thinks they are Middle Class.

Obviously, not everyone is Middle Class - it just isn't possible for everyone to be "middle" anything. Take a look at Wikipedia's discussion on what constitutes the Middle Class. It should just about blow the lid off of most people's misconceptions that they have any hope of making it as high as the Middle Class.

Let's use Wikipedia's somewhat formulaic method to determine what Middle Class in America means.

Throw out anyone who is obviously "rich". I'll use the nice round number of $1,000,000. If you make more than a million bucks a year, I think it's safe to say you're rich. Making $999,999.99 doesn't exactly qualify as "not-rich", but these things can't be any better than our numerical system. Regardless, I find it difficult to see anyone claiming that a million a year does not qualify someone as being rich.

Next, throw out the poor. Here, the federal goverment helps us be a bit less arbitrary. They have an official "poverty level". However, the federal government says that you are only poor if you are single and make less than $9,570 a year. That's just ridiculous. If your total housing costs are only $500 a month, that comes out to $6,000 per year by itself. You have a whopping $3,570 for food, clothing, and everything else you might need? Better be good at budgeting because you have less than $300 per month to meet your needs. If you have a dependent child, then you can make an extra $3,260. Anyone who has ever bought diapers and forumla knows that is a ridiculous number.

Furthermore, the government knows it's ridiculous. Federal guidelines for assistance have cutoff levels ranging from 125% of federal poverty guidelines to up to 185%. What is the point of setting a guideline if it must be exceeded for any realistic usage? Well, for one thing there's the fact that federal minimum wage, at a standard 2000 hour work year, only pulls in $10,300 - before any taxes or deductions. If the federal poverty guidelines were raised to where the 125% cut-off were made the full poverty level, then anyone who makes minimum wage would automatically qualify for benefits. 125% of $9,570 is $11,962.50 - and that's $1,662.50 more than you can make on minimum wage (without overtime). So, if we actually put the poverty level where it should be then we'd have to face the fact that we are condemning people to a life of working in poverty their whole life. Since we cannot stand our own hypocracy, we pretend like you can get by on that wage.

For our purposes, though, we'll use the 185% maximum cut-off for federal aid. After all, if that is the most you can make and get help, then you cannot be in poverty above that (insert a sarcastic tone there). So our search for the Middle Class cuts out anyone who makes less than $17,704.50 (if single - that works out to $8.85 per hour).

In the strictest sense, then, the "Middle Class" could be said to be anyone with income from (let's round it up) $20,000 up to a million a year. That's a pretty wide range. However, Wikipedia says we should throw out the "working class". Unfortunately, there is no good working definition for this term.

If we split the income range in half, we end up starting the Middle Class at $510,000 per year. That's pretty high.

The Middle Class should be somewhere between the rich and the working class. I'll make an arbitrary decision and say that to qualify as Middle Class, there has to be at least the ability to make ends meet on one income. Obviously, this also has to do with lifestyle - but lifestyle goes hand in hand with income and class. The difference between the high end of the working class and the low end of the Middle Class shouldn't be seen as which car they drive or the clothes they wear (remember the difference is really only a few dollars at the extreme ends) - it is the ease with which that income is brought into the home.

$250,000 seems too high to cut out the workers and $100,000 seems too low (after all, it's just two people making $50,000). If we split the difference, we come up to the number of $175,000. This would fit our extended definition where, if made by one worker, the other would not have to work at all. As well, if the non-working partner were to take a medium-wage job - say enough to escape poverty on their own - the difference would not be significant (though probably welcome).

Our working class, then, makes between $20,000 and $175,000 and the Middle Class starts at $175,000 and reaches all the way to a million a year.

Hold on a minute - I just hurt myself with that statement.

An interesting thing about this little intellectual journey is that the cut-off numbers tend to agree with the federal tax schedule. If you shift to the "Married, filing jointly" schedule, you'll see that the lowest tax bracket's high limit is $14,600 - which if you add back in the standard deduction for two people is remarkably close to our $20,000 lower limit. You'll also see that the $175,000, when standard deductions are added back in, is just a hair below the high limit on the 28% tax bracket.

Here's a rant against the unfairness. First, those still below the poverty level are paying 10% of their income in tax! If you think $2,000 isn't a lot to these people, then understand that it is four months of total housing costs! Hey, though, the poor suck, so let's stick it to 'em hard and fast.

Now let's look at the upper level unfairness. You'll notice that 100% of those who are considered wealthy here face no increase in taxation at all! Once you make it past what would be lower Middle Class, you don't face any sort of increase in taxation ever - ever!

Most economists believe that a strong Middle Class is necessary to balance the winners and losers of capitalism. The working class is the real backbone - it is responsible for churning out the "productivity" upon which all other classes depend. From looking at our tax code, you'd never guess either of these things. You'd think that the only people that matter are those who can break into the top bracket.

It's also interesting to me how closely this mirrors the tax system I mulled over in a previous post. Okay, maybe it isn't so interesting since both intellectual exercises sprung from the same brain. Still, it shows a very important problem.

If anyone wants to bring any type of real fairness to the tax policy, they are going to have to convince Americans that they are not even close to being as rich as they believe they are. Given the ability of Americans to deny reality, this will be an uphill battle.

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