Strengthening Constitutional Self-Government

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How Rich is Rich?

The Hill reported last week that “leading Democrats . . . are having a difficult time agreeing on what it means to be wealthy.” Speaker Pelosi thinks it means making over $500,000 a year. Senator Schumer says the threshold is $400,000. Candidates Obama and Clinton call for tax increases on those making more than $250,000, while John Edwards favors higher taxes on those receiving more than $200,000. Edwards also reflected, however, the Democrats’ general reluctance to discuss the topic: “I don’t know if I know what a rich person is,” the multimillionaire said at a recent debate.

Why is this topic a hot potato? Because for all the triumphalism of the liberal blogosphere, whose typists anticipate a Democratic president giving the 2009 State of the Union address to a Congress with Democratic majorities in both houses, political professionals know that it will be hard to sell tickets to “Great Society: The Sequel.” One of those typists, Mark Schmitt of “Tapped,” laments that the Democrats don’t just come out and say that “we all have to share in the sacrifice” for the sake of their various humane and noble goals.

The political professionals, however, are betting that the electorate is much less enthusiastic about the Democratic agenda than the bloggers. Specifically, they worry that people favor a new war on poverty, assault on global warming, dance classes for street gang members, etc., etc., only insofar as somebody else will pay for it. The Congressional Budget Office’s most recent estimate was that in 2004 a household needed an income of $266,800 to land in the top 1% of the income distribution. Thus, Pelosi and Schumer are talking about higher taxes for only a fraction of that top 1%, while even the populist Edwards would limit his tax increases to the wealthiest 3% of the country.

The households in the top 1% of the income distribution received 16.3% of all pre-tax household income in 2004, and paid 25.3% of all federal taxes. (By comparison, the “lower” 80% of American households received less than $64,300 in 2004. Those four quintiles received 46.5% of all pre-tax household income and paid 32.9% of all federal taxes.) If political constraints are forcing Democrats to contemplate tax increases only for the very prosperous, economic constraints will leave them with very modest social welfare budgets. No Democrat is advocating a revival of the 70% income tax bracket that Pres. Reagan abolished, or of the 90% bracket that existed before JFK’s tax bill was enacted. If Democrats are going to focus their tax plans on the pinnacle of the income distribution, however, marginal increases will yield negligible results.

Discussions - 7 Comments

Your use of the numbers is a bit off, William. In the CBOs reckoning, if your household earning is $266K and there is only one person in your household, then you're in the top 1%. But if there are four of you in the household, you'd need twice that, or over a half a million dollars in income. The PDF shows that out of all households, the average income in the top 10% was $297K.

It's just not true to say that a tax on the top 1% would reach every household that earns $266K, as you imply above.

. . .unless, of course, I'm reading the tables wrong, which is a distinct possibility.

Brett, I think you are reading the tables wrong. The link goes to a cluster of 12 tables. Table 1C is titled, "Number of Households, Average Income and Income Shares, and Income Category Minimums for All Households, by Household Income Category, 1979 to 2004." The "minimum adjusted income" in 2004 dollars for the top 1% of the income distribution is $266,800; for the top 5% it's $116,400; and for the top 10% it's $87,300. "All households" has to be the most encompassing category, no?

I suspect the American people -- by which I mean the voters in the "middle" who determine elections -- are not going to pencil this out. Statism is enormously attractive to them. Obamaesque or Hillaryesque or Edwardsian rhetoric (they're almost indistinguishable) plays well. Always has, always will. Tax and tax, spend and spend, elect and elect. To a great extent that we may realize, it's still FDR's world.

What does "adjusted" mean, then?

Here's the explanation from the table you cited:

The minimum adjusted income is the lower income boundary for each quintile. Because incomes are adjusted by dividing income by the square root of household size, an adjusted income range implies different unadjusted income for different size households. To compute the unadjusted income range for a particular size household, the adjusted income must be multiplied by the square root of the household size: 1.414 for a two-person household, 1.732 for a three-person household; 2.0 for a four-person household, 2.236 for a five-person household. For example, in 2004, the highest quintile had adjusted income above $64,300. A two-person household would need income above $90,900 to fall in that quintile, while a four-person household would need income in excess of $128,600.

So, if you're talking about adjusted income, that's fine. I just don't think that's a meaningful number for your readers unless they all happen to be in one-person households. You'll note that the minimum adjusted income table is identical for all categories.

I'll admit to being a little confused about how these numbers work - as some of my comments above show - but I don't think that they work in the way you imply in your second paragraph. According to CBO numbers, if your unadjusted household income for a family of four is around $232K, you're in the top 5%, not the top 1%.

Good catch, Brett. There must be a mistake in the COB tables, because the minimum adjusted income for all households in Table 1C is exactly the same grid as the minimum adjusted income for households with children in Table 2C, elderly childless households in Table 3C, and nonelderly childless households in Table 4C. I've written to COB to ask for corrected figures, and also to ask for income category minimums unadjusted for household size.

While that's pending, you might want to look at this table from the Census Bureau. It shows the 2005 household income distribution, in brackets that increase by $2,500 increments, up to $250,000. Its subcategories are racial groups: white, black, Hispanic, Asian. For our purposes, the "All Races" category is the most interesting; that's the one that gives data on the entire country. According to it, there were 114,384,000 American households in 2005. 2,023,000 of those households - the most prosperous 1.77% - had incomes above $250,000. Unless the Census Bureau is hiding something, this is income unadjusted for family size, shoe size or barometric pressure. Another 1,529,000 households had incomes between $200,000 and $249,999. That works out to 1.34% of the total number of households.

The John Edwards plan to raise taxes on households making more than $200,000 will affect the welathiest 3.11% of Americans, while the Clinton and Obama plans to nick those making more than $250,000 will affect the highest 1.77%. There's no way to tell, from the Census numbers or the incomplete and garbled CBO numbers, how small a portion of the population would be affected by tax increases that started at $400,000 or $500,000. The main point of my post, however, still stands: the Democrats' hopes to raise huge amounts of government revenue from a sliver of the income distribution are far-fetched and almost certainly cynical. Either they're dissembling about all the additional things the government will be doing after they are in power, or there are going to be tax increases on people making less than $200,000 a year, including some people making a lot less.

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