President Obama's January 20th State of the
Union speech (since every action in Washington seems to require an acronym, his
speech is the SOTUS) was characterized by the White House and then the media as
addressing "middle-class economics." It's a politically smart focus,
especially because there have been lots said about the denouement of the middle
class, its "hollowing-out" and its on-going struggles. Even
Republicans are extolling "middle class economics," since they (mistakenly)
believe they've been vaccinated against shameless duplicity – endemic to GOPers.
Because it's once again a focus of our
political nobility, being middle class is in the news. So how does one qualify
as a "middle-class" American? Alas, there is no single definition of
"middle class," a social, cultural, economic, and of late, political concept
that has been central to American's self-image for a long time. A recent survey by the Pew Research Center indicates
that nearly 90% of respondents judge themselves to be some version of
"middle class," which defies math and statistics, but is a truly-held
belief for lots and lots of folks. This survey result echoes Garrison Keillor's
Lake Wobegon residents who are all
"above-average." It also reflects the ever-broadening
characterization of who is middle class, especially at the top end. At this
point, almost everyone's middle class, which suits politicians just fine.
One traditional foundation of our middle class
is to define it by one's annual income. By calculating what the median income[1] is
for the US we can determine a central point of the middle-class. So what is the
median income in the US? Excellent question; unfortunately there are multiple
answers, depending on how you measure income, as shown in the following table
that shows 3 different median income calculations.
Table 1: US Median Income
Measure of Median Income
|
Amount
|
Year
|
Source
|
$52,250
|
2013
|
US Census
|
|
$40,768*
|
2014Q1
|
Dept. of Labor
|
|
$36,055
|
2012
|
Tax Foundation
|
* In 2013 dollars.
Median household income is the most often used
way to gauge middle-class income, and provides the highest measure of median
income, $52,250. But weekly earnings for full-time workers (there now are 104.3
million full-time workers according to the Department of Labor) and adjusted
gross income (AGI) from your Federal income tax form 1040 are well-known and
-regarded alternative measures of income. As Table 1 illustrates, even
determining a mid-point of middle class income is perplexing as there's a 40%
difference between $36,055 (AGI) and $52,250 (Household Income).
One gloomy finding is that real median weekly
earnings have not increased in 10 years; they're now virtually the same as they
were in 2004. Adjusted gross income includes not just wages and salary but
income from interest, dividends, capital gains (that collectively comprise
"investment income"), business and pension/retirement and other
sources. Unsurprisingly, personal income from investment is 46% of total 2012
AGI for those with income exceeding $1 million. For people whose total AGI is
less than $100k, investment income is 3%. With AGI between 100k to 200k,
investment income is almost 4% of their AGI. Why median AGI is so much lower
than Household Income is puzzling.
But there is a range of income that
encompasses the middle class, not just the mid-point (the median). An often-cited income range for the middle class is
$25,000 to $100,000/yr. The lower bound of being "middle class" frequently
employs the federal "poverty-level" income (FPL) or a multiple of FPL, which varies by
family size. In 2015, the FPL for a 4-person family is $24,250. This poverty-level
income is used as a basis to determine eligibility for certain public programs
and benefits. For example, the federal Affordable Care Act defines a lower and
upper AGI range for people to receive premium savings (e.g., subsidies,
discounts or tax credits). If a family of 4 people has an AGI of $23,850 to
$95,400, they can qualify for lower premiums at the Health and Human Services'
federal marketplace healthcare website.
Defining what the upper-end of middle-class
income is far more fraught. Politicians, among others, offer an expansive view.
In speeches during his run for his second term, President Obama has said “the
rich” are those who make $200,000 or more as individuals and $250,000 or more
as households; adeptly implying that those households making less than $250k
are not "rich," and thus middle class. Remarkably, this upper-range
was also cited by Mitt Romney when he was a presidential
candidate. Stretching the middle class to include households whose income is
$250k means the middle class includes families within the top 3% of all income earners. It may be good
politics, but it's wholly unsound economics and math.
After his election, when President Obama and
the Republicans were negotiating how the government would not push itself off
the infamous "fiscal cliff," they agreed that "the rich"
really made a lot more money and raised the definition of “rich” to $400,000
for single people and $450,000 for couples. Making $450k places a household in
the top 1% of all earners, nationally. Whether it's $200k or even $450k, that's
a very spacious upper-end definition of middle class.
Culturally, being part of the American middle
class is tied to several keystone fixtures beyond income. These fixtures
include owning a home and sending one's children to college. Home ownership
peaked in 2004, when 65% of Americans were paying mortgages for their domicile.
Now, after the housing bust, just 64% own their homes, and a rising 34% of middle-class people say they'd
rather rent than own if it were time to move.
However, a college education remains
highly-sought after. It is closely intertwined with the American Dream,
prominently wished for by all of us perhaps especially by middle middle-class
folks. Sending our kids to college to improve their future prospects has become
more of a perceived necessity rather than an option, given the lethargic growth
in even middle-skilled jobs and wages. Thus, the president's middle-class
economics plan included proposals to broaden the affordability of college
education.
Any change federal tax policy to strengthen
the middle-class' economic situation and
make college education more affordable should be a bipartisan slam dunk. Nope. Exhibit
A is the response to the president's proposed change to benefit middle-class
citizens in their efforts to save for their kids' college expenses. He briefly mentioned
this proposal in his SOTUS, which was to reform tax-free higher-education
savings (aka, 529) plans so more benefits would be focused on "true" middle-class
folks.
The president's proposal was to eliminate the
tax-free status of 529 plans and instead broaden an existing educational tax
credit – the American Opportunity Tax Credit (AOTC) – that would provide more
money than 529 plans for lower- and middle- middle-class families to cover
their kids' college costs. The AOTC would be phased out for families with
incomes greater than $180,000. The AOTC is used far, far less than
529 accounts. And that's saying something because less than 3% of US households even have a 529
account. Not mentioned at all was that about 70% of all undergraduate college
students use loans to finance their educations. Thus, reforming student loan
policies – like making the loans' payments depend on the income of the
newly-graduated person (so-called Pay-As-You-Earn (PAYE) loans) – would likely
have a more pronounced benefit for true middle-class families for lowering the
costs of higher education than changing 529 plans. Oh well.
The White House stated that 70% of balances in the college accounts were
held by families making at least $200,000 a year. Others stated that more than
70% of the total number of accounts
are owned by households with incomes below $150,000. The average 529 account
balance in 2013 was $19,584, which as all you tuition-payers know
might cover, at best, one year at an in-state public
college/university.
This White House proposal was the target of
vehement criticism across a broad political spectrum, with lightning-quick
disapproval from both John Boehner and Nancy Pelosi. Less direct condemnation
was spread by the financial industry, which manages 529 accounts and often
receives hefty fees for that service. Why? Because 529 plans are popular,
despite their low numbers. There is over $240 billion in 529 accounts, and to listen to the
criticism, each and every one of these accounts are held by certified middle-class
citizens. Certainly many "middle-class" folks have money in 529
accounts, but as the White House pointed out, the benefits of such accounts disproportionately
accrue to people in the upper reaches of the middle-class.
Unfortunately, there is enough of a middle-class
patina on 529 plans to ensure the president's proposed 529-plan educational
benefit reform entered face down into the political waters without even getting
its toes wet.
This episode illustrates several inter-related
issues in dealing with the "middle class economics." First, there's
the difficulty that I've discussed above: defining who resides (or more to the
point, who doesn't reside) in the middle-class. From a political perspective, we're virtually all middle class, even
families who make $450,000. Silly me; I thought the middle class was a state of
economics, not of mind. Second, paying for tax reform that can assist "middle
class" people, a goal virtually all politicians pay at least lip service
to achieving, is fiendishly difficult. Because tax reform usually means some
folks will be winners (who get the benefits) and some will be losers (who pay
more taxes).
If the middle class embraces virtually
everyone – each of whom want to be tax reform winners – then it's next to impossible
to offer benefits to households whose income is far closer to the $52,250
median income. There are simply not enough families who earn over $250k to
provide tax revenue to assist middle-middle-class families, whether it be for
college education or any other fiscal benefit to make their lives less fraught.
P.S., If you're interested in seeing where in
the middle class your income places you, go here.
[1] Median
income is the numerical value separating the higher half of a distribution of
income from the lower half.
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