There has been a lot of talk about which presidential candidate has the best tax plan for “middle class” America. It’s an interesting question because I’m not sure that anyone can actually define “middle class” anymore – my readers seem to feel that it’s all over the place.
Middle class – as it’s widely defined – is generally defined as those families who are in the middle of income brackets. That can be confusing. Based on 2005 Census Bureau reports, 40% of Americans earned less than $36,000 a year (the bottom 20% earn less than $19,000). The next 40% – the so-called middle class – reported betwen $36,000 and $91,705 of earnings. The top 20% of earners, making $91,705 or more, earned 50% of the income reported in the US.
[Kelly’s geeky note: From a math perspective, that’s pretty interesting. While the richest 20% took in nearly 50% of income, the middle class (representing 40% of Americans) earned a fairly representative proportion of total income (37.5%).]
So there you have it, statistically you are middle class if you earn between $36,000 and $91,705 (adjusted for inflation since 2005) per year. Easy, right?
Not so fast.
There are a lot of factors that pure numbers don’t take into consideration including the size of your family and the cost of living in your geographical location. Lots of folks who make more than $75,000 per year may live comfortably in some areas of the world – but that kind of money won’t take you very far in areas like New York City or San Francisco where housing costs alone can easily reach $1 million for relatively modest homes.
The reality is that almost everyone thinks that they’re middle class, though of course, you can’t be. And realistically, you don’t want to be right now. Here’s why.
Elizabeth Warren, professor at Harvard Law School, just testified before the Joint Economic Committee in Congress that the middle class is suffering. How much so? Adjusted for inflation, median household income for middle class families has dropped by $1,175 between 2000 and 2007 – that represents a significant decline. While income is dropping, expenses are rising. The average family is spending $4,655 more each year on basic expenses, such as gas, food and health insurance.
Let’s talk the bane of my existence (as most working parents): child care costs. Families with children under the age of 5 spend $1,508 a month more on child care costs (yes, do the math, that’s more than $18,000) – older children cost about half that much. You don’t escape during the teens, either: the cost of sending a child to college has more than doubled over the last 20 years, far outpacing increases in income.
Also in the news these days are those folks who cannot afford housing. The proportion of families who spend more than 35% of income on housing has quadrupled in a single generation – a disproportionate number of middle class families spend nearly half of their income on housing. Two “middle class” Americans earning an average salary could not afford to pay the mortgage of a median-priced home in 2/3 of the nation’s metropolitan areas including my own Philadelphia (which is reasonably priced, I might add). In addition to the increased costs of housing stock, real estate taxes have also increased. Most municipalities have not tweaked their systems to account for a disproportionate increase in property “value” (albeit somewhat artificial) – this means that taxpayers are often paying too much (for reassessed properties at historic rates) or too little (for properties that have not been reassessed) in real estate tax from neighbor to neighbor. The high costs, as much as $10,000 in some middle class neighborhoods, are hitting folks in the pocketbook.
According to Warren, if you include real estate taxes, along with Medicare and other taxes, the total tax burden for a two income family today is 38% more compared to one income families a generation ago. And yes, I realize in a progressive tax system, that was bound to happen. It’s not so much that it happened that’s surprising, it’s what it means. It means less money in the pockets of middle class Americans at the end of the day.
Income is decreasing and expenses – including taxes – are increasing. So what are people doing? Charging up a storm. Credit card debt for middle-income families rose 75% between 1989 and 2001, according to Demos, a non-partisan public policy organization. Warren’s report claims that 10% of total disposable income in the United States goes to paying off credit cards. This, of course, jives with much of what you told me you would do with your economic stimulus check.
There has been a clamoring for a second stimulus package to offer some relief. Despite the rumors to the contrary, no such package has yet been seriously proposed. Jared Bernstein, senior economist with the Economic Policy Institute, has advised that a package should rely on getting funds together for the states, particularly for infrastructure projects, and not into the hands of taxpayers. Infrastructure means jobs – this was made abundantly clear when Congress thought about tinkering with the gas tax.
Second stimulus package or not, it’s clear that something needs to change. What is the breaking point before the middle class is no longer middle class?
Another geeky note from the WSJ:
In a new sign of increasing inequality in the U.S., the richest 1% of Americans in 2006 garnered the highest share of the nation’s adjusted gross income for two decades, and possibly the highest since 1929, according to IRS data. Meanwhile, the average tax rate of the wealthiest 1% fell to its lowest level in at least 18 years.
Maybe I’m just a little slow on the uptake, but I just do not see how another stimulus package, whether it’s on the horizon or not, could possibly be helpful. I don’t see how the first one was helpful. It’s like putting an Elmo Band-Aid on a compound fracture — it doesn’t even come close to solving the problem. What am I missing?
kk
Kristen – Great analogy! And much like the Elmo Band-Aid, the stimulus package makes folks feel like they should feel better – until they realize that they’re still hurting. It feels good for politicians to be able to say that “they’re putting money back into the hands of taxpayers.” It is the kind of stuff we want to hear, apparently, in an election year.
Maybe middle class is a mentality, not a real income bracket. Maybe middle class is the people that are not starving, not filthy rich, but make an income that look good on paper but runs out quickly?
I don’t think the stimulus check is very useful either. I am just going to put it in the bank. The people that really need money will just spend it on groceries or something else that they immediately need. Yeah, it will make some people go shopping for things that they want but don’t necessarily need, but they don’t seem to be the majority. (And I have absolutely no statistics to back up what I’ve just said.)
I am very interested in the notion of creating another “economic stimulus ” that puts people to work rather than sending them a few bucks. I’m no expert on the policies of FDR, but it seems to me that he had some great ideas and programs with regards building back the economy during a depression, the likes of which I hope we will never see again. With all the talk of a crumbling infrastructure nationwide, why is this article the only one I’ve seen with any mention of stimulating the economy through work programs and rebuilding? Rebuilding that is sorely needed, not projects created just because! Seems to me if such innovative programs worked before, they can work again.
I would think that if the government wasn’t putting us into so much debt that there would actually be some money left for the rest of us. People should demand the government to ammend the constitution so that it can not spend more money than it collects.
Our government has accumulated more debt then people have equity in thier own homes.
9.5 trillion dollars is a ridiculous # that makes credit less available for all other purposes. Creating a balanced budget ammendment is the best thing that “we the people” can do to help the government do more with less just like the rest of us must do.
Stimulus? The only people thinking these economic stimulus checks were a great idea are the same people who think they’re getting a great deal because their 18% $49 annual fee credit card gives them 1% back.
The same people who fill out the class action lawsuit papers, follow each correspondence for a year, spend $2.00 in postage, then get a check for 49 cents.
I’d hate to know the admin cost of each of those stimulus checks… Any idea? What does it cost to run a few hundred bucks through the gov’t to have it paid back? A few hundred bucks?
Sean
http://www.franchisepick.com
I was reading Debra James’ blog and liked what she said. I work for Employment Services and have funding to put people through training to obtain employment (WIA – Workforce Investment Act) However, this country will not be able to provide jobs to Americans if we do NOT stop sending our companies overseas! Also I can put an unemployed person through short term training, however the jobs they are offered sometimes are less money than they are making on unemployment or assistance they maybe getting. The problem is we need someone to come in and “fix” our programs so they compliment each other.
“Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need.”
~From the movie Fight Club, based on the novel by Chuck Palahniuk