How is it that a quarter-million dollars of income has come to represent the dividing line between the middle class and the wealthy?

By MSN Money partner 4 hours ago

This post comes from Alicia Munnell at partner site SmartMoney.

 

SmartMoney logoIt seems as though no one reads the Census Bureau’s annual publication “Income, Poverty, and Health Insurance Coverage in the United States” for anything but the number of people in poverty. The parts I find most interesting are those pertaining to the level and distribution of income. The numbers go to the heart of conversations about the “middle class” and the “rich.”

 

Couple stood outside of villa © Image Source, Image Source, Getty ImagesBoth President Barack Obama and Gov. Mitt Romney have adopted household income of $250,000 as a meaningful demarcation point for defining the middle class. In the case of the president, he proposes to retain the Bush tax cuts for households with less than $250,000 and eliminate the tax cuts for those above that threshold. Romney, in a recent ABC interview, offered the same definition of the middle class: “Middle income is $200,000 to $250,000 and less.”

 

Where does this concept of $250,000 as the appropriate cutoff come from? According to the data in the Census Bureau report shown in Table 1 below, which presents the thresholds for being in different parts of the income distribution, the median household in 2011 had an income of $50,054. A household with an income of $143,611 was at the 90th percentile point, or in the top 10th of the income distribution. A household with an income of $186,000 was at the 95th percentile, or in the top 5%. The table does not even show households with $250,000, but they must be in the top 97th or 98th percentile.

 

Table 1. Household Income at Selected Percentiles, 2011

Percentile Dollar limit
10th $12,000
20th $20,262
50th (median) $50,054
80th $101,582
90th $143,611
95th $186,000

Source: U.S. Census Bureau, “Income, Poverty, and Health Insurance Coverage in the United States: 2011.” Table A-2.

 

The thresholds must be interpreted with caution, because households include old and young, urban and rural, coastal and midland, and small and large. But it is very hard to understand how anyone could think of $250,000 as the middle. It seems as if both candidates have a mental picture of the very rich and everyone else.

The “very-rich-vs.-everyone-else” framework may come from data on the share of income earned by various households. Here the census data show that those in the top quintile – the highest-earning 20% – earn more than the bottom four quintiles combined (see Table 2). That is, the top 20% receives more income than the bottom 80%.

 

Table 2. Shares of Household Income by Quintile, 2011

Quintile Share
Lowest quintile 3.2
Second quintile 8.4
Third quintile 14.3
Fourth quintile 23.0
Highest quintile 51.1

Source: U.S. Census Bureau, “Income, Poverty, and Health Insurance Coverage in the United States: 2011.” Table A-2.

 

And a recent study by economist Emmanuel Saez shows that within the top quintile the distribution is also very skewed, so that the top 1% receives about 20% of total income.

 

Thus, while the $250,000 threshold makes no sense in describing the middle class, it seems like a relevant divide for defining where the money is. Nevertheless, dividing the nation’s households into the “wealthy” and “the middle class” doesn’t seem like a useful exercise. It pits the majority of Americans against the top 1% or 2%.

 

It suggests that the majority of Americans should not be called upon to solve the nation’s fiscal problems. It violates the notion that we are all in this together. Yes, the rich can contribute more, but we can all contribute something.

 

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