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More On Middle Class Taxes

Yesterday I argued that President Obama's proposed one-year extension of the Bush tax cut for family income up to $250,000, though probably a good idea in the short term to help boost a weak recovery, was a bad idea in the long term. That's because federal taxes on the middle class are pretty low by historic standards, and the Treasury will eventually need revenue from a middle-class tax increase (in addition to a steep increase in taxes on the affluent) to bring the deficit under control. 

One point I should have underscored is that anyone whose family income exceeds about $110,000 resides in the top decile (i.e., top 10 percent) of U.S. incomes and therefore probably shouldn't be called "middle class." To do so, as I've noted before, would require you to believe that your child's score of 90 percent on a math test merits a C rather than an A. Obama's $250,000 threshold would hold harmless much family income that by any reasonable measure well exceeds what's "middle class."

A second point is that extending the Bush tax cut on family income up to $250,000 wouldn't mean the only beneficiaries would be families with incomes below $250,000. The tax-cut extension would benefit a lot of very affluent people, too; that's why the White House is saying that only the top 2 percent would see their taxes rise. The low tax rate that Obama would maintain from the Bush era is a marginal rate, which means even people earning well in excess of $250,000 would benefit by continuing to pay lower taxes on their earnings up to $250,000. They would pay the higher (39.6 percent) rate only on the amount of their income that exceeds $250,000. 

How much would families with incomes above $250,000 benefit from extending the Bush tax cuts on family income below $250,000? The Center on Budget and Policy Priorities has calculated that in dollar amounts the biggest winners would be families earning between $200,000 and $1 million.

Those whose incomes are between $200,000 and $500,000 would save, on average, $12,112. Those whose incomes are between $500,000 and $1 million would save, on average, $10,504.

By comparison, those whose incomes are between $100,000 and $200,000 would save, on average, only $6,447. And those whose incomes exceed $1 million would save only $5,442. (You might well ask yourself why people earning in excess of $1 million should receive any benefit at all from a "middle class tax cut.)

The larger point is that when I say we need to increase taxes on the "middle class," I'm including quite a lot of people who are actually too wealthy for us to consider them middle class.