NCPA - National Center for Policy Analysis

In Tax Cut Plan, Debate Over the Definition of Rich

October 4, 2010

As the political debate about whether to extend the Bush tax cuts drags on, there is concern about whether it is fair to tax a person who earns more than $200,000 a year (or a family that earns more than $250,000 a year) at rates similar to those who make $5 million, says the New York Times.

In some expensive sections of the country, many families with income levels near the $250,000 cutoff insist that they have more in common with middle-class Americans than millionaires or billionaires, says the Times. 

  • A study released this month by two Princeton University professors found that in most of the country, people feel comfortably middle class if they earn $70,000.
  • But in New York City, the figure was $165,000.

The fact that families making $250,000 are sometimes being invoked in the same terms as billionaires is a symptom of one of the paradoxes of the American tax system: at the same time that wealth has become far more concentrated in recent decades, the tax code has become far less precise in differentiating levels of affluence.

  • Today's tax code has fewer brackets than it had a half century ago -- just six.
  • Mr. Obama's plan would raise the top bracket (which affects income for individual filers who earn over $382,550) to 39.6 percent, from 35 percent.
  • Thus, Mr. Obama's plan would charge the same rate on the 382,551st dollar of earnings as it would on the 30 millionth.

Tax brackets at the upper end of the income scale were not always drawn so broadly.

  • In 1970, when someone earning $37,000 had the buying power of a $200,000 income today, there were 25 income brackets.
  • The taxpayer with $37,000 was taxed at the middle of the scale -- 13 of the brackets charged higher rates to those with higher income.

Source: David Kocieniewski, "In Tax Cut Plan, Debate Over the Definition of Rich," New York Times, September 29, 2010.

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