Income Tax and the $250,000 Threshold

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May 17, 2011

In a recent article in the New York Times, Andrew Ross Sorkin examines the “magic number” of $250,000 that serves as a threshold between middle and upper class in fiscal policy debates.  Those earning $250,000, he writes, are by no means middle income, as they represent only 2% of households in the nation.  Yet, Sorkin notes, “some economists and tax reform advocates are questioning whether those households are rich enough to be worthy of the same tax bracket as millionaires.”  From the article:

The dividing line appears to have its genesis in 1993, when President Bill Clinton created a new tax bracket at $250,000 and raised the rate to 39.6 percent. Prior to Mr. Clinton’s new bracket, the highest earners were those defined by making more than $86,500; they paid 31 percent under the first President George Bush…

Aides that worked with Mr. Obama during his campaign said he latched onto $250,000 because it helped invoke President Clinton’s era of economic prosperity in the 1990s — a demonstration, the argument goes, that higher taxes did not hinder growth.

Sorkin points out that $250,000 in 1993 is equivalent to just over $386,000 today, when adjusted for inflation.  He cites an article by Karen Hube of The Fiscal Times that concluded that families earning $250,000 a year in the present often “end up in the red — after taxes, saving for retirement and their children’s education, and a middle-of-the-road cost of living,” especially in high tax areas on the east and west coast.

Sorkin contends that millionaires and billionaires often earn most of their income from investments and therefore pay taxes at the long-term capital gains rate of 15 percent.  He cites a report from the IRS that found the wealthiest 400 Americans in 2007 paid an average of 16.6% in income tax.  Sorkin concludes by noting that tax rates were as high as 70 percent in the 1950s-1970s, but concedes “we are unlikely to see those rates anytime soon.”

Teachers could use this article in a class discussion about income tax rates.  At what income threshold should households be expected to pay more in taxes?  Who qualifies as wealthy and how are those decisions made?  What are the pros and cons of increasing the taxes on the wealthy?  How might tax increases affect the federal budget deficit and national debt?

Students should be encouraged to observe how politicians discuss wealth and the ways in which these ideas are reflected in their fiscal policies.  How does each party use categories like upper class and middle class in an effort to sway voters’ opinions?  As students follow the debate about the federal budget, they should develop their own opinions about the tax structure and support those opinions with logic and evidence.

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