Obama Will Lower Taxes; $250K = Rich

Tax plans drawn to scale.

I've gotten into a few debates recently with friends who oppose Obama's tax plan for two main reasons: (1) they feel that raising the capital gains tax will hurt the national economy by discouraging investment and removing liquidity from the market; and (2) taxes are going up for those households making over $250,000 per year. That's not much money, they argue -- a good chunk of my friends have advanced degrees (with associated debt) and live in S.F. and NYC. If they want to even dream of owning their own apartment in a decent neighborhood, making that kind of money is a necessity.

If you agree with point number two, first take a look at the chart above, which shows how the tax plans of McCain and Obama will directly impact different segments of the population.*

Clear? Good. Welcome back. Next, Daniel Gross takes apart the second argument in his Slate article "The deluded Obama critics who think $250,000 is a middle-class salary."

Barack Obama's tax plan, . . . promises to improve the nation's fiscal standing by scaling back tax cuts for people making more than $250,000. Since then, the business pundit class has been griping that people who make $250,000 a year aren't really wealthy, especially if they live in and around New York; San Francisco; or Washington, D.C. . . . On Wednesday afternoon, CNBC's unscientific online poll found that (surprise!) only 35 percent of respondents believed an income of $250,000 qualified a household for elite rich status.

I have two pieces of bad news for the over-$250,000 crowd. First, the reversal of some of the temporary Bush tax cuts is probably inevitable, given the Republican fiscal clown show of the past eight years. Second, I regret to inform you that you are indeed rich. . . . [I]ncome data can surely tell us something. And they tell us that $250,000 puts you in pretty fancy company. The Census Bureau earlier this week reported that the median household income was $50,223 in 2007—up slightly from the last year but still below the 1999 peak. So a household that earned $250,000 made five times the median. In fact, as this chart shows, only 2.245 million U.S. households, the top 1.9 percent, had income greater than $250,000 in 2007. (About 20 percent of households make more than $100,000.)

In dealing with aggregate nationwide numbers, we should of course take account of the significant differences in the cost of living from state to state. . . . But even in wealthy states, $250,000 ain't bad—it's nearly four times the median income in wealthy states like Maryland and Connecticut. And even if you look at the wealthiest metropolitan areas—Washington, D.C. ($83,200); San Francisco ($73,851); Boston ($68,142); and New York ($61,554)—$250,000 a year dwarfs the median income.

Still feel that $250,000 isn't much money? Let me know why -- I'd love to discuss.

[Update -- According to this 1997 paper put out by the Fed [pdf], 1% of the population owns 82% of the stock market.]

* Looking at tax policy alone can be misleading, especially because of the radical differences in proposed health care plans.