The New York Times is reporting that President Obama is backing off his pledge to allow the Bush tax cuts on income more than $200,000 ($250,000 for couples) to expire, instead proposing to only allow the tax cuts on income above $400,000 to expire. Though not quite as bad as House Minority Leader Nancy Pelosi’s preemptive cave last summer in proposing to shift the threshold from $200,000 to $1 million, this is still a really bad idea.
Beyond the revenue loss, it’s simply ridiculous to claim that households making up to $400,000 are “middle class”; as we’ve shown before, even households up to the $200,000–250,000 threshold probably shouldn’t be considered “middle class.” Yes, it’s notoriously hard to pin down an exact definition of “middle class,” but it is clearly intended to characterize households that fall roughly in the middle of the income distribution. Yet, as the below graph shows, all the thresholds mentioned above include households whose income falls well outside the area where most households are concentrated.
This isn’t surprising. More than 87 percent of taxpayers make less than $100,000 a year, according to IRS data, and the average household makes roughly $50,000 a year. This means that households making between $200,000 and $400,000 are making between four and eight times what most American households earn. Stretching the definition of “middle class” to include households with more than $200,000 is to render the term meaningless.