SYNOPSIS: A response to House Speaker Hastert's claim that a "typical family" is in the 95th income percentile
House Speaker Hastert's letter in today NYT was the same old same old: I point out that he is holding up unemployment benefits in order to extract tax cuts for upper-income families and corporations, and he accuses me of "class warfare".
But there's a substantive - and rather funny - point worth noticing: his depiction of the reduction in the 27 percent bracket as a "middle class" tax cut.
This issue has been well covered by the Center on Budget and Policy Priorities; here is their study. First off, three-quarters of families have no income in that bracket; so this is a "middle-class" tax cut that provides benefit only to the top 1/4 of families. As CBPP points out, a family of 4 would receive a tax break only if it earned at least $66,500. The "typical" family we heard so much about in last year's debate, a family of 4 earning $40,000, would get nothing - indeed, it wouldn't be anywhere close to being in the money.
But before you take that $66,500 figure too seriously, remember that only income over $66,500 would get a reduced tax rate. So the tax cut becomes significant only for families earning a lot more than the minimum. To get the full advantage of the cut, a family would have to make about $130,000 per year.
As a percent of income, the tax cut would peak for families right at the top of the 27 percent bracket. The top of the 27 percent bracket, then, is the "center of gravity" of the cut. As CBPP points out, in 2000 only 4.4 percent of families were in tax brackets above 28 percent (which is now 27 percent). So the representative beneficiary of the tax cut is a family at the 95.6th percentile of the income distribution!
Now I wouldn't say that a student at the 95th percentile of the grade distribtution was in the middle of his class. How can Hastert claim that a tax cut that peaks, as a percent of income, at the 95th percentile of the income distribution is a "middle-class" tax cut? He seems to have an expansive notion of "middle".
True, in America almost everyone describes themselves as middle class, from families struggling on incomes barely above the poverty line to "some $400,000 a year working Wall Street stiff flying first class and being comfortable" (Gordon Gekko, from Wall Street). But what Hastert wants you to think is that he is proposing something for typical families; he isn't.
Originally published on the Official Paul Krugman Page, 2.23.02