Obama’s ‘Wealth’ Benchmark Hurts the Middle Class Most

Published May 10, 2011

Consider a two-income family of public school teachers each earning about $60,000 a year. With a combined income of $120,000, are they “the wealthy”?

Most people probably would say they are not. But based on the current federal tax system, most people would be wrong.

With that combined income this husband-wife schoolteacher couple would be well into the top 10 percent of U.S. earners. Just $113,800 of earnings puts a two-income family in the top 10 percent, based on 2008 IRS and census data, the most recent available. The top 10 percent of wage earners in this nation currently pay nearly 70 percent of all federal income taxes, according to the nonpartisan Tax Foundation.

To be in the top 5 percent, a couple would have to earn about $159,000. The top 5 percent pay nearly 59 percent of all federal income taxes while having less than 35 percent of the nation’s taxable income.

The threshold to reach the top 1 percent — the people President Obama and others have targeted in calls to tax the rich more — is about $380,000 a year. This top 1 percent has about 20 percent of the nation’s annual earnings and pays 38 percent of the federal income tax bill.

Meanwhile, the bottom 50 percent, who have about 13 percent of national earnings, pay just 2.7 percent of the federal income tax bill.

In 1980, the top 1 percent paid 19 percent of the federal income tax bill, and the bottom 50 percent paid 7 percent. Yet we hear that our tax system favors the wealthy. Compared to when? Certainly not any time over the past 30 years.

Astonishingly, 45 percent of all income tax returns filed this year will owe no federal income tax, according to the Tax Policy Center.

Some supporters of the current income tax system protest that those in the bottom 50 percent do pay payroll taxes for Social Security and Medicare.

In many instances, however, the money they get back more than offsets the taxes they paid for Social Security and Medicare, according to Jason Fichtner, a senior research fellow at the Mercatus Center at George Mason University.

Bear all this in mind when Obama and others call for higher taxes on “the wealthy” and the elimination of “loopholes” such as the mortgage interest deduction and possibly employer-funded health insurance.

Remember a speech he gave while campaigning for president on Sept. 12, 2008, in Dover, N.H.: “I can make a firm pledge. Under my plan, no family making less than $250,000 a year will see any form of tax increases. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”

Too bad for the tens of millions of people who earn less than $250,000. President Obama apparently has forgotten the pledge of Candidate Obama. Get ready for more tax hikes on the middle class.

Steve Stanek is a research fellow at the Heartland Institute in Chicago and managing editor of Budget & Tax