Debate is heating up over the expiration of the Bush tax cuts. President Obama has proposed extending the tax cuts for all Americans except for those families who make more than $250,000, citing his commitment to keep taxes low for middle-class Americans. Republicans are holding out for full extension, arguing that all Americans deserve tax relief. It's common to hear people argue that the $250,000 cutoff is both arbitrary and unfair. As my congressman, Jim Himes (D-Conn.), put it, "$250,000 in Fairfield County does not make you really rich." Republicans argue that raising taxes on the $250,000-and-over crowd would hit middle-class small-business owners who could be creating jobs. Once again, I feel compelled to remind everyone of the uncomfortable truth: I'm sorry, but making $250,000 a year makes you rich in this country. Even in Fairfield County. Here is my column from February, reprinted below.
Here we go again. Whenever the subject of taxes comes up—and it's come up in the debate over the Obama administration's decision to let many of the Bush-era tax cuts expire this year—we're treated to a chorus of complaints that people who make $250,000 a year aren't really rich. Raising taxes on these people, we're told, would be raising taxes on the middle class. Media Matters has assembled a few choice quotes on the topic.
As I argued in an article in August 2008, now reprised and updated, 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 appalling mismanagement of fiscal affairs between 2001 and 2008. (It's rich when Bush-era economic officials, like Edward Lazear, Greg Mankiw, and Keith Hennessey, carp about the fiscal situation.) Second, for those of you making more than $250,000, I regret to inform you yet again: Yes, you are indeed rich—any way you slice it.
To a surprising degree, feeling rich or poor is a state of mind. There are people who pull down $3 million a year who are miserable and feel strapped for cash and people who make $30,000 a year who believe they have everything they need. But income data can surely tell us something. And they tell us that $250,000 puts you in pretty fancy company, especially after the collective pratfall the economy took in 2008. The Census Bureau last summer reported that real median household income was $50,303 in 2008, down 3.6 percent from 2007. It's likely that figure fell further in 2009. So a household that's making $250,000 today is making about five times the median. In fact, as this chart shows, only 2.476 million U.S. households, the top 2.1 percent, had income greater than $250,000 in 2008. (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. $250,000 doesn't go as far in Santa Barbara or Manhattan—in most places, actually, where television anchors and their on-air guests live—as it does in, say, Paducah, Ky. As census data show, state median incomes vary from $67,508 in New Hampshire to $37,416 in Mississippi. But even in wealthy states, $250,000 ain't bad—it's nearly four times the median income in wealthy states like Colorado, Massachusetts, and Connecticut. And even if you look at the wealthiest metropolitan areas—Washington ($85,236), San Francisco ($76,068), Boston ($70,334), and New York ($63,957)—a quarter of a million dollars a year dwarfs the median income.
But people in Georgetown mansions don't necessarily compare themselves with fellow Washingtonians in Anacostia. Relative income works mostly at the neighborhood level. As we know from the work of Cornell economist Robert Frank, people assess their well-being not so much on how much they make and consume, but on how much they make and consume compared with their neighbors. After all, you have to compete with them for status and for important positional goods such as housing and schools. And here the $250,000-isn't-rich crowd has a point. In a few ZIP codes and neighborhoods, to be sure, brandishing a $250,000 salary is like bringing a knife to a gunfight. There are significant numbers of rich people—including a healthy contingent of filthy rich people—in places like New York City and San Francisco. If you want to live in a neighborhood where starter homes cost $1 million, and you want to send your kids to private schools, and you want to go on great vacations and have a beach house, then $250,000 likely won't cut it. When the investment banker down the street just got a $2 million bonus, the knowledge that you're doing better than 98 percent of your fellow Americans is little solace.
But the places where $250,000 stretches you are few and far between: some of the swankier East Coast and Chicago suburbs, several neighborhoods in Manhattan, chunks of the California coast. Even in the most exclusive communities where the wealthy congregate, $250,000 is still pretty good coin. Consider this: In late 2008 Forbes ranked America's 25 wealthiest neighborhoods. In all of them, someone making $250,000 a year would probably not be able to afford his dream house. But in all of them, someone making $250,000 would be doing better than most of his neighbors.
Once again, I await the tidal wave of e-mails, blog posts, and comments from hardworking, self-made people who earn $250,000 a year but don't feel financially secure and don't consider themselves rich, especially compared with the venture capitalist next door. Having spent my entire adult life in and around Washington, Boston, and New York, I feel your pain. I'm eager to listen and empathize. Tell me all about how insanely expensive housing is in any area with good public schools. Tell me about how many seemingly undeserving neighbors make so much more than you do. Tell me about how you want an income tax system that accounts for geographic differences in the cost of living (the Alternative Yuppie Tax?). Just don't tell me you're not rich.