Thursday, December 13, 2007

Defining the Middle Class Up

by Tom Bozzo

It's been interesting to see the Alternative Minimum Tax fix and the hoopla over Harvard's new undergrad financial aid policies framed as middle-class issues. This may be true in some technical sense, but it's misleading.

A lot of Googlers used to find their way here searching for definitions of "upper-middle class." As far as I recall, we never really provided a definition, though my informal economist's take is that the upper-middle class is basically the upper-working class. That is, in contrast with the "rich," the upper-middle class depends on a flow of wage income to maintain its standard of living, etc. For instance, the 95th percentile net worth in the 2004 Survey of Consumer Finances data, $1.43 million, would buy a $57,300 joint life annuity with some inflation adjustment for a 50-year-old and spouse at the terms offered by the Thrift Savings Program; that's roughly a 65th percentile income.

It follows directly that Harvard's more generous financial aid policies only benefit the upper end of the income distribution, since the Harvard endowment isn't going so far to remedy the institution's "Upstairs/Downstairs" problem as to put the keys to late-model BMW M cars into the hands of kids from actual middle-income families. [*] That is, students from families with incomes under $60,000 get nothing more than before, and that's roughly the median income for families whose heads are old enough to send kids to college. [**] The real action is between the 85th to 95th percentile of the general income distribution and still a lofty slice of the families-with-college-age-kids distribution.

A W$J article (no link) reported that about half of Harvard's undergrads receive grant aid, and about a third of those get the under-$60,000-income free ride. So the national median (or maybe a bit better) income puts a kid at the 17th percentile or so of the Harvard undergrad distribution, and the 90th-95th percentile nationally is something like the Harvard median. So while Megan McArdle may not be quite on the money in characterizing the beneficiaries of the new policy as "actual" "working and middle class students," I can't disagree with her that the implied distribution is interesting if maybe not surprising.

The issue may be one of scale as much as anything — in a population the size of the U.S., being in the top percentile of something puts you in an exclusive club of some three million members. [***] So out of the top couple of deciles of U.S. households by income — the top 25 million or so — there will be smart teenagers far in excess of Harvard's modest undergrad enrollment. Of course, the same goes for the bottom half. In this regard, Felix Salmon is right to say, "I simply don't buy this idea that there's a limited pool of 'top students' which all top universities want." At least, if that's how elite schools' admissions officers view things, then they should sharpen their pencils.

In any event, I can hardly object to more generous aid terms, even though a really bold policy could spend a little more of the Harvard endowment's returns to a more conspicuously anti-elitist effect. If they wanted to do so, they could afford to match the income distribution of the general public.

The AMT discussion is less innocent. This morning, as many others recently, I've groggily heard NPR announcers telling me how an unfixed AMT will ensnare 22-point-something million "middle income" taxpayers. For actual middle-income taxpayers (q.q.v.), it takes very special circumstances to end up with an AMT bill of any size. The typical AMT relievee, in fact, looks quite a bit like me — decent income, couple dependents, relatively large deductions for state and local taxes — and I could not tell you with a straight face that it would cause substantial hardship to pay another grand or two to the Feds.

Middle-income "victims" of the AMT are easier to find than family farmers put out of business by the estate tax, but again the issue is that the moderately-well-heeled are numerous in a big country. There's no doubt that politicians of both parties wouldn't care to annoy tens of millions of taxpayers from high-voting-rate demographics, but by and large the issue is an annoyance rather than an injustice. As it happens, the annoyance could be resolved justly by closing some prominent tax loopholes and modestly increasing rates for high-income taxpayers, but the Republicans who engineered the problem in the first place [****] have decided to circle the wagons around not raising any tax for any reason.

[*] Maybe tooling around Cambridge and Brookline in such vehicles is more of a BU thing. No matter.

[**] The income distribution shifts upwards with age, up to a point, reflecting the progress of typical career paths.

[***] So the answer to questions like "how many people can afford those megabuck lakefront houses and McMansions" is "more than you'd perhaps think," Big Shitpile issues notwithstanding.

[****] That is, the AMT problem was known when the Bush tax "cuts" were pushed through; taking away the cuts for upper-middle-income taxpayers was a means of keeping the official effect on the federal deficit small enough that fiscal conservatives could close their eyes and think of England while voting for it.

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