Middle Class Bad, Take 2

Re: my previous post on the topic, see this, this, and this.

I'm too lazy to make my own chart, but imagine what the dollars of output versus take-home dollars graph must look like. You need to count all the taxes the employer pays per employee as well as those taxes the employee pays. Now perhaps you can begin to understand why I think that the very existence of a middle class as a stable entity might be the production of our tax system and monetary policy. Stupid advice like "buy the most house you can afford" and people's need to own shiny new cars don't help either.

Now off to cut my expenses more so I can get a job I don't have to work as hard at.

Update: the third link was the same as the second link due to a brain-o on my part. Fixed. Thanks to Brandon for pointing that out.

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Oh. I have been making the

Oh. I have been making the same mistake in my use of the term "regressive." However, I still think most people assume marginal rates never go down at higher income levels in a progressive system. But you're right about the actual definition of "progressive" versus "regressive." Even a flat tax is progressive as long as you only tax income above a certain amount.

IMHO class has nothing to do with income distribution, but about mobility. After the revolution :grin: the middle income levels might be made up entirely of people either rapidly on their way up or rapidly on their way down. Even if income is still distributed as a bell curve, I would hesitate to call the group in the middle a "middle class." People at the bottom would tend to stay at the bottom just because of the way they would have had to get there, and likewise once people get on the ladder they would tend not to fall off or get sidetracked. This situation would be improved by the fact that firms would (IMHO) tend to be smaller and non-hierarchical, resulting in greater individual *useful* productivity.

Actually the marginal rate

Actually the marginal rate *is* what matters, because choices about whether and how much to work harder (or less hard) are made on the margin. For me, a potential 10k raise would only net me about $5500 a year, whereas the amount less that I could work and get no raise is worth quite a bit more to me than $5500. Hence I will probably not get promoted and I'll be happy about it.

Two of those links go to the

Two of those links go to the same post. And it's wrong no matter which link you take to get there. What the chart at MR shows is marginal tax rates, not effective tax rates (that chart's here).

Yes, those in the upper middle class do pay slightly higher marginal rates on a very small portion of their incomes due to the phasing out of certain deductions. But because of the very low marginal rates they pay up until that point, their effective tax rates are still lower than those of people making several hundred thousand per year.

Also, this chart assumes all income is wage income. Dividends and long-term capital gains are taxed differently (and not necessarily at a lower rate, after you factor in corporate income taxes).

Actually, the post isn't completely wrong. The upper-middle class does get screwed by taxes. Just not as much as the upper class does.

Oh. Actually, I was

Oh. Actually, I was responding primarily to the claim at Half Sigma that the tax system is regressive.

I'm still not sure I understand your argument completely. What's the alternative to having a middle class? What do you think the wealth distribution will look like come the revolution?

So...are you saying that

So...are you saying that people in the middle class tend to top out in terms of earning potential early on or midway through their careers, rather than moving continuously upward?

To the extent to which this is true, I don't think this is necessarily a product of illiberal policies. Part of it is just that many people have neither the talent or dedication necessary to earn very high salaries, nor the discipline necessary to save enough to have much investment income. Those who have one or the other escape the middle class, and those who have neither don't.

I'll grant that inflation creates disincentives to save, but the Chinese, whose currency has been pegged to ours for many years, face the same disincentives yet have a truly remarkable savings rate. And most people seem to believe that the stock market will beat inflation handily (with the exception of Democrats, who believe it when managing their own money but not when talking about Social Security reform), so it shouldn't create that much of a disincentive. I worry about it, but it doesn't stop me from saving.

Social Security may be a part of the problem. Many people blindly assume that they don't need to prepare for retirement because of Social Security.

I do think that high marginal tax rates (by the way, a 45% marginal rate is what you get for living in California) tend to slow down the speed at which people in the middle class move upwards, but I don't think they stop them completely.

Finally, I don't think there's any lack of mobility today. If you go to college, major in something useful, get a good job, put off having kids until you have some money saved up, save diligently, and invest wisely, you'll be a millionaire someday. It's not brain surgery (being able to do brain surgery does help, though).

I would define the middle

I would define the middle class as people who earn enough money that governments can track them down to collect, but who lack the means of hiring high-priced tax accountants and lawyers to protect them. There is also a forced conformity in this group creating a boring mediocrity. If you do not meet these criteria, you must either move up or down on the socioeconimic scale. The middle class all live in the same general type of housing, hold "regular"jobs, subscribe to essentially the same legal and religious precepts or face sensure. The upper and lower classes are more free, because the lower classes just don't give a damn, and the upper classes enjoy the luxury of being expected to do whatever they please, because they have the money and power to extricate themselves from whatever difficulties they get themselves into. This has always been the prerogrative of the aristocracy in all times and places. It is no less true today of the vieux riches, the nouveau riches, and the big time white collar criminals.