Are you middle class enough to get the tax breaks President Trump and House Speaker Paul Ryan are promising?
The short answer is, it depends — and on a lot more than how much you earn each year.
Where you live makes an enormous difference, since a dollar does not go as far in New York as it does in Alabama. Likewise, whether you’re single or have children matters. Finally, what tax breaks you take now will go a long way toward determining whether the overhaul being planned leaves you with a tax cut, breaking even, or paying more.
Trump has been pretty clear, however, about who the prime beneficiaries of the tax overhaul should be.
“By eliminating tax breaks and special interest loopholes that primarily benefit the wealthy, our framework ensures that the benefits of tax reform go to the middle class, not to the highest earners,” Trump said Oct. 11 in Harrisburg, Pa.
A political non-profit that supports Ryan, R-Wis., has even launched what it calls the Middle Class Growth Initiative to fund campaign-style ads to build support for the tax plan in key districts.
But when the chairman of the president’s Council of Economic Advisers, Kevin Hassett, was asked by reporters to define the middle class that Trump’s tax bill would target, he said that it was up to tax-writing committees in Congress, which will set the income levels for the proposed tax rates of 12%, 25% and 35%.
And House Ways and Means Committee Chairman Kevin Brady, R-Texas, was equally vague when asked last week to define a typical middle-class household.
“I can’t, because it really depends on the cost of living,” Brady said. “If you live in states where state and local governments just hammer people with high taxes and drive up the cost of housing, and food and other elements, middle class is much different there, or the standard of living, than it is perhaps in my part of Texas.”
It appears there is no fixed definition of middle class.
Grover Norquist, president of Americans for Tax Reform, said the phrase grew out of Europe, where there were nobles, peasants, and people in between. In American politics, it’s used by the two political parties to say different things, he said.
“If you look in the mirror and say ‘I earned what I have,’ that’s the American definition of middle class,” Norquist said.
A Gallup poll in June found that 62 percent of Americans identify themselves as middle or upper middle class, while only 2 percent think they are upper class.
The Census Bureau releases data every year about household income, and economists use it to break the population into groups to try to analyze the middle.
Using 2014 data, the Pew Research Center created an online calculator last year that lets someone enter where they live, and what their income and household size are to see whether they’re in the upper, middle or lower class.
The middle is defined as anyone making between two thirds of the median and double the median. Averaged nationally, that ranges from about $42,000 to $126,000 for a family of three, said Rakesh Kochhar, Pew’s associate research director.
“It would be less than that for smaller households, and more than that for bigger households,” Kochhar said. “If you’re living in New York, one of the most expensive areas in the country, your cost of living could be 30% to 40% higher than for people living parts of Missouri or somewhere else in the Midwest.”
For example, he said the 2014 middle-income range for a family of three in Mobile, Ala., went from $37,000 to $110,000, while a family in New York City needed $51,000 to $153,000 to have the same standard of living. Those figures for 2016, the most recent year available, would be about 5% to 10% higher.
And that’s where the challenge of delivering tax relief comes in, since tax rates are the same nationally, regardless of the cost of living. If a tax rate is set to provide a tax cut to those making up to $125,000, some people who are just as middle class but live in a more expensive part of the country will lose out.
Brady said the tax plan would “lower tax rates at every level so Americans can keep more of what they earn regardless of where they live.” The current bottom tax rate is 10%, but Brady said people in that bracket would see their taxes eliminated by an increase in the standard deduction.
The biggest group of taxpayers, about 30% of all filers, are currently in the 15% bracket, and they would see their rate drop to 12%. The Trump framework also calls for increasing the child tax credit and the standard deduction, but it would eliminate exemptions, which are currently worth about $4,000 for a taxpayer and spouse.
But whether taxpayers actually come out ahead depends on whether deductions they use now are continued, cut back, or eliminated.
For example, the House bill will likely eliminate the deduction for state income and sales taxes, and could scale back the deduction for property taxes, possibly with an income limit or an exclusion for vacation homes. In states such as New York, New Jersey, Illinois and California, the loss of that deduction could force people with middle-class incomes to pay higher taxes.
The House also is reportedly looking at drastically lowering, to $2,400 from the current $18,000 for someone younger than 50, the amount of income that can be deposited in a 401(k) retirement plan before income tax is calculated. Again, that could result in more tax being withheld from a worker’s paycheck, even with lower tax rates, depending on how much he or she saves now.
What’s the bottom line?
The purest definition of a middle-class household encompasses those earning between $48,000 and $86,000, including wages and other income, according to the Tax Policy Center’s (TPC) analysis of the Republican tax proposal. Under the plan, those households would save an average $660 a year, or 1.2% of after-tax income, based on TPC preliminary analysis of the the blueprint. Only 13.5% of those Americans would pay more taxes under the changes.
A broader definition of the middle class includes households with income of $86,000 to $149,000, and that group would save an average $1,110 annually, or a similar 1.2% of income, the TPC estimates.
“This would be an aggregate tax cut for the middle class,” says Alan Viard, resident scholar at the right-leaning American Enterprise Institute. “Republicans are determined to have that show up in the numbers.”
Hunter Blair, budget analyst for the left-leaning Economic Policy Institute, agrees — to some extent.
“This is a slight tax cut on average for most people,” he says. But, he adds, “It’s tilted to the top 1%” of income earners.”
The top one-fifth of households would save an average 3.3% of their after-tax income, and the top 1% would save an average 8.5%, or $129,000.
Al Zdenek, CEO of Traust Sollus Wealth Management, says the 50 million Americans with 401(k) plans, including many middle-class households, probably won’t come out ahead if contributions to the retirement plans are scaled back.
“For someone living paycheck to paycheck, an extra $600 is nice,” he says. “But for some people with 401(k)s, I’m not sure that $600 is going to be there for them.”