Not Just Rich, Tennessee Rich

People tend to derive their idea of "normal" from the things they see around them. Hence, you frequently see journalists suggesting that an annual salary of $200,000 to $250,000 is solidly middle class. To them, it is. They largely live in places like New York and Washington, which are rich by national standards, and their circle of friends is richer still. And in the New York and Washington markets, a salary of $200,000 really doesn't go all that far. But even in Fairfax County in the Washington suburbs, one of the richest counties in the country, $250,000 is twice the median household income.

As Felix notes, the "quarter mil isn't rich" line gets really hard to stomach when you're talking about Tennesseans. He finds a Journal profile of a Tennessee couple that takes home $260,000 a year and has $6,700 a month in disposable, after tax income, yet which still considers itself struggling to make ends meet. And maybe they do feel that way! But they earn six times the median household income for the state of Tennessee, which is also a place where a dollar goes a long way. It seems as though a lot of families equate "rich" with "free from budget constraints," but just because you can't buy a yacht on a whim doesn't mean you don't out-earn the vast majority of American homes.

And as Matt Yglesias notes, the notion that an increase in marginal tax rates for the highest bracket is going to heavily burden families earning in the neighborhood of $250,000 is also silly. Still, Lane Kenworthy has a point in saying that erasing the long-run budget shortfall while spending on major priorities like a reformed health insurance system, is going to require new revenue sources; at some point the Laffer curve will actually kick in for the highest brackets. He writes:

Moderate or high levels of tax revenue can't come solely from higher rates or new taxes on the rich; the math simply doesn't work. To significantly increase spending on transfers and/or services, President Obama and/or his successors will need to increase taxes on the middle class. One way to do this would be via a federal consumption tax, such as a value-added tax (VAT).

Tyler Cowen adds:

I would like to see a betting market in when this is first mentioned by the Obama administration. I don't think it will be very soon, but it will be within eight years' time.

I'd also suggest that there are plenty of good opportunities out there to improve social welfare while raising revenue by taxing negative externalities -- congestion, pollution, and carbon emissions, for example. The key to all of this is that a tax system can become less progressive without excessively hurting the poor if the quality of public services provided is improved. The European model isn't necessarily to achieve reduced inequality via taxation, but by providing services like health care, quality education, generous unemployment insurance, and pensions. Which isn't to say that America needs to become like Sweden. It is to say that we needn't rely on the tax system alone to address recent growth in income inequality, and that Americans as a whole might feel better about paying taxes if they got a little more for their money.

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