Pelosi Says $350,000 is Middle Class

July 22, 2009

From ABC News:

Ensuring that the middle class doesn’t have to pay the $1 trillion-plus price for overhauling the nation’s health care system will mean trimmiing billions of dollars in “fat” out of the current health care system, Speaker Nancy Pelosi, D-Calif., told USA TODAY’s editorial board Tuesday.

“I wanted to remove all doubt that we were not touching the middle class on this,” Pelosi said, explaining why she has advocated in recent days for a higher income threshold for taxes proposed in the House version of the health care bill. “When you go there you get less money because there are fewer people so you have to adjust the fee, but you can’t adjust it endlessly. It has to be responsible.”

Lawmakers in Congress are debating ways to pay for Obama’s pledge to provide health insurance to the 50 million people in the country who do not have it.

House Democrats are considering a $544 billion tax on families that earn more than $350,000 a year, but Pelosi wants to raise the income threshold to $1 million for joint filers.

Pelosi also said she believes there is more savings to be found in the current system that could be used to pay for expanding the system.

According to Madam Speaker, I guess a household in the top 1-2 percent of the nation is now middle class. Considering that in 2007, only 15 percent of households in Manhattan made more than $200,000, I personally wouldn’t even say that a cash income of $200,000 is middle class in the U.S., let alone $350,000.

By the way, under a static score, if Congress wants to raise the same amount of revenue for a surtax by only taxing income beyond $1 million ($800,000 for singles), then the required top surtax rate would likely exceed 6 percent (compared to the current 5.4 percent).

That being said, just because the taxes are levied on tax returns making over a high threshold does not mean that others are correct to say that the surtax doesn’t “affect” others. For simplicity, distributional tables typically assume that the burden of the federal individual income tax is equal to the legal burden. However, given the amount of S-Corp and other businesses activity that are at the high-level and given that it is partially a tax on capital, whatever assumption you make about the long-run incidence of a tax on return to capital, others outside the top will be “affected.”

For example, if we reduce the rate of return for S-Corps, we should expect capital investment to leave S-Corp dominated industries (or S-Corps to restructure but still facing a higher burden than otherwise) and thereby increase the supply of capital in other industries. But over the long-term, the rates of return in all industries would equalize, and the return to all owners of capital would thereby be reduced by the S-Corp tax increase. (This is even assuming that capital stays within the borders of the U.S., and thereby labor does not face reduced wages.) Therefore, all owners of capital (which include people beyond just the top 1-2 percent that would be hit by the proposed surtax) would be affected by the surtax.

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