Magazine | May 2, 2011, Issue

Blame the Not-Too-Rich

Why Obama courts the upper middle class

It is widely understood that the American middle class has fuzzy boundaries. Many relatively poor and relatively rich people identify as middle-class. In an ambitious 2008 survey, the Pew Research Center found that an extraordinary 53 percent of Americans described themselves as middle class. Yet it’s also clear that within this diverse, sprawling middle class, there are some households that are better off than others. College-educated households, for example, have largely been spared the scarring effects of unemployment and underwater mortgages. And upper-middle-income households, a group that overlaps fairly closely with the college-educated middle class, have seen fairly healthy improvements in their standard of living in recent years. This is a group that has a great deal, and a great deal to lose.

In recent years, a number of progressive historians and political scientists have been making the case that American political life is dominated by the ultra-rich. The recent obsession with the billionaire Koch brothers is only the most vivid example of this phenomenon. In Winner-Take-All Politics, the political scientists Jacob Hacker and Paul Pierson link the evolution of the U.S. economy from the late 1970s through the present to the rising political influence of the top 1 percent of the income distribution. In their view, key members of this group have actively sought to deregulate the economy, to undermine the power of organized labor, and to advance regressive tax policies. The end result, they argue, has been a policy environment hostile to the interests of the middle class.

Naturally, conservatives will object to Hacker and Pierson’s take on the decades-long effort to free the American economy, which we see as crucial to American prosperity. In the absence of deregulation, the declining influence of organized labor, and a tax policy designed to spur work, conservatives generally believe that the country as a whole, including the working and middle classes, would have fared far worse in a more competitive global economy. Indeed, if there is a social group that has been a barrier to good public policy, one can make a strong case that it isn’t the ultra-rich but the upper middle class, a group we’ll loosely define as households earning between $100,000 and $250,000.

There is no denying that Americans in the top 0.01 percent of the income distribution have more potential for political influence than those earning $150,000. This influence is channeled through campaign donations and also through charitable giving, particularly to nonprofits devoted to shaping the ideological environment. Just as the Koch brothers have donated to various libertarian causes, their opposite numbers at the Ford Foundation, Atlantic Philanthropies, the Soros Foundations, elite research universities, and countless other lesser-known organizations have devoted themselves to providing intellectual support for the expansion of the welfare state. It is very difficult to tease out which side has had the most cumulative influence over time.

#page#What we can say with confidence is that in any given election the top 0.01 percent has less collective political weight than the upper middle class, simply by virtue of the fact that there are more voters in the upper middle class. These voters tend to be more active as volunteers and as small donors than other Americans, and they are heavily concentrated in professions — media, the upper echelons of the public sector, higher education — that further magnify their influence. In Red State, Blue State, Rich State, Poor State, Columbia University statistician Andrew Gelman and his colleagues found that Republicans in heavily Republican states tend to win elections with a coalition of middle-class and upper-income voters, while Democrats in heavily Democratic states tend to win elections with a coalition of voters drawn from all income groups. In effect, upper-middle-class voters are always represented in the winning coalitions, regardless of region.

Voters in households earning more than $100,000 constituted 26 percent of the 2008 electorate. By any standard, President Obama performed very well with this bloc in 2008. In the 2010 House elections, in contrast, voters in over-$200,000 households chose Republicans over Democrats by a margin of 64 to 34 percent, while $100,000 to $200,000 households favored Republicans by a more modest 56 to 43 percent margin. The president’s political advisers are keenly aware of the fact that Democrats need to improve their performance with these voters or face defeat in 2012. This helps explain the profound irrationality of the Obama administration’s approach to key public-policy questions.

One of the most fascinating aspects of the Obama era has been the elevation of a $250,000 annual household income to an almost mythical status. The magic number was first introduced by Hillary Clinton in 2008, when she defined $250,000 as the upper bound of the middle class. That same year, Barack Obama pledged to cut taxes on all households earning less and to raise them, ever so slightly, on those earning more. Given that 49 out of 50 households earned less than $250,000 that year, there is no question that the cutoff number chosen was politically shrewd. As the Democratic nominee promised a panoply of new social programs, ranging from a health-care entitlement to an expensive effort to foster a green economy, he also made it clear that only one out of 50 households would pay for all that new spending and for reducing the deficits that had widened during the Bush years.

Over-$250,000 households were expected to earn 24.1 percent of income in 2009 and to pay 43.6 percent of personal federal income taxes, a number that does not include payroll taxes. Because over-$250,000 households tend to be concentrated in high-tax state and local jurisdictions, this figure tends to understate their total tax burden. In an essay titled “Desperately Seeking Revenue,” Rosanne Altshuler, Katherine Lim, and Roberton Williams of the Tax Policy Center found that achieving a budget deficit of 3 percent of GDP by 2020 through tax increases on over-$250,000s would require doubling their rates, kicking the top rate to 76.8 percent. Suffice it to say, marginal tax rates at these levels would have a powerfully negative impact on work incentives. It’s hard not to conclude that President Obama is aware of how economically damaging it would be to balance the budget through tax increases on over-$250,000s. A far less economically damaging strategy would involve curbing tax expenditures for all households, a policy Rep. Paul Ryan has endorsed. But that would cost the upper middle class, and so the president has stayed true to his campaign strategy. 

#page#After the debut of Ryan’s Path to Prosperity, a proposal designed to keep federal spending in line with the current tax burden, the White House released a deficit-fighting plan of its own, with a heavy emphasis on tax increases. Among other things, the president calls for lifting the cap on the amount of income subject to Social Security payroll taxes and curbing tax expenditures such as the mortgage-interest deduction for households earning more than — you guessed it — $250,000. Note, however, that the mortgage-interest deduction, which will cost $637 billion over the next five years, overwhelmingly benefits affluent households at a staggering cost to the Treasury. What the president has really proposed is to preserve this tax break as a gift for households earning between $100,000 and $250,000, since under-$100,000 households are far less likely to itemize their taxes.

As Matthew Yglesias of the left-leaning Center for American Progress has argued, Obama’s strategy on taxes has a serious downside for the progressive cause. “A platform of no tax increases for the bottom 95 percent can win elections, but it reinforces rather than debunks the right’s fundamental view of the tax question — that public services aren’t worth paying for — and merely suggests that the correct answer is to get someone else to pay for them.” Rather than persuade voters to embrace a grand bargain of higher taxes for more public services, the Obama campaign promised a more appealing bargain of more public services at no cost. This was also the central premise of the president’s health-care-reform push, when the White House tried to convince the public that painless Medicare cuts and unobtrusive tax increases on the rich would generate enough revenue to pay for an enormous new entitlement program.

One could argue that the failure of Democratic voters to accept the need for higher taxes reflects pervasive political immaturity. But that’s not quite fair. In 2008, the median household income was $52,029. This number masks the fact that there is a rising number of single-person households, but it does give a crude indication of how a large number of American households are faring. During the 2008 election, 37 percent of voters lived in households earning less than the median. An additional 36 percent lived in households earning between $50,000 and $100,000. It is easy to accept the argument that these voters, many of them young and upwardly mobile but buffeted by rapid economic change, should be insulated from tax increases. These voters aren’t the problem.

But if one believes, as the president emphatically believes, that we need to dramatically expand the scope of government, it makes far less sense to argue that households earning between $100,000 and $250,000 should be completely exempt from tax increases. Very bluntly, President Obama and his congressional allies aren’t protecting these upper-middle-class households out of a deep commitment to social justice. Instead, they’re protecting them because this is a class with outsize political power and interests that are very much in tension with those of the American economy as a whole. The end result could be that the United States will end up with tax policies that seriously undermine our growth potential.

– Mr. Salam is a policy adviser at Economics 21.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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