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Why six-figure salaries don??t make you wealthy

Instead of obsessing over who is in the middle class, the nation should turn its attention to improving the lives of every single person, regardless of where each is starting from.

University of Michigan student Jesse Klein made headlines across the Internet on February 19 when her article insisting her parents are ??middle class? despite having a combined annual income of $250,000 was covered by several major media outlets. Virtual sparks flew throughout the blogosphere, Twittersphere, and everywhere in between as debaters on both sides of the issue lined up to defend or denounce her allegedly controversial claim.

Americans who earn something close to the 2013 median household income of $52,000 may find it hard to believe, but destructive tax and economic policies imposed by governments at all levels have significantly reduced the value of earning six-figure salaries in the United States and made incomes once considered to be a sign of wealth more similar to those typically thought of as ??middle class.?

For example, a family of three in Illinois earning the 2013 average household income of $53,000 according to the U.S. Census Bureau, would pay an effective tax rate of 18.47 percent, calculated with minimal deductions, and have an after-tax income of $44,209. The same household in Illinois earning $100,000 per year would pay an effective tax rate close to 23 percent and have an after-tax income of $78,018.

What started as a salary gap of nearly $50,000 quickly closed to a difference of $33,809, and there are numerous other considerations to take into account as well. For instance, if one parent in the household is able to stay at home and care for a child, the savings offset a significant portion of the additional income. According to the National Association of Child Care Resource & Referral Agencies, the average cost of center-based daycare is $11,666 annually. This brings our initial gap of $33,809 down to $22,143.

Other factors also must be considered. A household in Illinois with an income of $53,000 would be eligible for more federal subsidies to help pay for health insurance, increased financial aid for college students??such as Pell grants, and various other tax incentives. Even if we assume these annual savings amount to a modest $5,000, our initial wealth gap has now fallen below $18,000, which few Americans would argue makes the difference between being wealthy and being in the so-called ??middle class.?

Location and the associated cost of living play a major role when thinking about wealth. A household living and working in Chicago, or in many other major U.S. cities for that matter, with an income of $100,000 will pay a higher sales tax, increased gas taxes, and will end up paying a variety of city taxes and fees on businesses passed along to the consumer that Illinoisans living in Chicago??s suburbs or in rural Illinois don??t have to pay. In many metropolitan neighborhoods, housing is also much more expensive.

By the time you calculate all of the relevant costs, it??s far better financially to be a family of three earning $53,000 per year with one parent living and working in the suburbs or in a rural part of the state than it is to be a household of three living in Chicago with two working parents earning a combined income of $100,000.

Even if the cost of childcare is taken out of the equation, the difference between the two households?? wealth is negligible.

In the case of Klein??s family, who makes considerably more than the $100,000 example listed above, an argument can be made that her seemingly controversial assertion is correct. After all, her family does live in Palo Alto, California, where the average rent in 2014 was $2,700 per month and the average home sold for $2.2. million.

Klein??s article does more than spark an interesting conversation about wealth in America; it also shows just how absurd the concept of the ??middle class? really is. The idea that we can compare who is in the middle class and who isn??t based on income is ridiculous. Wealth is very much dependent on the cost of living, and that can radically change depending upon where you live. Further, standards of living are relative. What??s considered ??blue collar? in America would be considered ??rich? in much of the world.

Instead of obsessing over who is in the middle class, whether the middle class is growing or shrinking, and how much income different groups of people are earning, the nation should turn its attention to improving the lives of every single person, regardless of where each is starting from.

Justin Haskins (Jhaskins@heartland.org) is an author, blogger, and the editor of The Heartland Institute, a leading free-market think tank headquartered in Chicago, IL. Follow him @TheNewRevere.

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archive

Why six-figure salaries don’t make you wealthy

University of Michigan student Jesse Klein made headlines across the Internet on February 19 when her article insisting her parents are “middle class” despite having a combined annual income of $250,000 was covered by several major media outlets. Virtual sparks flew throughout the blogosphere, Twittersphere, and everywhere in between as debaters on both sides of the issue lined up to defend or denounce her allegedly controversial claim.

Americans who earn something close to the 2013 median household income of $52,000 may find it hard to believe, but destructive tax and economic policies imposed by governments at all levels have significantly reduced the value of earning six-figure salaries in the United States and made incomes once considered to be a sign of wealth more similar to those typically thought of as “middle class.”

For example, a family of three in Illinois earning the 2013 average household income of $53,000 according to the U.S. Census Bureau, would pay an effective tax rate of 18.47 percent, calculated with minimal deductions, and have an after-tax income of $44,209. The same household in Illinois earning $100,000 per year would pay an effective tax rate close to 23 percent and have an after-tax income of $78,018.

What started as a salary gap of nearly $50,000 quickly closed to a difference of $33,809, and there are numerous other considerations to take into account as well. For instance, if one parent in the household is able to stay at home and care for a child, the savings offset a significant portion of the additional income. According to the National Association of Child Care Resource & Referral Agencies, the average cost of center-based daycare is $11,666 annually. This brings our initial gap of $33,809 down to $22,143.

Other factors also must be considered. A household in Illinois with an income of $53,000 would be eligible for more federal subsidies to help pay for health insurance, increased financial aid for college students—such as Pell grants, and various other tax incentives. Even if we assume these annual savings amount to a modest $5,000, our initial wealth gap has now fallen below $18,000, which few Americans would argue makes the difference between being wealthy and being in the so-called “middle class.”

Location and the associated cost of living play a major role when thinking about wealth. A household living and working in Chicago, or in many other major U.S. cities for that matter, with an income of $100,000 will pay a higher sales tax, increased gas taxes, and will end up paying a variety of city taxes and fees on businesses passed along to the consumer that Illinoisans living in Chicago’s suburbs or in rural Illinois don’t have to pay. In many metropolitan neighborhoods, housing is also much more expensive.

By the time you calculate all of the relevant costs, it’s far better financially to be a family of three earning $53,000 per year with one parent living and working in the suburbs or in a rural part of the state than it is to be a household of three living in Chicago with two working parents earning a combined income of $100,000.

Even if the cost of childcare is taken out of the equation, the difference between the two households’ wealth is negligible.

In the case of Klein’s family, who makes considerably more than the $100,000 example listed above, an argument can be made that her seemingly controversial assertion is correct. After all, her family does live in Palo Alto, California, where the average rent in 2014 was $2,700 per month and the average home sold for $2.2. million.

Klein’s article does more than spark an interesting conversation about wealth in America; it also shows just how absurd the concept of the “middle class” really is. The idea that we can compare who is in the middle class and who isn’t based on income is ridiculous. Wealth is very much dependent on the cost of living, and that can radically change depending upon where you live. Further, standards of living are relative. What’s considered “blue collar” in America would be considered “rich” in much of the world.

Instead of obsessing over who is in the middle class, whether the middle class is growing or shrinking, and how much income different groups of people are earning, the nation should turn its attention to improving the lives of every single person, regardless of where each is starting from.

Justin Haskins (Jhaskins@heartland.org) is an author, blogger, and the editor of The Heartland Institute, a leading free-market think tank headquartered in Chicago, IL. Follow him @TheNewRevere.

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TRENDING NOW:

Jessica Yaniv, Canada transgender waxing case Jessica Yaniv, Canada transgender waxing case

State-Enforced Sexual Assault.

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