Rich: How did $250,000 become the magic number?





 

In the debate over how to close the budget deficit, President Obama talks often about raising taxes on“millionaires and billionaires,” but his policy prescription is a bit different. He says that federal income taxes should be increased on families making more than $250,000. That seems to be the threshold. Under $250,000, you’re middle class; over it and you’re wealthy.

Where did this number come from? Is it based on a statistical metric of wealth in America — a true dividing line?

Empirically, these households are surely not middle income. Only 2 percent of households in the nation make more than $250,000, according to the Internal Revenue Service. But some economists and tax reform advocates are questioning whether those households are rich enough to be worthy of the same tax bracket as millionaires.

“The very round nature of it suggests that it’s arbitrary,” said Roberton Williams, a senior fellow at the Tax Policy Center and the deputy assistant director for tax analysis at the Congressional Budget Office from 1998 to 2006. “There’s nothing magical about $250,000 per year. It has no economic basis.”

It does have a political basis.

The dividing line appears to have its genesis in 1993, when President Bill Clinton created a new tax bracket at $250,000 and raised the rate to 39.6 percent. Prior to Mr. Clinton’s new bracket, the highest earners were those defined by making more than $86,500; they paid 31 percent under the first President George Bush.



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