We have several economic classes of people in the United States from the poor to the ultra-rich. The left claims we can get the rich to pay their fair share through increased taxes to help the poor. The right claims that higher taxes will negatively impact the economy. Frankly, I’m tired of wondering which tactic will benefit all Americans the most and so I put together a simple model.
The U.S. Census in 2022 breaks down financial classes into quintiles. A quintile is 1/5th of the population. They have made a further classification of the top 5% and the bottom 5%. I have created seven economic classes for these households: 1) Bottom 5% (Indigent); 2) Bottom 5% to 20% (Poor); 3) Middle 20% to 40% (Lower Middle Class); 4) 40% to 60% (Middle Class); 5) 60% to 80% (Upper Middle Class); 6) 80% to 95% (Upper Class); and 7) Top 5% (Wealthy).
Here is a list of annual household earnings per year by economic class:
Class | Annual Income |
Indigent | $0 |
Poor | $20,000 |
Lower Middle Class | $45,000 |
Middle Class | $75,000 |
Upper Middle Class | $120,000 |
Upper Class | $200,000 |
Wealthy | $500,000 |
These amounts are rounded to easy numbers are are taken from the 2022 U.S. Census.
Income Taxation
Let’s first consider taxation. Two types of taxes are levied on income: 1) Income taxes; and 2) Added payroll taxes (social security, medicare, etc.). Higher-income earners take advantage of tax breaks and other tax credits that are not used by lower-income earners. Here is the taxation picture for each income class.
Class | Income Tax | Payrol Tax | Tax Breaks | Total |
Indigent | 0% | 0% | 0% | 0% |
Poor | 0% | 15% | 0% | 15% |
Low Income | 10% | 15% | 0% | 25% |
Middle Class | 20% | 15% | 0% | 35% |
Upper Middle | 25% | 13% | -5% | 33% |
Upper Class | 30% | 12% | -8% | 34% |
Wealthy | 35% | 3% | -11% | 27% |
Indigent people pay no income taxes because they have little to no income. The poor pay no income taxes, but they pay the full amount of other payroll taxes. The middle working class will pay higher rates of income and the full rate of payroll taxes. As income earners earn more money, they pay a higher income tax rate but also gain tax breaks given to them through the tax code. These tax breaks are often given by the U.S. Congress to favor certain kinds of spending. In addition, wealthy individuals either gain income through capital investments or exceed the limitations for wage withholding taxes and thus pay much lower payroll tax rates than most people.
Given the current progressive tax code combined with the nature of payroll taxes, people in the middle and upper classes pay the highest tax rates of all income earners.
Other Government Taxes & Fees
Income taxes are not the extent of taxation levied by the government to earn revenue from its citizens. The three added taxes on general income and wealth are: 1) Property Tax; 2) Government Fees; and 3) Tax Credits.
Class | Property Tax | Govt Fees | Tax Credits | Total |
Indigent | -$525 | -$2,000 | $30,000 | $27,475 |
Poor | -$750 | -$3,000 | $7,500 | $3,750 |
Lower Class | -$1,125 | -$5,000 | $3,000 | -$3,125 |
Middle Class | -$3,750 | -$8,000 | $0 | -$11,750 |
Upper Middle | -$5,625 | -$10,000 | $0 | -$15,625 |
Upper Class | -$7,500 | -$11,000 | $0 | -$18,500 |
Wealthy | -$15,000 | -$12,000 | $0 | -$27,000 |
Poor to low-income people do not own homes and often rent apartments. They still pay property taxes indirectly through their rent. Indigent people earn disability income, other social security, unemployment, and other government benefits to survive. Other tax credits like earned-income credits are available to households with lower income levels. Other benefits given to low-income earners include food stamps, low-income housing subsidies, utility payments, and other subsistence programs. The middle to wealthy economic classes pay higher property taxes because they often own valuable property. Government fees include tolls, license registration fees for vehicles, and recreational vehicles, park passes, motor vehicles licenses, and other fee-for-government services.
Spending, Investment, & Debt
Each economic class spends its money in different ways. Poor people have poor credit ratings and they are not given loans by banks or credit card companies. They must match their living costs to whatever income they get. As people earn more money, they spend more money than they earn as they are given credit for car loans and credit card debt limits. High-income earners avoid debt and invest excess earnings in stocks, bonds, or other ventures to earn added interest income. Whatever money is spent by any economic class results in one more tax… sales tax.
Class | Excess | Lifestyle | Sales Tax | Savings | Interest |
Indigent | 0% | $25,277 | -$2,198 | $0 | $0 |
Poor | 5% | $20,045 | -$1,743 | -$1,038 | -$104 |
Low Income | 10% | $30,993 | -$2,695 | -$3,125 | -$313 |
Middle Class | 5% | $35,742 | -$3,108 | -1,850 | -$185 |
Upper Middle | 0% | $59,041 | -$5,135 | $0 | $0 |
Upper Class | -5% | $99,199 | -$8,626 | $5,675 | $568 |
Wealthy | -25% | $233,220 | -$20,280 | $84,500 | $8,450 |
The excess values have been estimated. If the excess lifestyle is 0%, that means that this economic class is spending exactly what it earns. If the excess value is greater than 0%, then that economic class is spending more money than they earn. This excess spending results in debt. If the excess value is less than 0%, then this economic class is spending less than what it earns. The amount left over in this case is invested.
This net investment is critical in growing a capitalistic economy.
Who is Paying for the Government?
Political conversations tend to devolve into bickering between the left and the right about who is paying for government. The left complains that large corporations are making record profits and paying little in taxes. The right retorts that the wealthy pay all of the taxes while the poor game the system for handouts. Let’s see who is paying the most for the cost of the U.S. government.
Class | $/ Household | Total | % |
Indigent | -$25,277 | -$164.3 B | -2.7% |
Poor | $993 | $19.4 B | 0.3% |
Low Income | $17,070 | $443.3 B | 7.4% |
Middle Class | $41,108 | $1,068.8 B | 17.8% |
Upper Middle | $60,959 | $1,584.9 B | 26.4% |
Upper Class | $95,126 | $1855.0 B | 31.0% |
Wealthy | $182,280 | $1,184.8 B | 19.8% |
It must be noted that my categories are not equal percentages of households. The indigent and wealthy are 5% of households, and the Poor and Upper Class categories are 15% of households. To look at the contribution to government based on equal quintiles, we can combine the two extreme categories into one. This means that the indigent and poor categories will receive $2.4% from the total government while the Upper Class and Wealthy will pay for 50.8% of the cost of government.
This table illustrates two key findings: 1) the rich are paying much more than their fair share, and 2) the poor are not taking a substantial amount from the total amount of government money.
The total amount of government revenue in this example is $6.0 trillion. The actual spending by the U.S. government in 2022 was $6.5 trillion.
Benefits of Government Services
Contrary to popular opinion, the government doesn’t only take our money, it also provides beneficial services. Based on simple math, and our current financial model, the government provides $42,870 per household per year in beneficial services. These services are public roads, a national defense, a police force, firefighters, forest service, criminal justice, public schools, airports, sea ports, border security, and many other services. Some citizens take more advantage of these services than others. For example, lower-income and middle-class citizens are more likely to send their children to public schools while wealthier individuals will opt to pay for private schools.
Class | Lifestyle | Debt | Govt. Services | Total | % of Income |
Indigent | $25,277 | $0 | $34,296 | $59,573 | ∞ |
Poor | $20,045 | -$104 | $40,727 | $60,668 | 303% |
Low Income | $30,993 | -$313 | $42,870 | $73,557 | 163% |
Middle Class | $35,742 | -$185 | $40,727 | $76,284 | 102% |
Upper Middle | $59,041 | $0 | $38,582 | $97,624 | 81% |
Upper Class | $99,199 | $568 | $36,440 | $136,206 | 68% |
Wealthy | $233,220 | $8,450 | $36,440 | $278,110 | 56% |
After all of the tax payments are taken in and the income is redistributed, the wealthy are left with 56% of their initial gross income, and the poor benefit from government services to the extent those services are being delivered efficiently, and are relevant to these groups of people. An argument could be made that the wealthy gain more from public services that create a greater infrastructure for their business ventures.
The middle class tends to do no better or worse than they started. Again, assuming that they can benefit from all government services being offered. The upper middle class, upper class, and wealthy experience a reduction in the benefits they earn in income in our progressive taxation system.
Government Debt & Deficits
The way that this current model is set up is assuming that the government spends the same amount as it takes in with tax revenues. Unfortunately, this is not how our current government operates. In 2022, the U.S. government spent $1.385 trillion more than it earned in tax revenue. The total debt of the U.S. government after 2022 is $33.0 trillion. Deficit spending will increase the government benefit per household. Instead of $42,870 per household, this benefit should be greater when the government spends in excess. Unfortunately, this excess is offset by the debt service required to pay for the $33.0 trillion of debt. The cost of interest on the U.S. government debt is expected to be $660 billion in 2023. This interest cost will reduce the benefit of government services.
If the U.S. government decides to reduce its debt, citizens in this payback generation will experience lower government services. However, future generations will benefit from reduced interest costs.
Inflation & Government Spending
Given the fact that people seem to be gaining a net benefit from excess government spending, it may be necessary to discuss the downside of excessive government spending. When the government spends money that it has not received from taxpayers, it increases the supply of money. This increase in the money supply creates more money than goods and services. This imbalance results in inflation. Inflation is the increase in the prices of goods and services. Inflation increases the value of assets and the profitability of businesses. Both of these factors benefit the wealthy and harm the middle and lower-income classes.
This is the opposite of what most class warfare combatants think. Many believe that a larger government benefits the poor. A large and inefficient government harms the poor and helps the rich.
The Welfare Trap
I have called the no-income class of people “indigent”. Indigent means that these folks cannot earn a living for some reason. They are either old, disabled, or lazy. I guess that few of these folks are lazy, but I cannot prove that. The next level up on the economic class ladder is the poor. The working poor have a job that pays around $10 per hour and work roughly 2,000 hours per year. The lifestyle of the working poor is less than the lifestyle of the indigent ($20,045 vs $25,277). If you can figure out how to gain government benefits and prove that you are indigent, you can avoid work and live a better lifestyle than if you worked 40 hours a week for low pay. This is known as the “welfare trap”.
When you're stuck in the welfare trap, it is hard to justify getting a low-paying job that results in less income than if you lived off of government benefits. If you have children that need your attention and you can avoid paying for childcare, this is an added incentive to consider using government benefits instead of earning a living for your household.
Capitalism vs Socialism
The U.S. has a combination of socialistic and capitalistic economies. The government services and the welfare associated with our economy are the socialistic portions of the U.S. economy. The capitalistic portion of the U.S. economy is the savings and investments made by the wealthy and upper-class income earners. Their income is gained by the profitability of companies. Likewise, their savings are invested in the growth of private-sector companies. These companies provide jobs for a large number of people in the U.S. economy and the economies of other countries.
There is a tendency of left-leaning politicians to lambast the rich and create envy among other classes of people. This is known as class warfare. A byproduct of a capitalistic society is that there will be people who get rich from profitable investments. Likewise, investors will lose from unprofitable investments. The hope of winning with profitable investments ensures that investors will continue to invest in U.S. companies.
Indeed, the rich will become richer, and the poor will become poorer in a capitalistic economy as long as the rich are making wise investments in profitable companies. The poor will become poorer if they increase their debt to live above their current income levels.
The Economic Class Ladder
The discussion thus far has pretended that economic class is a fixed category. If you are poor today, you’ll always be poor. After all, the poor get poorer. Right? This is where the idea of class warfare can be so destructive. If you believe that you will be stuck in a certain income class, it is easy to give up or envy those in higher income classes. This thought of being “stuck” in an income class is a lie.
You can improve your income class through several mechanisms in a country like the United States of America. This truly is the land of opportunity. Here are some common factors that lead to economic prosperity and climbing the economic class ladder:
Starting a family after you’ve established a high-paying job.
A two-parent family with two income earners, or a high-income earner and a stay-at-home parent.
Pursuing relevant higher education that leads to a needed skill in the free market.
Strong work ethic.
Keeping your expenses at or under your current level of income to avoid increasing debt.
Borrowing to purchase or invest in income-earning opportunities.
Not borrowing to purchase or invest in depreciating assets.
Starting and growing a profitable business that provides a needed product or service.
All of these actions can be completed regardless of your ethnicity, gender, or what level of wealth was achieved by your parents.
The Undeserved Rich or Poor
In our economy there exist those who gain wealth without merit. There are also the poor who have lost their wealth undeservedly.
We all know the rich trust fund kid who inherited their parent’s wealth. Likewise, family members either marry or gain wealth from a rich family member undeservedly.
Like the undeserved rich, there are the undeserved poor. The middle class breadwinner who invested in a ponzi scheme and lost their life savings. The 30-year old professional who is stricken with life-ending cancer leaving their family destitute. The entrepreneur who works tirelessly only to see their life savings dwindle in a failing business.
Both deserve your pity. The trust fund kid who is desperately seeking a life of purpose, and may not find it because of their overabundance of money. The family who did everything right and needs your help to get back on the economic class ladder.
Who is the Class War Winner?
I’ve talked a lot about money. If you’re not a money person, you may not have made it this far. Money is NOT the reason that we live our lives. Money is simply a currency. In the end, we all leave this earth with no money.
Money allows you to purchase things that you want, do things that cost money, or give to charities that are close to your heart.
That said, money is a result of investing your life fruitfully. We must genuinely care about the indigent in our society. However, we must not encourage people to waste their lives simply trying to survive. The idea of climbing the economic class ladder is not simply an effort to gain more wealth. Wealth is a side benefit of being fiscally responsible. However, the primary growth that happens when you climb the economic class ladder is becoming productive members of society. You are learning more. You are honing your God-given gifts. You are deliberately living a life of purpose and meaning. You may grow a business that is making the world a better place. You could be raising children who will become great and loving people.
The winner of the class war is the person who doesn’t see economic classes as a war at all. The winner in our economy is the person who pursues their life’s mission and purpose and eagerly climbs the economic class ladder. This individual will not envy the poor who are gaining a pittance from the government, and won’t envy the rich.
About the Author
Jeff Schuster is an accomplished businessman, engineer, and writer. Three of Jeff's books are attempts at helping people understand and solve political problems that are being made worse by political partisanship. His first book, Trial & Error, is a collection of 14 short stories. ReEngineering Education is a story of innovative education reform in the midst of political corruption. Engineering Unity is Jeff's most recent book published in August 2023 addressing political polarization on wedge issues that politicians use to divide us. You are welcome to join our private Facebook group called Reengineering Politics where we discuss politically polarizing topics in a civil manner.
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