Guest Post: The Three-And-A-Half Class Society

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

The Three-And-A-Half Class Society

The top 20% are supporting the entire Status Quo. This is an unstable arrangement.

The U.S. has a three-and-a-half class society. According to demographer Joel Kotkin, California has become a two-and-a-half-class society, with a thin slice of "entrenched incumbents" on top (the "half class"), a dwindling middle class of public employees and private-sector professionals/technocrats, and an expanding permanent welfare class: about 40% of Californians don't pay any income tax and a quarter are on the Federal Medicaid program.

I would break it down somewhat differently, into a three-and-a-half class society: the "entrenched incumbents" on top (the "half class"), the high-earners who pay most of the taxes (the first class), the working poor who pay Social Security payroll taxes and sales taxes (the second class), and State dependents who pay nothing (the third class).

This class structure has political ramifications. In effect, those paying most of the tax are in a pressure cooker: the lid is sealed by the "entrenched incumbents" on top, and the fire beneath is the Central State's insatiable need for more tax revenues to support the entrenched incumbents and its growing army of dependents.

Let's start our analysis of the three-and-a-half-class society by noting that the top 25% pay most of the Federal income tax, and within that "middle class" the top 10% pay the lion's share of all taxes.

The top 25% of taxpayers--34 million workers out of a workforce of 160 million and 140 million wage earners--pay almost 90% of all Federal income taxes. Where Do You Rank as a Taxpayer?

An adjusted gross income (AGI) of $66,193 or more puts you in the top 25% of earners. The top-earning 25% of taxpayers reported 65.81% of all AGI and paid 87.30% of total federal income taxes ( $755.9 billion).


How much do you need to make to be in the top 50% of earners? Just $32,396. Fall below that level and you are in the bottom half, along with nearly 70 million of your fellow taxpayers. All told, that group earned just 13% of the income reported on 2009 tax returns. And they coughed up 2.25% of all the income taxes paid.

The second class is made up of the working poor: 38 Million Workers Made Less Than $10,000 in 2010-- Equal to California's Population (The Atlantic magazine)

2011 real median household income was 8.1 percent lower than in 2007.

Only 104 million tax returns actually pay any Federal tax: Many Unhappy Returns? (America's aggregate 1040, from IRS tax data).

In 2009, the IRS reported 140.5 Million personal income tax returns were filed. From this starting point, 36.3 Million returns (or, one quarter of the total) are lost to the tax base because of losses, exclusions or deductions. By line 43, taxable income, only 104.2 Million returns survive. In aggregate dollar amounts, total income from all sources falls from $7.7 Trillion to $5.1 Trillion — a decline of more than one-third. This latter amount is what truly constitutes the tax base, since it is the income ultimately subjected to tax.

Soaring Poverty Casts Spotlight on ‘Lost Decade’:

According to the Census figures, the median annual income for a male full-time, year-round worker in 2010 — $47,715 — was virtually unchanged, in 2010 dollars, from its level in 1973, when it was $49,065.

After including earned-income tax credits, the bottom 60% of households paid less than 1% of all Federal income taxes, and the households between 60% and 80% paid 13%.

The top 20% paid 68.7% of all Federal taxes: Income taxes, Social Security and Medicare, excise and corporate taxes. The top 10% of households paid fully 72.7% of all Federal income tax, the top 5% paid 60.7%, and the top 1% paid 38.8%.

Here are the source documents:

Historical Effective Federal Tax Rates, 1979 - 2005.

Tyranny of the Majority, Corporate Welfare and Complicity (April 9, 2010)

A number of commentators have noted that the incomes of the super-wealthy (which I define as the top 1% who own most of the productive assets of the nation) have risen even more than their taxes. They also note that the Social Security tax of 7.65% (employee and employer each pay 7.65%) is regressive, as those making $500,000 a year only pay tax on the first $108,000 of income: 47% Of American Families Pay No Income Tax! Really?

My conclusion is this: by heavily taxing earned income, the system extracts the highest taxes from the most productive citizens, leaving the less-productive with essentially no income taxes and the super-wealthy with the huge tax break offered to capital gains and other unearned income.

As I noted in Tyranny of the Majority, Corporate Welfare and Complicity (April 9, 2010):

In essence, this is a vote-buying scheme by the Status Quo: the top 1% control the policies of the State in alliance with the State's own Elites, and together they buy the complicity of the bottom 60% to passively accept their dominance.

In other words, the bottom 60% pay relatively modest taxes or are recipients of Central State aid and the top 1% who "own" the political process limit their taxes by favoring unearned income (what they collect from sales of securities, stock options, rents, etc.). Thus the productive quintile (top wage earners) pay the highest tax rates and most of the taxes.

It's a partnership of "Tyranny of the Majority" and "entrenched incumbents Elites." If the political Status Quo alienates the majority by making them pay more taxes, they risk losing power in the next election. If they alienate the top .5% who fund their multi-million-dollar campaigns, then they will also lose power. So they heap the tax burden on what remains of the middle class.

When that 20% rebels, falters or opts out, the system collapses for want of tax revenues. Not coincidentally, that happens to fit the Pareto Distribution: the 20% "vital few" exert outsized influence on the 80%--once the pressure cooker blows.

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jjsilver's picture

There is one problem with all this, he makes the presumption most americans are are required to pay income tax. Nothing could be further from the truth.

Captain Willard's picture

In a voluntary system, compliance is everything. Presumably, compliance is at least a partial function of citizens' perception that the system is somewhat fair. We will test the outer limits of this perception in the future.

Meanwhile, the growth of currency in circulation suggests that the cash economy is growing faster than the real economy.

redpill's picture

They are also making the assumption what people write down on their tax return is what they actually earned that year.


The reason the income tax system exists, and persists, despite it being the worst of all options, is that it allows politicians to sell favors for tax breaks and examine every detail of your life once per year.  You think the grocery store club cards are a data-mining scam?  The income tax system is the mother of all forced datamines.  The government is allowed all sorts of secrets, but we the people are allowed none.


jjsilver's picture

However, the federal government can only create and enforce laws for their property, nothing else. It really is that simple. Everything is done through trickery and deception.

United States Territories: District of Columbia, Guam, Puerto Rico, Virgin Islands, American Samoa, the Northern Mariana Islands


The way they do it on a state level is when agree to something that has wording THE STATE OF or the COUNTY, these are not the geographical areas the common man thinks. What they do is get you to agree you live in THE STATE OF TEXAS which is a fiction, it is the federal jurisdiction they created, all by way of fraud and the ignorance of the people I may add. And now magically you are on federal property.


Brady v. U.S., 397 U.S. 742, 748, “Waivers of Constitutional rights, not only must they be voluntary, they must be knowingly intelligent acts done with sufficient awareness.

"If you´ve relied on prior decisions of the Supreme Court you have a perfect defense for willfulness."
U.S. v. Bishop, 412 U.S. 346


 Balzac v. People of Porto Rico, 258 U.S. 298 (1922) This Supreme Court opinion by Chief Justice William Howard Taft identifies United States district courts as territorial courts. Any federal court calling itself a “United States District Court” will be a court that is limited to federal territory and federal property



City of Dallas v. Mitchell, 245 S.W. 944, 945-46 (Tex.Civ.App.-Dallas 1922):

"The rights of the individual are not derived from governmental agencies, either municipal, state or federal, or even from the Constitution. They exist inherently in every man, by endowment of the Creator, and are merely reaffirmed in the Constitution, and restricted only to the extent that they have been voluntarily surrendered by the citizenship to the agencies of government. The people's rights are not derived from the government, but the government's authority comes from the people. The Constitution but states again these rights already existing, and when legislative encroachment by the nation, state, or municipality invade these original and permanent rights, it is the duty of the courts to so declare, and to afford the necessary relief.


BLOTTO's picture

Kleptocracy, alternatively cleptocracy or kleptarchy, (from Greek: ??????? - klept?s, "thief"[1] and ?????? - kratos, "power, rule",[2] hence "rule by thieves") is a form of political and government corruption where the government exists to increase the personal wealth and political power of its officials and the ruling class at the expense of the wider population.


Heads we lose,

Tails they win.

The Alarmist's picture

Followed by ....

kakistocracy (plural kakistocracies)

  1. Government under the control of a nation's worst or least-qualified citizens.

insanelysane's picture

Missed the 4th class, illegal immigrants.  

Allowed in by the repubs as cheap domestic help and allowed in by the dems to make the 3rd class feel good about themselves.

redpill's picture

Yep, and a third of people want to arrest them after we essentially invited them in, a third of people want to keep the status quo, and a third want to break the bank by giving them full social security/medicare handouts.  First class, Grade A, clusterfuck.

dugorama's picture

of course, if they have an actual job then they pay SS, FICO, etc.  But will never get any benefits from any of those programs.  Thus they help support those who would have them deported.  Quite a bargain for citizens, really.

The Alarmist's picture

"Missed the 4th class, illegal immigrants."  

4th Class?  Didn't they get moved to the front of the line?

Kreditanstalt's picture

You have to include all "public employees" as part of the state-dependent class.  Otherwise it just doesn't make economic sense.

You can also add anyone "working" for a government-contract-dependent business or anyone "working" for a business that wouldn't exist except for some government law.   (such as lawyers, driving schools, insurance agents, accountants, makers of tax-compliant receipts, printing companies, the whole shebang)  None of them actually "produce" any real wealth either.

Bastiat's picture



Florida Audit Finds Local Governments in Dire Straits

Bond Buyer | Oct 19

Some 113 of Florida's cities, counties, and special districts could be declared in a state of financial emergency, according to a recent assessment of fiscal 2011 audits.

Bastiat's picture

Jerry Brown's answer? 

Provisions of Proposition 30 include:

  • Raises California’s sales tax to 7.5% from 7.25%, a 3.45% percentage increase over current law. (Under the Brown Tax Hike, the sales tax would have increased to 7.75%)[3][4]
  • Creates four high-income tax brackets for taxpayers with taxable incomes exceeding $250,000, $300,000, $500,000 and $1,000,000. This increased tax will be in effect for 7 years.[3][5][6],_Sales_and_Income_Tax_Increase_(2012)

Dr Benway's picture

Great article. Explains much of the political debate too, as each side will solely focus on half the problem. It's either "eat the rich" or "starve the freeloaders".

vast-dom's picture

hey doc can i practice my D'Arce choke on your neck today?

Dr Benway's picture

As long as there is zero eye contact, you can be the Wanderlei to my Shogun anytime, vast-dom.

vast-dom's picture

maybe i'll have to strap on my steelydan backwards...

Nels's picture

Any article that uses the term 'unearned income' with a straight face is crap.  Risk dieserves a reward.  Unlike the Solyndra investors, my investments are at risk, nobody is going to bail me out.  Double taxation on dividends means that they are taxed higher than other forms of income.

MillionDollarBoner_'s picture

Hey...I got the solution...

Feed the Rich to the Freeloaders :O)

Seasmoke's picture

Just stop paying taxes......SIMPLE ANSWER and SIMPLE SOLUTION !

edifice's picture

...Until the armed IRS agent kicks in your door, takes your house, your car, and everything of value.

AGuy's picture

"Until the armed IRS agent kicks in your door, takes your house, your car, and everything of value."

One can simply opt not to work. Its perfectly legal to not work and not pay taxes. Of course if you have loans on your house, car, etc, then you really don't own it anyway.

pazmaker's picture

Simple to say...but harder to do..... The state I live in if you try that you get arrested.  I got arrested put in handcuffs and hauled off because I didn't file one year and it wasn't the IRS that issued the warrant but the state dept of revenue.

Arrested for failure to file.  It's not fun sitting jail for that overnight.


Silenus's picture

The workforce is half the population, which is normal, since the other half are dependents like kids and seniors. In fact, half of the population working is historically a very high proportion. It used to be like a fourth to a third, back in the days of single-earner households. So the 34 million in the top 25% likely have spouses who are in the top 50% or the bottom 25% and maybe a teenage kid in the bottom 25% of earners. So when you add in all the household members of people in the top 25% earnings bracket, you probably get something 80-100 million people out of the 313 million U.S. population.


The presentation of the numbers in this article makes it seem like these categories are clear and don't overlap, but there's tons of overlap in them within multi-earner families, which are the majority of families.

dark pools of soros's picture

Nothing like donating to charities so your wife can busy herself with the 'job' of running said charity


Who says you can't use your taxes wisely

vast-dom's picture

The Zero Class Society: Just Print Everything from taxes to revenues.

Rubbish's picture

I would like more free money please.

No really, I linger around the 50% but somedays I just want to be poor and smoke pot.

tickhound's picture

Two of these classes seem half-full, one class is half-empty.

Dr. Richard Head's picture

Being in the top 5% of earners does not make me feel so well.  I still need to relinquich $8,900 in Federal Income taxes just to square off the theft of '10 and '11.  I guess it's better than being on Uncle Sam's teet, but I am tired of being the breat pumping machine for his mamories. 

Midas's picture

It is a little fun to get lost in the weeds about who is getting the "fair" shake and who is getting reamed, but I think this is a distraction.  The feds have the financial restraint of junkies.  They take in enough money to support a functional government that fulfills the needs of the people.  We should be taking a hatchet to that budget.  Wait, lets get a budget and then take a hatchet to it.  We might have to cut back on some of our foreign escapades, but I am willing and I think most voters are too.

Dr. Richard Head's picture

Unfortunately, there are at least 20 million R voters that think having military bases, control over those respective country's central banks, and missles pointed everywhere is specifically there to keep us safe. 40 Million other voters could care less, as long as the status quo continues and their pop tarts are hot.

Cathartes Aura's picture

I'm down for hatchet-jobs. . . but all those volunteer foreign escapader's who signed up for a jawb are gonna need assistance. . .

looks like the post office will have to e  x   p   a  n   d  to catch-all.

dugorama's picture

The $1T we spend on "defense" would fund 2 million $500,000 / year jobs.  We have 2mm armed forces personnel.  Ok, I oversimplified, so say those jobs would only pay $100,000 and we could just reduce spending some and a couple hundred thou goes into still having some military and the occasional computer purchase.  I'm not frightened by the prospective of drawing down the military.  I think of it as another peace dividend.

Cathartes Aura's picture

anything that puts these sorry shits out of a jawb - sitting on their ass in NV joy-stickin'g drones that kill/maim families on the other side of the world - would be welcomed by many.

CIA chiefs face arrest over horrific evidence of bloody 'video-game' sorties by drone pilots

(link posted by Yen Cross yesterday.)

Mad Mohel's picture

Soon you may find that there is no option, so don't knock the teat till you've tried it. I heard it can be quite succulent.

Oldrepublic's picture

America's nomenklatura

JPM Hater001's picture

Yeah, I checked out.  I neither collect a check from uncle sam nor pay out to him anymore.


Try's refreshing.

OutLookingIn's picture

George Carlin said it best;
The rich are there to collect the money.
The middle class are there to pay the money.
The poor are there to scare the shit out of the middle class so they keep paying the money!

AurorusBorealus's picture

"after including earned-income tax credits, the bottom 60% of households paid less than 1% of all Federal income taxes, and the households between 60% and 80% paid 13%."

I object to this statement and all the other attempts to insinuate that the wealthiest households in America are taxed disproportionately.  Social Security and Medicare / Medicaid are taxes, plain and simple.  There are no "trust funds" for these programs and never have been.  The funds have been plundered by the Federal Government for general ledger items and shortfalls in the programs are now being covered by disbursements from the general ledger of the Federal government.  These programs are taxes... and nothing but taxes on labor.  These programs are also capped in how much income is taxed and thus fall heavily and disproportionately on all workers receiving less than $100,000 each year in income.  I grow very weary of hearing complaints from the wealthy about how much they are taxed, when, in fact, if Social Security and Medicare / Medicaid are considered as the taxes that they are, lower income people pay more in taxes than higher income people.  Finally, most local taxes: sales tax, property tax, are not tied to income at all and again fall disproportionately on the lowest income Americans.

It is the wealthy, as much or more, than the poor who are instigating "class warfare" over the issue of taxes.  It is time to call a spade a spade.

jal's picture

YOu need a flat tax  at 20%.

Then raise ALL OTHER FEE. (Romie amended plan) Social Security and Medicare / Medicaid UI etc.

AGuy's picture

"YOu need a flat tax at 20%."

A flat tax (aka a national sales tax) is just away to get you coming (making money via the income tax) and going (spending your money via sales tax). You think they are just going to abolish the income tax and replace it with a national sales tax overnight? Hardly, They will make up some sweet talk about a transistion period from income to sales, but as time goes the income tax never goes away, but instead starts going up again even after the national sales tax is implemented. Now you get double taxed. History has shown us, that  old tax polcies never get bolished, when a newer tax policy is implemented.

In addition, What about people with savings? They already paid income tax (in full), now when they go spend there savings they get hit with an additional 20% tax? that's fracking insane!  I also wonder how big the blackmarket becomes as people turn to alterative means to avoid paying the tax.

Perhaps you're thinking a flat 20% income tax. Thats not enough revenue consider that everyone already pays 15.4% in payroll taxes, so we already have a miniumal flat tax, Its Federal income tax on top of the 15.4% payroll tax that provides revenue. since every penny of the payroll taxes is used to pay outlays for SS and Medicare. Since outlays for medicare far exceed revenues, its the Federal income taxes that makes up the difference. To have any balanced budget, Federal taxes would need to rise somewhere near 50%. We still are running a $1 Trillion budget deficit (mostly to fund entitlements and Weathfare).




Urban Redneck's picture

And the self-employed and small business owners literally pay AT LEAST twice the rate that their employees do.  Take every single sole proprietorship in America, the employer matching on payroll taxes comes directly out of the owner's pocket.  So the business owner pays his own payroll taxes at double the rate his employees do, and then pays the match of the sum total of all his employees payroll taxes.




AurorusBorealus's picture

Good point.  I didn't even mention the enormous tax burden placed upon small businesses.  Also keep in mind for many years, in most states, small, local shopkeepers were tax agents for the state governments collecting sales tax (and increasing their prices by a corresponding percent) while their off-shoring, multinational, wall-street financed internet competitors like e-bay and google, got to sell tax-free.

Stuck on Zero's picture

The solution is simple.  Those who actually work and make the system work should go on strike.  When the food stops arriving, gasoline stops flowing, water stops, lights go out, and television ceases then the government may wake up.


Nick Jihad's picture

Have you noticed any signs of government waking up in Detroit? Chicago?

I still agree with you - Ayn Rand figured it out long ago, and the only way to fight back is to go Galt.  And I think you could make a good case, that that is how the Soviet Union was eventually overthrown by its slaves. To paraphrase Edmund Burke: "All that is necessary for the defeat of socialism is that good men do nothing."

mumbo_jumbo's picture

it amazes me when i read the whining about who pays the taxes in the country (lest we forget that most corporation pay zero as well), the PROBLEM isn't necessarily the tax structure it's that most americans don't make shit for wages.  an associate (engineering) just got a raise, he now makes $5 an hour less then i did 25 years ago when accounting for the government massaged inflation figures.  use the shadow stats and he's behind BIGTIME.

and that my friends is why we are in this mess......lack of does not pay taxes when one earns shit money.

Winston Churchill's picture

But corporations do pay taxes.

You are refering to Corp. tax and the vast majority  actually pay that.

The big ones ,with paid lobbyists ,and internal tax lawy depts, do not.

But even those ones pay the employERs part of the payroll tax,so there is a base 8%

in taxation before corporate taxes,which the big guys avoid.

zanez's picture

One could argue the 8% is actually taken from the worker - not the corporation. If the $ was not going to the government, the corporation could give it to the worker.


AGuy's picture

They also pay property taxes, sales tax, and unemployment tax.

My company pays no corporate income taxes because all of the income is paid to its employees and to purchase good and services. It makes no sense to save money for a corporation. Instead its more logical to borrow money for expansion\upgrades\retooling and avoid the corporate tax. Why would any company be foolish so save money when they take a 35% Federal hit, plus state and local corp. taxes?