Class in 21st Century America

I have a theory of class I’d like to propose to the readership. I postulate that, (1) as opposed to being universal (or Marxist), class is specific to some place and era, and (2) class in America in 2024 is defined, by and large, by the Federal tax code.

Lower class – In our society, members of the lower class have zero wealth (net worth). Their objective is survival.

Lower middle class – Members of the lower middle class receive a regular income but live paycheck to paycheck. They are unable to contribute to retirement accounts. They rent their homes. Their objective is stretching a limited regular income to meet competing needs. Many work low-level jobs in the service economy, or they are, dare I say, teachers.

Middle class – Members of the middle class derive their wealth from income. They contribute to retirement accounts and own their own homes. They may own life insurance policies and other types of insurance such as disability or umbrella insurance. They make budgets and allocate as much as they can to investments. They may have other types of tax-protected assets, such as college or health savings accounts. Their objective is maximizing (tax-protected) investments to build wealth while prioritizing certain expenses over others. Many work non-specific middle management, corporate, or government jobs.

Upper middle class – Members of the upper middle class still derive their wealth from income, but they have maximized investments in tax-protected real estate assets and whatever retirement, health, and college savings accounts they may qualify for. They employ professional money managers such as financial advisors, tax attorneys, and accountants to help them find additional productive avenues for investment. Their objective is building self-sustaining passive income through investment. Many are professionals, such as doctors, lawyers, accountants, or investment bankers, or upper managers.

Upper class – Members of the upper class derive their wealth from capital. They do not need income for survival. Their wealth is self-sustaining. Their objective is estate and asset protection. Some may have jobs, but they do not need to work.

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I’ve defined class above in a behavioral way – not based on identity. Economic actors respond to incentives, and the Federal tax code has created strong incentives to allocate wealth in certain ways described above. This is all obviously an oversimplification, but I think it is a useful framework for discussions of class in 21st Century America that gets beyond antiquated notions of family legacy, arbitrary numerical boundaries, and political spin.

One might imagine a natural progression through the various classes as articulated above, in the course of a normal person’s life and career, from initial joblessness and poverty to retirement. This is the path the tax code wants you to take. It is a remarkably stable path – one that has existed more or less since just after World War II – a heavily-manicured American Dream, if you will. It is likely resilient to whatever Catalinian conspiracies of the day. Depending on one’s career, location, and expense portfolio, getting to the next level generally requires More Income. The rub is that, whereas the tax code has very clearly created this path incentivizing ever more income, that same tax code contains a progressive income tax as its core source of revenue. The tax savings that come from deriving one’s net worth from capital assets in lieu of income are staggering, yet few ever make it to the upper class. Viewed through a cynical lens, one might even describe the middle class as captured by the system. Furthermore, it should not escape the reader that politicians have corrupted the meanings of many of the terms above in an effort to identify with voters – who are almost entirely middle class – and that nearly all politicians come from the upper class as I’ve defined it above.