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Financial Planning > Tax Planning

Yes, a Six-Figure Income Means You’re Affluent

By Justin Fox

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Economists and tax wonks almost universally share the view that benefits from the tax deduction on home mortgage interest flow mostly to the well-off, and do little for the economy at large. It’s one of those rare things that the right-leaning American Enterprise Institute, the sort-of-right-leaning Tax Foundation, the left-leaning Center on Budget and Policy Priorities and the centrist (or sort-of-left-leaning) Urban-Brookings Tax Policy Center all can agree on.

I did find a guy at Heritage Foundation, which leans quite far to the right, who defends the deduction, but he does so on the principle that all interest payments should be tax deductible (because those charging the interest are paying taxes on their profits), not on the basis of any empirical evidence.

So I was a little surprised when several readers took issue with my characterization of the mortgage deduction in my column Wednesday as a “subsidy for the affluent.” There was the funny fellow who requested, “Please do your research before posting such clearly socialist comments,” but also serious-sounding commenters and e-mailers who seemed to think that, in part because the interest deduction isn’t granted for mortgage amounts above $1 million, it isn’t chiefly benefiting the affluent.

The numbers on who takes advantage of the mortgage interest deduction are straightforward: According to the Joint Committee on Taxation of the U.S. Congress, which is run by Republicans these days and thus presumably isn’t socialist, 82% of the $72 billion in tax savings from the mortgage interest deduction in 2014 flowed to taxpayers earning more than $100,000 a year, with 42% going to those with incomes of $200,000 or more.

So I guess the real question is whether $100,000 or $200,000 in annual income makes a person affluent. Households making $100,000 or more constituted the top 24.7% of American households in 2014, according to the U.S. Census Bureau. To put it differently, they’re better off than three-quarters of the country. Those making $200,000 or more were in the top 5.6% of households in 2014. The threshold income for membership in the infamous One Percent, according to the calculations of Thomas Piketty and Emanuel Saez, was $423,090 including capital gains and $387,810 excluding them in 2014.

Now, I realize that $100,000 or $200,000 or even $423,090 doesn’t go nearly as far in New York City or San Francisco as it does in, say, McAllen, Texas. There are lots of people making that kind of money in big cities and fancy suburbs who don’t have much in the way of savings and are stretching to make their mortgage payments.

These are the folks my former Fortune magazine colleague Shawn Tully dubbed “HENRYs” (for high earners, not rich yet), and economists Greg Kaplan, Giovanni L. Violante and Justin Weidner called “the wealthy hand-to-mouth.” They work long hours, they make big investments in education for themselves and their kids, and they pay among the country’s highest tax rates (the federal tax system is progressive up to somewhere high in the One Percent, where capital gains income and tax shelters begin to bring rates down). They’re not spending their days lounging poolside or eating bon bons — although I can report from personal experience that some of them permit themselves a piece or two of dark chocolate before bed.

But are these people affluent? Heck yeah! The median household income in the U.S. in 2014 was $53,657. If you’re making twice that, or more, you are doing quite well from the perspective of your fellow citizens in what happens to be one of the richest nations on earth. And yes, a tax break that chiefly benefits you and others like you is in fact a subsidy for the affluent.

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