How Rich Is Rich? Where America Draws the Wealth Line

This is not a good time to be rich in America. This country has always had a love/hate relationship with its wealthiest citizens, and the financial hardships of the Great Recession have only broadened the chasm between the rich and the poor. Today, with millions struggling to pay the mortgage or fill the gas tank, the small wealthy fraction who have reaped the rewards of an exploding real estate bubble and rising gas prices have become especially reviled.

The trouble is, while everybody knows that "the rich" are the enemy, it's hard to determine where exactly the line lies between hard-working, salt-of-the-earth members of the middle class and parasitical, bloated plutocrats who are feasting on a struggling economy. Part of the problem lies with America's famed egalitarianism. In a country that prides itself on social mobility, the idea of a clearly-defined upper class seems somehow inappropriate. For that matter, with financial insecurity leaching its way into even the wealthiest households, few people are comfortable describing themselves as rich.

The Million Dollar Question

Traditionally, the line between the rich and the rest lay at a simple number: $1 million. In Indecent Proposal, $1 million was the staggering sum that lured Demi Moore's character into Robert Redford's bed, and in Austin Powers, it was the magic number that a time-twisted Dr. Evil called forth to blackmail the world. Perhaps most impressively, in Kingpin, it was the bowling prize that inspired Bill Murray's character to joyously proclaim "Finally, Big Ern is above the law!"

But today, millionaires aren't all that rare: America has more than 8.4 million of them. And billionaires -- a designation that was almost nonexistent a few short decades ago, now number more than 400 in the U.S. With those kinds of numbers, having seven digits in the tally of your assets doesn't carry quite the cachet that it did a hundred years ago.

But if a million dollars is no longer the official entry point into the wealthy club, where does the line lie?

The Tax Line

One way of dividing the rich from the middle class is through the top tax rate. Ever since the Sixteenth Amendment instituted a permanent income tax in 1913, America's highest earners have paid its highest tax percentage. While the top rates were mainly designed to bring in extra money, they had the side effect of setting a standard of wealth. This role was particularly clear at the end of World War II, when the highest bracket -- 94% -- effectively created a salary cap. Anyone making more than $250,000 was basically giving the top slice of their earnings to the government.

When it comes to defining the wealth line, a quarter of a million dollars doesn't seem like all that much money ... until one considers that $250,000 in 1944 translates into about $3.2 million in 2011 dollars. Over the following years, as the tax rate slowly dropped, so did the entry point for the top bracket: In 1951, the top rate began at $200,000 -- the 2011 equivalent of $1.7 million. In 1971, when the top tax rate fell to 70%, it hit earners who made $100,000 or more -- the equivalent of today's $595,000. And today's top rate starts at a comparatively meager $373,651.

Where we peg the bottom of that top bracket is fairly controversial: During his presidential campaign, Barack Obama came under fire when he suggested setting the entry point for the highest tax bracket at $250,000. In the grand scheme, this move would have been largely symbolic: For the tiny fraction of workers who make between $250,000 and $373,651, it would have increased taxes on the top portion of their income by a minuscule 2%. Even so, it infuriated Obama's critics, who saw it as a move to brutalize the 1.8% of Americans who make a quarter million dollars or more per year.

Not the Best Measure

There are a few problems with using the highest tax bracket as a wealth line, the biggest of which is that the top rate often has more to do with political maneuvering than any measure of wealth. For example, Andrew Ross Sorkin argues that Obama's choice to lower the top tax bracket to $250,000 was a reflection of President Clinton's 1993 decision to use that salary as the top bracket cut-off.

For that matter, the influence of politics is demonstrated by the plummeting top tax bracket. For much of the last 70 years, the highest tax percentage has been dropping, as has the cut-off line for the top bracket. While people in the lower income brackets have seen slight cuts in their tax rates, the top-level earners have watched their taxes plummet.

The best example of the wealth line/tax percentage drop is probably the 1988 tax schedule. A severely abbreviated version of earlier tax tables, the 1988 schedule only had two tax brackets, 15% and 28%. The top rate kicked in at $17,850 -- the equivalent of $33,975 in 2011 dollars. This cut-off wasn't based on advanced calculations about income or philosophical ruminations about the nature of wealth; rather, it was a slight jump from the previous year's 28% cut-off line of $16,800. While most taxpayers had to pay about the same amount as the previous year, people making between $16,800 and $17,850 saw their tax rate fall by 46%, people making $54,000 or more had a 27% drop, and people making $108,300 or more had a 60% drop from their top rate in 1981.

Asking the Wealthy

Some of the loudest complaints about Obama's attempt to set the rich line at $250,000 have come from Northeastern cities -- areas that are usually among his biggest strongholds of support. According to these critics, the high cost of living in certain urban centers means that a quarter of a million dollars barely buys a middle-class existence. As someone who is currently raising a family in New York City with a household income of well under $100,000, I would personally argue that this is a serious exaggeration. However, there is no question that life is expensive in some Northeastern cities -- for example, $250,000 in New York buys the same quality of life as $151,000 in Atlanta, $129,000 in Houston, or $125,000 in Roanoke, Va. (my former home).

So if the top tax rate isn't a good measure of wealth, and $250,000 doesn't quite cut it, where exactly does the wealth line fall? One would think that the richest Americans would have a good idea of where the creme de la creme kicks in, but many seem to be beset by the same money worries as everyone else -- albeit with a few extra zeroes.

In Richistan, his exploration of America's wealthiest 1%, Wall Street Journal reporter Robert Frank uncovered a surprising factoid: Even the country's richest people are worried about their finances. When a survey by PNC Advisors asked about how much money it would take to make them feel secure, most answered that they would need around twice as much money as they currently had: "Those worth $500,000 to $1 million said they needed $2.4 million. Those worth $1 million to $1.49 million said $3 million. And those with $10 million or more said $18 million." Frank concluded that "people's definition of 'rich' is subjective and is usually twice their current net worth."

A recent survey of 1,000 millionaires echoed Frank: 42% stated that it would take "at least $7.5 million" to make them feel wealthy. The poll, which was undertaken by Fidelity Investments, came up with an interesting correlation: On average, the respondents had $3.5 million in assets ... roughly half the amount of money they would need to feel secure.

Wealth Is Relative ... or Not

Frank has his own theory on where the wealth line lies: In Richistan, he notes that an "upscale" lifestyle costs between $500,000 and $1 million per year. To permanently finance this level of opulence, one would need a bare minimum of $10 million in the bank and would need to receive at least a 5% annual return rate. Frank admits, however, that the actual price tag for a wealthy lifestyle is "probably more like $20 million."

The average American family gets by on just $49,777 per year, which means that -- using Frank's number -- it would take the combined wealth of at least ten normal families to fund the lifestyle of just one rich household. Or, to put it another way, Frank's entry point into wealth is equal to the yearly take-home of 200 to 400 families. By comparison, the old standard of $1 million is equal to twenty families, and President Obama's controversial $250,000 sum is the equivalent of five families.

Ultimately, the wealth line is relative, depending greatly upon one's position and fear of financial failure. But, as various surveys have shown, even the richest 1% of Americans -- those who make $1.1 million or more per year -- often worry about becoming destitute. Given that this miniscule fraction of the population holds almost 35% of the entire country's net worth, yet still feels insecure, it's hard to imagine a clearly-delineated wealth line, on the other side of which one feels completely safe.

Then again, maybe these feelings of insecurity have more to do with the increasing instability caused by America's vast income inequity. To put it another way, perhaps the key to true security might be to increase the number of people who have access to wealth.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.