Commentary by Joe Mysak
December 21, 2007
SourceDec. 21 (Bloomberg) -- Wall Street does a good job selling municipal bonds to the rich, not the middle class.
That may have to change if hedge funds, which have been such a prominent feature of the market during the past decade, cut back their purchases of municipals, as some analysts predict.
Here are the numbers: Of the 13,776 taxpayers who filed returns with adjusted gross incomes of $10 million or more, 10,954 said they received tax-exempt interest -- 80 percent. That's a pretty good penetration rate for any product. It goes down pretty drastically after that.
The figures are from 2005, the latest available, and are published in the always-compelling Table 1 of the Internal Revenue Service's Statistics of Income Bulletin, the fall edition of which is just out.
Of the 134.4 million returns filed in 2005, 4.5 million reported receiving tax-exempt interest, up ever so slightly from the year before, when 4.4 million returns reported such income.
There's your municipal bond market. By comparison, more than 31 million returns claimed receiving ordinary dividend income.
Of course, the table of figures, which breaks adjusted gross income into increments such as ``$20,000 under $25,000'' and ``$40,000 under $50,000'' raises the question: Who's rich?
We are talking here in terms of cold dollars, not any of the other things one might be rich in, as conveyed on the greeting cards so popular at this time of year, and otherwise unconvertible into legal tender at the cash register.
Dividing Line
I think we would all agree that $10 million a year, the top IRS category, qualifies as rich.
So does between $5 million and $10 million. So does between $2 million and $5 million. In fact, I think most Americans would say that if you (singular and plural, as in married taxpayers filing jointly), have an adjusted gross income of $1 million or more, you qualify as rich.
If $1 million a year is incontrovertibly rich, who or what is middle class? This question flummoxes pollsters and pundits alike. The category is about as flexible as an accordion file, and can expand and contract to accommodate almost any number.
The most-populous group of taxpayers in the U.S. is that between $50,000 and $75,000, according to the IRS. In 2005, 18.4 million filers put themselves in that category. Does that qualify as middle-class, or perhaps the beginning of middle- class? If it is the beginning, where does middle-class end?
Does an adjusted gross income of between $100,000 and $200,000 qualify as middle-class -- or as rich?
Most Interest
Who claims the most tax-exempt interest? It's not who you think -- not the people at the very top of the food chain.
Those 10,954 taxpayers making $10 million or more, who also said they received tax-free interest in 2005, claimed $5.2 billion, or about $476,000 each.
The group claiming the most tax-exempt interest is made up of people who make more than $100,000 but less than $500,000. Between the two categories ($100,000 under $200,000 and $200,000 under $500,000), there were 1.6 million filers claiming $18.6 billion in tax-exempt interest, or $11,392 each.
That $11,000 and change sounds almost pathetic, certainly un-municipal-bondy, more like the returns from mutual funds.
What would you call this group? There are 13.5 million of them altogether, meaning that Wall Street only manages to get about 11 percent of this group interested in the municipal market. Is a couple making just under $500,000 still in some part of the middle class?
Rich for a Reason
Perhaps the answer depends upon where you live. It costs more to live in places such New York, Boston and San Francisco. It takes more money there to put together what one would consider a comfortably middle-class life than it does in, say, Maine or Kansas.
In last Friday's column I had some fun describing a blog in which various commentators reacted to the news that some Goldman Sachs bankers had just moved to Brooklyn Heights, and that more might be on the way. The postings, as is typical with blogs, were all over the place. Class envy was never very far.
At one point, one of the readers said that not all bankers took car services -- ``rich people are rich for a reason.'' To which another reader responded, ``They are rich because they make million dollar bonuses, not because they save on carfare,'' ending his note with a choice expletive.
Is that where ``rich'' begins -- a $1 million bonus? Or is it right below that category, in the $500,000 to $1 million ranks?
The taxpayer category that grew the most between 2004 and 2005 was the ``$100,000 under $200,000'' bunch. More than a million taxpayers graduated into this group, which grew from 9.7 million to 10.8 million. Surely that group doesn't yet qualify as ``the rich.''
The group right above it -- $200,000 under $500,000 -- grew by almost 400,000, to 2.7 million. Only 20 percent of them claimed tax-exempt interest, averaging about $16,000 apiece. Again, those are mutual fund-style earnings, which suggests Wall Street isn't targeting that group for municipal bonds.
They aren't ``the rich.'' Maybe that's the top of the middle class. Can you imagine? $500,000 a year, and you're still just middle class?
(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Joe Mysak in New York at
jmysakjr@bloomberg.netLast Updated: December 21, 2007 00:02 EST