If the May budget showed anything, it's that setting limits and thresholds in economics is mostly arbitrary and politically motivated rather than based on any theory, writes Greg Jericho.

The May budget brought to the fore the question of where the line is between rich and poor.

It highlighted that setting thresholds and limits in economics is mostly arbitrary and often politically motivated rather than based on any theory. And it confirmed that in the past decade the line at which one is considered rich by the tax system has risen, but the limit at which you are considered deserving of obtaining welfare has fallen.

Of course there's aren't really any "natural" limits in economics. There is no maximum amount that any person can earn. Even in a macroeconomic sense most limits are mathematical rather than economical - e.g. you can't have more than 100 per cent unemployed. There is, for example, no limit on how fast prices can go up - in 2008, inflation in Zimbabwe hit an annual rate of 10,500,000 per cent.

Sometimes economists think they've found limits - such as when Carmen Reinhart and Kenneth Rogoff suggested government debt at 90 per cent of GDP was the limit at which there would be a significant drop in GDP growth. Alas the conclusion was based on an Excel spreadsheet error, and there was found to be no limit at which government debt suddenly hurts GDP growth.

Mostly limits in economics are imposed either by governments or regulators - such as a limit on the amount of leverage banks are able to have. For example, in the UK banks must ensure the amount of their lending is supported by at least 3 per cent of equity - i.e. for every £100 worth of loans they must have £3 worth of equity.

But the limits that affect us most directly are to do with tax and welfare, and these are less about financial stability and more about deciding who pays and who receives.

In Australia currently we have four limits set for taxing people's income - $18,201, $37,001, $80,001 and $180,001.

At each of these limits you are expected to pay a higher share of your income in tax. The brackets are effectively arbitrary. There is no natural rate at which income should be taxed and no natural point of income at which it should be taxed higher than any other income.

These limits are set for reasons of equality. Progressive taxation is a foundation of income taxation around the world, and when used with progressive welfare systems it can greatly reduce income inequality.

But the thresholds also serve to have a psychological impact. The top income rate effectively denotes who is rich - a metaphor for being wealthy.

However, this income limit that divides the middle class from the wealthy has changed significantly over the past 20 years. Since Australia moved to five tax brackets in 1991-92, the top tax bracket has become progressively further above the earnings of average Australians.

In 1994-95 average weekly earnings were about $544 or about $28,300 a year. This meant the top tax bracket of $50,001 was just 1.77 times average earnings.

The second tax bracket - a good guide for denoting the comfortable middle class - in 1994-95 at $38,001 was 1.34 times average earnings.

By 2004-05 the top tax bracket had risen to $70,001, the ratio of it to average earnings was barely changed - 1.74 times average earnings. Compared to the median taxable income, the top tax bracket was almost double (1.96 times). So effectively if you were earning double what the median tax payer was earning, you would have been considered rich.

But from this point on the Howard tax cuts kicked in. In the four years from 2004-05 to 2008-09 the top tax bracket rose from $70,001 to $180,001. It went from being 1.74 times the average earnings to 3.8 times.

Since that year, inflation has brought it down but it remains more than three times the average earnings.

And yet while what is considered rich has increased, the level of the second highest tax bracket has remained relatively stable and is now at almost the same ratio to average earnings as it was in 1994-95.

Similarly the most recent budget saw the limit of what is considered well off enough to not need welfare assistance fall.

Three years ago when the ALP's budget extended the freeze on the limit for receiving the Family Tax Benefit B at $150,000 it was slaughtered in much of the media as class warfare hitting the "so-called rich". Joe Hockey suggested it was "the politics of envy".

Then in the budget this year, the government lowered that limit by a third to $100,000.

Thus in 2011 when the limit for a primary earner to receive the Family Tax Benefit B was $150,000 it was roughly 2.77 times the average earnings. Now set at $100,000 it is 1.72 times the average earnings.

The lack of logic over the limits between what constitutes one being rich or not, or at the very least wealthy enough to not have access to welfare, is also imposed in other ways. The Medicare surcharge when introduced in 1996 was, in the words of the government, targeted at "higher income earners who can afford to take out private health insurance".

Indeed at the time the $50,000 limit was the same as the top tax bracket.

The level at which it was set rather lacked much logic. Michael Wooldridge, who was health minister at the time later told The West Australian that, "I think the numbers in the end were negotiated with Senator Harradine - it was over a bottle of Jameson's whisky late at night if I recollect correctly".

In 2009 the ALP changed the surcharge to $88,000 for individuals. Thus in 1996 it was originally set at 1.67 times the average earnings; now it is about 1.51 times - a bit lower, and certainly reflective of the view that private health insurance is not just for the wealthy.

But it is also reflective that what was once a limit designed to target those considered high income earners changed to become a quasi private health insurance subsidy. For in economics and politics, unlike with science and medicine, limits are rarely fixed, either in amount or reason.

Greg Jericho writes weekly for The Drum. His blog can be found here and he tweets at @grogsgamut. View his full profile here.