Good Old Middle Class or Wealthy – You Decide Redux
| October 15, 2010 | Posted by Roshawn Watson under Uncategorized |
By: Roshawn Watson
Taxes are rising! Taxes are rising, or are they? I guess we still don’t officially know what exactly is going to happen yet. However, that doesn’t stop the bickering and fighting over the proposed tax increases. During what appears to be a very slow recovery, many would characterize the present state of the economy as fragile. Thus, a change in tax policy could potentially have very big implications: help plug deficits or send the economy over the edge.
Good Old Middle Class or Wealthy?
A little over a year ago, I wrote an article (Good Old Middle Class or Wealthy, You Decide). It discusses just how difficult it is to distinguish the middle class from the wealthy. Many families who earn in excess to $250,000 do not feel wealthy and consequently don’t want to be subject to a 3% tax rate increase on income above $250,000 proposed in the Obama budget. They argue that although their income may be in the top 2-3% of Americans, they are not rich. Here are some examples:
James Duran, an owner of a human resource company Silicon Valley, and his wife make $400,000 annually and bemoans how he’s “barely getting by.” Additionally, Mrs. Ellen Parnell, a surgeon’s wife, claims her family’s “needs are met, but we don’t have a load of cash to cover wants… the reality is Obama may call me wealthy, but I thought we were just good old middle class” despite their $260,000 annual income.
She cites the $60,000 decline in the value of their house, the fact that Dr. Parnell works 7 days a week, and that he drives a 10 year old Infiniti as her justifications. Additionally, she says taxes, premiums for medical care and deductions for Social Security and their 401(k) contributions cut their gross to about $12,000 per month. The family tithes $1,300 a month at their church. Their mortgage, second mortgage and payment on land they bought is nearly $4,000 a month. Other expenses, including their family car payment, insurance and college funds, as well as basics like food, utilities and donations to charities, leave them with about $1,200 left over each month.
Parnells Have Gained Allies Over The Past Year
The Parnells are not alone though. Todd Henderson, the now infamous University of Chicago senior law professor, said that Obama’s tax hikes on “the rich” might force his family to sell their house. According to Henderson’s blog post, his family’s tax payment is “nearly $100,000” (including state taxes), so using a reverse tax calculator that puts the Hendersons income at about $400,000 a year.You may ask why would a family making approximately $140,000 more than the Parnells also have trouble with a 3% tax increase. After all, that’s over $11,000 per month more than what the Parnells earn. Well in his post, which has subsequently been taken down amid the controversy, he wrote “(a) quick look at our family budget, which I will happily share with the White House, will show (President Obama) that, like many Americans, we are just getting by despite seeming to be rich. We aren’t.” .
Flawed Argument
The problem with the Parnells and Hendersons’ argument is they are essentially saying “we have no room in our budget, so our inability to afford a tax increase means we are not rich.” They ignore the fact that sloppy financial management can make you broke even if you earn millions a year, such as Screech and Toni Braxton.
For example, it makes no sense why the Parnells would have a car payment or a second mortgage with $21,000 monthly income. Perhaps, the debt represents their unwillingness to live on that income. They clearly have no aversion to debt despite their less than indulgent lifestyle.Thus, even with an income five times above the median household income in the US, they struggle. It’s their lack of personal responsibility with regards to their finances, not their opposition to the tax hike, that’s particularly troublesome.
Economic Basis (or Lack Thereof) For Tax Abatement
Then, there are also the more prominent allies who dispute the economic merit of raising taxes, such as famed economist and personality Ben Stein. You know Ben Stein “the guy who got rich because when he talks, it sounds so boring it’s actually funny (Bill Maher).” Here’s Ben’s take:
I am a fairly upper income taxpayer. Not anything even remotely close to sports stars or movie stars or financial big boys. But I am above the level Mr. Obama says makes me rich. So, in the midst of a severe recession, I am to have my taxes raised dramatically…. I worked for almost every dollar I have… I pay my income taxes, and after them and the commissions I pay my agent, I am left with about 35 cents for every dollar I earn…I am not quite sure what my sin is.
Moreover, he argues “(t)here is no known economic theory under which raising my taxes in the midst of a severe recession will help the economy recover. It isn’t part of any well known monetarist or Keynesian theory. So if it does no good to raise our taxes, I assume we are being punished.”
Art Laffer also weighed in saying that removal of the Bush tax incentives would precipitate an economic collapse in 2011. In Will the Economy Collapse in 2011, I discuss his famous Laffer curve (he theorizes that there is a “sweet” spot for taxes which we are presently in), and increasing taxation will only serve to hurt the economic recovery and result in lower government revenues. At the core of his theory is the concept that money moves where it is best treated. The wealthy control the volume, location, and the timing of their income. Thus, many will choose to avoid these tax cuts via minimizing earned income, changing residency (low or no state taxes), and finding loopholes, etc. As support, he cites how states that have “millionaire taxes,” such as New Jersey, are more apt to have struggling economies. Additionally, he points to the dramatic surge in economic activity that occurred when Reagan gave tax relief. Notwithstanding, the accuracy of some of his predictions, his theory is quite interesting. To read more, click here:
Concluding Thoughts
First, without complete financial records, it is impossible to accurately judge the Parnells, Durans, and Henderson’s financial positions, so who knows whether they are wealthy. However, I am certainly inclined to believe them when they say they are not rich. Additionally, I highly doubt if taxes were 20% lower that they would consider themselves rich then either. In other words, the taxman isn’t the only reason they are just getting by. It is particularly hard to have empathy for families who complain that they can barely make it on $400,000 per year, especially during a time when one middle-aged man in four can’t find a full-time job.Too many people build sizable fortunes on less. Too many people thrive on less. If you are barely making it on $400,000, you are probably pretty crappy at money management (or have extremely unreasonable expenses). Being inept at your finances or living above your means is your prerogative, but complaining about a 3% tax increase on the basis that you can’t afford it on $400K embarrasses your cause and only you brings ill-will. I am certainly not against anyone’s success; in fact, I applaud it. However, if the best the Parnells, Durans, and the Hendersons can do is to tell us how they are struggling like everyone else, then they may consider struggling a little more quietly (free speech or not).
With respect Ben Stein and Art Laffer, they have some interesting points. For example, regardless of how rich you are, there’s a big problem when you only get to keep 35 cents on every dollar you earn mostly because of taxes, especially when 47% don’t pay any taxes. That, at the very least, is demotivating. It was demotivating when taxes were 91% under Eisenhower and 70% under Nixon. I certainly hope the government is not increasing taxes to punish high-income earners because somehow anyone who earns a lot must have done something evil to get to that level. While that sounds silly, it’s not like the pro and con arguments for class warfare have been exactly logical lately. Anyway, I am curious how increase taxes will solve what trillions of dollars in fake money couldn’t. Just like like the aforementioned families could likely cut the fat, what would happen if we collectively tried to cut the fat on a national level, an interesting thought indeed?
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Good Old Middle Class or Wealthy, You Decide
I agree with you 100% on this Roshawn!!!
To me nobody recognized all the great thing that the rich have done to make America great! Most of the large charities get a substancial percentage of their money from the rich!
Heck, if an Angel investor didn't fund Google (not to count the endless other businesses) when they were a start up, Google still might be an underground website or worse yet defunct…
I'm not rich, however; I see no reason to the wish them ill-will or taxes them just because they work hard and/or are more successful than most.
What kind of Bizarro society do we have when we punish the ones creating businesses, taking risk and hiring others. To me it make no sense to reward those that drift along and punish those who succeed! I think Ben Stein nailed it (He's more than the Bueller, Bueller, Bueller guy! He's actually one of our brightest here in the U.S.).
Thanks for writing thisit, I was feeling all alone for a while!
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I'd like to have the problem of what to do with $12K in income per month. This family obviously has some money management issues and could use some help from all the great bloggers on the internet.
But to me the bigger question is what percentage of anyone's income does the government deserve? I don't care about their income level. The US isn't about equality of results, it's about equality of opportunity and providing the necessary freedoms so that people can achieve as much or as little success as talents will allow as long as they abide by the laws and don't injure others.
The more revenue Congress gets, the more they will spend. The more they spend, the more they will claim they need to fix the problems their previous spending has created. It's a never ending cycle of good intentions gone bad.
I definitely think that a lot of people do not understand the concept of marginal taxes, and yes I do feel like some people do change their tax strategy based on a few percentage points too. I recall reading an article on WSJ of a private practice dentist who said when the tax increases go into effect, she was going to limit her income to $250,000 and take less patients (Her salary then was bout $290,000 and she worked like a dog). She reasoned that earning the additional money is nice but not if it kicks in other taxes. The other taxes she was talking about were both the proposed tax increases in the Obama plan and a state Millionaire tax for high-earners who make >$250,000 per year.
One thing that perplexes me is how people that people feel entitled to money that they don't earn.
Thanks for the articles and for the comment!
My recent post Good Old Middle Class or Wealthy – You Decide Redux
@Money Reasons – it's amazing how much we think alike. Yes, as much as the wealthy are vilified in this country, some do an incredible amount of good. I like to focus on people who make meaningful contributions because it unites rather than divides; however,, some of us seem so bent on destroying others who are more successful than us. I guess tearing someone else apart can make you feel better about yourself but at what price.
With regard to Ben Stein, he is a brilliant mind and always has thoughtful opinions. No, you are not alone, but this certainly is not a popular opinion.
My recent post Good Old Middle Class or Wealthy – You Decide Redux
I agree with both points 1) the families are in dire need of help and 2)we have the right to pursue happiness not to happiness.
We absolutely have to balance the budget and stop digging this financial hole deeper and deeper. Our economic policy henceforth must be rooted in more than good intentions.
My recent post Good Old Middle Class or Wealthy – You Decide Redux
Kris,
I agree that making $250,000 doesn't mean that you are living high on the hog necessarily, but I am calling foul on the whining about struggling. I think a good financial counselor in the vast majority of cases could help them trim the fat in their budgets and help them thrive even on a mere quarter million 🙂 For example, $250,000 may not be enough for you to help family financially if you are a complete financial mess yourself. It's tough not to be able to give, but it may be your reality and serve as a motivation to be more diligent with money management.
For people in this income bracket to argue that they are struggling suggests that their expenses are out of whack in most cases and is offensive to some who lack adequate income and are doing their best.
This isn't to say I'm advocating "punitive" taxation/wealth redistribution, but I think people who make $400K and say they are struggling actually hurt the cause for keeping taxes lower and sound greedy.
This is just my opinion though, and thanks for sharing yours too.
BTW, Ben Stein is just phenomenal, and I'm glad you enjoyed reading his thoughts!
Kris,
Gotcha. There are exceptions (i.e. big medical bills, big family, etc.), and lumping them into the same category as the Parnells and Durans would not be fair. I'm not for hating anyone and am for personal responsibility, so I think we're definitely on the same page.
I like Ben too. I'm sorry he loss his job as a commentator because he is spokesperson for a credit reporting business. I rather enjoyed reading his thoughts.
Shawn – Everything is at the margin and I realize it's hard to empathize. I certainly has hell DON'T empathize with a complainer/whiner who makes $400,000 and can't get by. They need to keep quiet.
However, people who criticize them have no right b/c they are not in their shoes AND b/c someone who makes $400K/yr ALREADY pays $100,000 a year in taxes. That number makes most of them sick, and to pay another $12,000-$15,000 in taxes is even more sickening.
Please trust me on this.
Sam
My recent post How Higher Taxes Saved Me A Boatload Of Money
Okay Sam,
I do trust you on this one a lot. I received A LOT of backlash via email and social media sites (both on this post and the previous incarnation of this post ) not because of what I said but because of how I said it. I guess I didn't learn my lesson the first time mate.
Anyway, I do not want high-income earners to be taxed into oblivion either. I really have a problem with how high-income earners are vilified and are painted as greedy. All I was trying to get across is that if you don't have any margin in your budget to account for a 3% increase in graduated taxes when you are already making $400K, then you are likely mismanaging your money in most cases. Dispute the tax increase from a philosophical or macroeconomic perspective (i.e. Ben Stein or Art Laffer), but using language such as I am "struggling or barely making it" will be offensive to many because 99% of the country survives off of less.
That said, we'll see what happens to our perspectives as our income continues to rise. I can definitely understand why the thought of paying more taxes is sickening to them because they already pay the majority of taxes in the country to begin with and am not trying to trivialize the matter. Thanks for sharing your thoughts!
My recent post Good Old Middle Class or Wealthy – You Decide Redux
Hey Nicole and Maggie,
I love the discourse, so thanks for sharing your opinion; here's another perspective. It's possible that the dentist didn't understand a marginal tax increase and it is also possible that she figured out that their were other ways she could increase her income without increasing her taxes above the threshold. It's unclear from the article, so I can't speculate. I am sure that she would have access to a good accountant who would have explained the true financial implications though.
The implication is that if you don't support tax increases that you don't care about this country , educating children, helping the poor, etc. is a false and dangerous premise. Most of the people I know with the biggest hearts and give the most prefer to do their giving to charitable organization instead of paying it to the government. For example, one person I know gives away over $500,000 each year. To say that he doesn't care about those issues you mention is not true. It is unfair and inaccurate to imply that they don't care. It's just a different way to tackle the same problem. Just because it is different doesn't diminish their level of caring or the validity of their argument.
With respect to the argument that government spending does need to be cut, even during a recession, you can cut government spending on things such as unfunded liabilities and balance a budget. By the way, this is what Bill Clinton did. He cut more government spending more than any other president. It's possible just a different approach.
My recent post Good Old Middle Class or Wealthy – You Decide Redux
People have a choice. You can have more flat screen tvs and exotic cars and potholes in the road or vice versa. You can live beyond your means and borrow to finance the building of schools and to fight wars thereby putting the burden on your children to pay. It looks like a lot of people would rather have the conspicuous consumption life style and put the burden on future generations. Of course part of it is that they don't think much about the future.
Cheyney's estimated net worth is between $30 million and $100 million and the tax cuts gave him more than most people make in a lifetime. I'm sure he could present a good explanation on why he isn't wealthy.
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I could not have said it better than this:
Being inept at your finances or living above your means is your prerogative, but complaining about a 3% tax increase on the basis that you can't afford it on $400K embarrasses your cause and only you brings ill-will.
I am certainly not against anyone's success; in fact, I applaud it. However, if the best the Parnells, Durans, and the Hendersons can do is to tell us how they are struggling like everyone else, then they may consider struggling a little more quietly (free speech or not).
You have made me want to RSS feed you now 🙂
Hello Robert,
At the end of the day, that's the essence of the issue: choice. I just wish people would own up to that choice even if it puts a less than favorable light on them instead of coming up with lame arguments about their struggles. It's an interesting narrative, but I'm sorry by definition if you are in the top 1-3%, how could you ever truly be in the "middle" of the distribution. I admit that doesn't necessarily make you rich or wealthy either. That's a different discussion altogether 🙂 Also, I'm not against the top 1% either; I'm just an advocate for personal responsibility.
Thanks for sharing Cheney's net worth. I knew he was wealthy, but I didn't realize how deep his pockets went!
My recent post Good Old Middle Class or Wealthy – You Decide Redux
That's awesome. I'm honored to be included in you fabulous mixed 🙂 (excuse the pun)
My recent post Good Old Middle Class or Wealthy – You Decide Redux
I think the irony in this whole post is that the richest entity on the planet, the U.S. government, needs to raise taxes on wealthy citizens because they are broke. Boy, if I made trillions of dollars per year, I could easily balance my budget.
As most of the readers here have already said, the government should just shut up and stop crying about being broke. Or, make better decisions with their income. 😉
I'm a little late to the discussion.
I agree that a small % change in tax should not make or break a person's personal budget, and should not be used as an excuse. Where we would expect to see the difference though is in those tens of thousands of marginal decisions that will now be altered due to a tax. Those consumer items not purchased, those dollars lost and not invested, these unseen effects all add up to a quite substantial difference.
In Canada, it only takes an individual income of about $50 to $60k a year to find yourself over 40% marginal income tax (and most provinces have a 12%+ sales tax). We are used to high levels of taxation, though I personally dislike them.
The real issue here is not how much is taxed by the government, but how much is spent. ALL spending by the government must be accounted for, in the following ways:
1) Direct tax. Highly visible and painful, so not preferred by the politicians.
2) Debt. Debt is a future tax which will be paid for by everyone in a variety of ways: Altered production and price structures, increased prices due to inflation, etc… the effects of debt are more pernicious and harder to pin down. Some of the costs of debt are also borne by the debt holder, which may be a foreigner. Debt is preferred to taxation by the politicians due to this.
3) Inflation. Inflation is the most pernicious and most difficult tax to pin down. Its costs are very difficult to see; the person who bought a house at the peak in 2006 was a victim of one form of inflation, and they were taxed for it. With a global currency such as the USD, everyone in the world suffers from a form of inflation of one degree or another. This creates an incredibly powerful redistributive effect for the federal government, as it shares the pain of excessive spending and also reduces the real value of debt to be repaid in the future.
The only way to reduce taxation sustainably is to reduce government spending. Doing anything else is merely postponing the inevitable, and perhaps making things worse down the road.
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I agree with your friend who donates money on his own terms. I don't mind giving to people who are needy, but I'd like to do it on my terms. I've recently taken a much more active role in my charitable giving. I've been organizing things on my own instead of going to big organizations where the majority of my contributions go to administrators.
As far as taxes, I have seen how the some of the stimulus money has been used locally. Some I agree with like fixing falling down bridges, but others I'm scratching my head..like repaving roads that don't need repaving. Yeah, generally I oppose the hike because I just think there will be even more wasteful spending.
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Hello Bret,
I'm glad you appreciate the juxtaposition. It is quite amazing that balancing a budget is the exception not the norm. We definitely have to do something about our national spending habits, and spending into perpetuity and whining about finite resources are not viable solutions. Like you and others have mentioned, I believe wiser decisions are clearly needed.
My recent post Good Old Middle Class or Wealthy – You Decide Redux
Kevin,
Those are some phenomenal points my friend. There's just so much there! I do agree that there is a ripple effect from taxation; the downstream impact can be tremendous whether it is reduced spending, reduced investing, reduced saving, changing the location, volume, and timing of income, all of these things can result from taxation.
Sorry about the tax situation in Canada. Your comparison of the percentages of income taxed highlights just how fortunate many of us are
Thanks for an excellent review of the types of taxes..
Lastly, I agree that curbing spending is vital to reduce taxes. Few people want to hear this, but that doesn't make it any less true. Anything else is denial.
Very true. We give a large amount away and do not complain or look for praise. This is just what has been modeled for us , and we enjoy it. No one needs to tell us to contribute to these things, it's virtually automatic. I know plenty of people like this, so for someone to pull the moral superiority card on anyone who opposes tax increases is ridiculous. People are allowed to see an issue differently without suffering from moral deficits.
I agree with you that there does need to be basic levels of services; however, when there is so much tax revenue that spending is consistently wasteful, that's problematic, especially when the solution is to increase taxes.
My recent post Good Old Middle Class or Wealthy – You Decide Redux
This was just published a couple of hours ago: http://www.europac.net/commentaries/tax_cuts_won&…
Given the topic at hand, you might find it interesting.
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Timely and intriguing.
Peter Schiff always has interesting insights. Thanks for sharing!
My recent post Good Old Middle Class or Wealthy – You Decide Redux
Did anyone else think that Ben Stein's " get to keep 35%" is a false and whiny arguement? Isn't the amount he pays his agent a business expense just like any business? By that rationale if a business has any expenses it's the government's fault. Last time I checked you deducted your expenses before paying taxes on profits.
Also everyone pays taxes. Yes even poor people pay sales taxes, property taxes (directly or indirectly), SSI and Medicare taxes, vehicle fees, etc. See the actual percentages here http://www.ctj.org/pdf/taxday2010.pdf .
Hey Andrew,
I'm sorry that you feel Ben is inaccurate and whiny.
Personally, I think he has an interesting point. You are right everyone pays taxes, but 47% don't pay federal taxes, which represents a huge amount of money for higher income brackets. I do not think the fact that paying an agent as a business expense (before taxes) in addition to state, federal, property, sales, and other taxes negates the fact that Ben doesn't get to keep the majority of his income largely due to taxes.
I think his voice adds to this conversation, and I welcome his opinions as I do yours.
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Thanks for welcoming my opinion. My point is that his business is entertainment. He makes the choice to pay an agent to generate more income. If he wants to avoid that expense he can, but apparently he still gets to keep more money even with paying the guy, right? To lump that expense or travel expense or any other expense in with taxes is not logical if your argument is taxes are high.
Here's a more complete Ben Stein quote: " And, I do not want my taxes raised. I already pay a staggering amount of tax and I don’t care for it. In fact, I would like to pay no tax at all. I could have so much more to prepare for onrushing old age.
But the unhappy fact is that it’s necessary to raise my taxes and the taxes of all upper-income Americans. (I do wish, however, that “upper income” started just a dollar above me.)" http://www.nytimes.com/2008/08/10/business/10ever…
Actually I like Ben Stein because he is a realist and seems pretty balanced in his reasoning. He admits that upper-income earners, such as himself, need to pay more taxes. Deficits have ballooned under Reagan and the Bushes. 'Like em or not, thems the facts'. http://en.wikipedia.org/wiki/National_debt_by_U.S…
Lets avoid starting trillion dollar wars for a while then get military spending inline with current threats. If the debt starts coming down then start the talk of gradually lowering taxes. Responsible adults pay their own way.
Hey Andrew,
If Ben fired his agent, then there would be yet another unemployed person, which is a major counterargument to increased taxation. Trying to penalize upper-middle class to wealthy individuals with increased taxes costs jobs both directly and indirectly (decreased discretionary spending) and can ultimately lead to decreased revenues.
My quote of Ben Stein was complete from a recent 2010 interview; your quote is a complete quote from 2008. Neither one more or less complete than the other, and they both get across his disgust with how much he pays in taxes. He is certainly entitled to his disgust and has a right to complain. I'm glad he uses humor, which is more exemplified in your quote than mine.
He is consistently against increased taxes and doesn't see it helping the economy. That position is allowed even if it is not popular.
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Hey Andrew,
Ben is balanced, which is one reason he is popular and influential: when someone is trying to make mostly impartial judgments tempered with humor, what's not to like? I say this knowing that he is biased.
Spending must be cut. This occurred heavily under the Clinton administration, which happened to balance the budget. I agree responsible adults pay their own way; the unaddressed issue is the 47% who pay no Federal income tax. The vast majority of taxes are paid for by the relatively few. I'm not suggesting that the non-payers are irresponsible, but clearly for someone to dissent based on lack of perceived economic benefit is reasonable (even if you ultimately disagree).
My recent post Second Chance Round Up with Uncommon Money News
You are so welcome 🙂 It's nice to hear some reason that is thought out logically rather than just a rant.
Where does the money go? The same can be asked of the US as a whole.
About $40B a month is oil imports. About $15B a month is the direct cost of the wars (on top of the regular military budget).
The entire trade deficit with China and Mexico combined is less than $20B a month.
So when you see that other countries have lower net taxes than we do and higher standards of living, well there's 2 things we must end – oil imports and war. Then we can work on the 1/5 of the entire budget that goes to interest payments on the national debt.
Is it really true that 47 percent pay no (federal income) taxes? At my last job I earned minimum wage and paid a few hundred in taxes.
What did I do wrong (besides working for minimum wage) to pay more federal income tax than at least 47 percent? (Not to mention state income tax, which was greater than the federal tax.)
Fantastic Post, thank you so much for writing this, truly insightful reading.