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.” .
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:
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
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.