Taxing the rich

May 16, 2011
Andrew Ross Sorkin gives credence -- but doesn't directly link to -- Karen Hube's rather offensive analysis of what it means to be "down and out on $250,000 a year". Hube's article comes up with a hypothetical two-earner family -- Mr and Mrs Jones -- who between them earn $250,000 a year, and who "end up in the red" at the end of the year.

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Andrew Ross Sorkin gives credence — but doesn’t directly link to — Karen Hube’s rather offensive analysis of what it means to be “down and out on $250,000 a year.” Hube’s article comes up with a hypothetical two-earner family — Mr and Mrs Jones — who between them earn $250,000 a year, and who “end up in the red” at the end of the year.

How do they do this? Well, for one thing, they put $41,000 a year into savings; they also pay $9,069 per year on out-of-pocket medical expenses and going to the dentist. And check out those two cars, which add up to as much as $16,277 per year between them. Are these normal and reasonable expenses for the average family of four? Of course not: the average family of four earns roughly that much money ($66,346) in a year pre-tax — and then, first and foremost, has to buy or rent a house of some description.

In any case, the Jones’s lifestyle ($19,000 a year for daycare and after-school activities; $1,571 a year for the dog) is hardly that of a “down and out” family.

Meanwhile, Sorkin quotes Roberton Williams as saying that when it comes to the $250,00-a-year cut-off, “the very round nature of it suggests that it’s arbitrary.” Which is about as sensible as criticizing a 14% cut-off on pinot noir alcohol levels on the grounds that it’s arbitrary. Any cut-off is going to be arbitrary, but $250,000 seems like a good one to me: it’s low enough that tax hikes above that level can move the needle in terms of fiscal revenues, while being high enough as to affect only a tiny percentage of taxpayers.

And while $250,000 a year certainly isn’t don’t-need-to-ever-worry-about-money rich, both Sorkin and Hube completely miss the point about marginal tax rates, which is that they’re marginal. If the tax bracket over $250,000 a year were raised to 99% tomorrow, the effect on the Jones family would be zero: no one’s suggesting raising federal income taxes on the Joneses by a penny.

And in fact Hube’s analysis shows that federal income taxes are a very small part of the total Jones tax burden. Let’s say that they both got 15% raises, so that their household income rose to $287,500. And let’s say that the tax rate on income over $250,000 a year is raised to 39.6% from the current 33%.

Right now, the Jones family pays somewhere between $29,909 and $34,317 in federal income taxes, depending on where they live. Let’s split the difference and call it $32,113. That’s just 12.8% of their total income. With their pay rise, they’d pay an extra $14,850, bringing their total federal income tax burden to 16.3% of their total income. (Update: As several commenters point out, that’s the gross extra tax they’d pay. Even if taxes didn’t go up at all, they’d still pay an extra $12,375 in taxes.) They would probably pay extra state income tax too, depending on where they lived — but they would still end up with an extra $20,000 a year or so in post-tax income to spend on fancy vacations or flashier cars. That kind of money is a real windfall for the vast majority of families in America; for the Joneses it would be a nice benefit at the margin.

The thing which really annoys me about all these pieces is that they seem to be based on the idea that a sensible fiscal policy would only raise taxes on people who are so rich that they never need to worry about money. Which of course is ridiculous. And when Sorkin says that “tax brackets could be added for the wealthiest,” he starts talking about tax brackets at the very highest levels of the income distribution — which look more punitive than useful. Instead, why not implement a wealth tax? Ask anybody with a net worth north of, say, $5 million to pay 1% of it per year in taxes. Then you’re certainly taxing the rich. Even Karen Hube would have to admit that people with $5 million in the bank count as rich. Wouldn’t she?


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