Paul L. Caron

Monday, November 26, 2007

Democrats Debate Raising Taxes on "The Rich" -- $97,000 Per Year?

Interesting article in the Washington Post:  That's Rich -- But Maybe Not for Someone Else; Issue of Who's Really Wealthy Can Also Affect Political Debate, by Joel Achenbach:

Who's rich? Who's middle class? How can you tell the difference? ... The two front-running Democratic presidential contenders, Sen. Barack Obama (Ill.) and Sen. Hillary Rodham Clinton (N.Y.), sparred over tax policy and quickly got entangled in the question of whether someone making more than $97,000 a year is middle class or upper class. That's upper class, Obama said. Not necessarily, suggested Clinton. ...

The exchange between Obama and Clinton began when the senator from Illinois said he was open to adjusting the cap on wages subject to the payroll tax. That's the tax that the government prefers to call a "contribution" to Social Security. Under current law, a worker pays a flat percentage (and employers match it) of wages up to $97,500. Wages beyond that aren't taxed.

Clinton responded by saying that lifting the payroll tax would mean a trillion-dollar tax increase, adding that she did not want to "fix the problems of Social Security on the backs of middle-class families and seniors."

Obama replied: "Understand that only 6 percent of Americans make more than $97,000 a year. So 6 percent is not the middle class. It is the upper class."

Clinton: "It is absolutely the case that there are people who would find that burdensome. I represent firefighters. I represent school supervisors."

Obama doesn't want to lift the payroll cap entirely, according to one of his campaign's senior advisers. Rather, Obama has said he would consider a "doughnut hole" arrangement, in which people would not have to pay any additional payroll tax until they had made at least $250,000 or $300,000. The adviser said of Obama: "He has always said that the people he expects to pay their fair share are households with income above 250,000."

Clinton has cited that same figure, saying households with income above $250,000 can pay the marginal rates set in the 1990s when her husband was president. She would also give married couples with estates worth less than $7 million an exemption from the estate tax, known in conservative Republican circles as the "death tax." ...

Edward Wolff, a professor of economics at NYUy, thinks that the middle class in a major city includes people in households with incomes from $40,000 to $100,000. From there, up to $200,000, people are "upper middle class." ... People making $200,000 to $350,000, he says, could be considered rich, but they still have to slog to work every day. To be really rich, in Wolff's scholarly judgment, you need not only an income upwards of $350,000 a year -- which happens to be right about the point where today's top marginal income tax rate of 35% kicks in -- you also need at least $10 million in accumulated wealth.

See also The Motley Fool:  Tax-and-Spar Democrats, by Rich Smith.

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I have to laugh to keep from crying. These two members of the American elite ruling class debate the definition of 'rich' while the rest of us are busy working, trying to build lives with what's left of our earnings after they take their cut.

Posted by: mrroofis | Dec 3, 2007 5:18:32 PM

Precisely why we best move toward enacting the FairTax consumption tax:

The effective tax rate percentages, that different income groups would pay under the FairTax, are calculated by crediting the monthly "prebate" (advance rebate of projected tax on necessities) against total monthly spending of citizen families (1 member and greater, Dept. of Commerce poverty-level data; a single person receiving ~$200/mo, a family of four, ~$500/mo, in addition to working earners receiving paychecks with no Federal deductions) Prof.'s Kotlikoff and Rapson (10/06) concluded,

"...the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.

"Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax."

Further, per Jokischa and Kotlikoff (circa 2006?) ...

"...once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohort. Under a 23 percent FairTax policy, the poorest members of the generation born in 1990 enjoy a 13.5 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 26 percent improvement in their well-being. For middle class members of this birth group, there's a 12 percent welfare gain. And for the richest members of the group, the gain is 5 percent."

Posted by: Ian from Ann Arbor | Nov 28, 2007 3:21:56 PM

What's the big deal, up until last year we were paying an extra tax on phone service from pre-1900. Why?

Because only "the rich" own phones.

Every tax of every form, at some time will rest on the lower middle class. Not because something has happened on accident, but because that's the best way to get money from taxation.

Oh, and Jay, I can answer your question... but I'm not going to. However I do know:
"Where did Obama get the stat that only 6% of Americans make over $97,000 a year?"

But where he pulled it from; isn't a place I'm willing to go hunting to see what other numbers he has available there...

Posted by: Gekkobear | Nov 28, 2007 1:24:29 PM

I don't know what you're complaining about. The Democrats haven't even been elected yet and they've already made you rich.

Posted by: Ernst Blofeld | Nov 28, 2007 10:51:57 AM

Minor error in my last comment, that was from current worksheet Schedule Q. Also, amusingly, line 10 refers to "Federal estate tax". I guess only the other death taxes are "death taxes" to the feds.

Posted by: Ken S, Fifth String on the Banjo of Life | Nov 28, 2007 8:08:41 AM

...the estate tax, known in conservative Republican circles as the "death tax."

That's, er, rich, given this verbatim quote from IRS form 706, lines 11 to 13:

11. State death taxes paid
12. Foreign death taxes paid
13. Other death taxes paid

A rare and shining example of honesty in government.

Posted by: Ken S, Fifth String on the Banjo of Life | Nov 28, 2007 8:05:26 AM

Let's not forget that the guys in the traditionally "blue" states also tend to have outrageous property taxes. And while they're making these "rich" salaries, they're often getting hit with AMT. They're paying a ton in SS taxes (and do you think they'll see a dime of that money at retirement?)like my husband does. Both mom and dad are working and trying to make a good living, but they are getting a dry cornholing from Uncle Sam because of their salaries. So there they are bursting at the seams in their 800K 2 bedroom shoebox that they live in with 1 or 2 kids, paying 20K a year or more in daycare, but they can only claim a teeny bit of it in April because they're "rich".

Anyone living in some hick town where $60K per year is a fortune just doesn't get how it is in the real world. I think Obama is trying to court more conservative (and backwoods) voters. It's pathetic and low. Of course, someone making less always thinks they can live better on a higher salary. There's always this holier-than-thou attitude about how *they* would do things with "that much money". Total crap.

Posted by: mldubose | Nov 27, 2007 6:34:11 PM

OK, let's get real on this (yes, AGAIN)...modern-day Democrats are addicted to tax increases the way Lindsay Lohan is addicted to coke/booze. As Shannon pointed out so well in the first post, Dems will not stop at 97, or 84, or anything. Gov. O'Malley in my People's Republic of Maryland just jacked the ciggie tax a buck and got the slots referendum through, both of which are regressive taxes that hit mid and lower classes harder. They will not stop doing this because they cannot stop doing this. An intervention is needed, quickly. You may not feel a bunch of warm fuzzies towards the typical Reepub pol right now (I know I don't) but give 'em this: 3, count 'em, 3 tax cuts in six years.

Bottom line: If you vote Dem next November, your taxes WILL go up. No ifs, ands, or buts. They will.


Posted by: Zregime | Nov 27, 2007 5:37:45 PM

Remember when Bush41 couldn't tell us what a quart of milk cost and everyone ridiculed him? Now Obama doesn't know what "the little people" earn. He'll be hailed as our savior. I'm sure the pimp, Oprah, will have a panel discussion on the subject.

Posted by: Crash | Nov 27, 2007 3:40:15 PM

Longshoremen, plumbers, electricians, machinists, tool and die makers, and auto mechanics all make more than $97,000/yr in the Pacific Northwest. I thought they were blue color workers. Silly me.

Posted by: Paddy | Nov 27, 2007 12:40:06 PM

Where did Obama get the stat that only 6% of Americans make over $97,000 a year? A quick Google search showed me that 27% made $75,000 or more in 2005 with nearly 16% making more than $100,000.

And people are making good points. Live in NYC and make $97,000 and you're lucky if you can afford to buy a small apartment in Manhattan. Chances are you'll be riding the N or 7 train in from Queens.

Take that $97K to Greenville, South Carolina however, and you can easily buy yourself a 2500 square foot home with granite counters, stainless steel appliances and hardwood floors.

Posted by: Jay | Nov 27, 2007 10:40:50 AM

"Lets see S-CHIP poor was $84,000 Obama rich is $97,000 therefore middle class is button holed between $84-97K. Yeah that's it."

Well, politicians are always saying how the middle class is getting squeezed in this country...

Posted by: KeithK | Nov 27, 2007 10:34:01 AM

What no one noticed is they have completely thrown out the idea that social security is not supposed to be a benefit, but your own money you are getting back with interest, which is why there is a cap.

They just made the leap to calling it a benefit that some should receive and other people should pay for, and no one called them on it.

Posted by: plutosdad | Nov 27, 2007 10:16:50 AM

The thing is, in the places with the greatest concentration of Democrat voters : New York, San Francisco, Boston, Los Angeles, Washington DC, etc. the cost of living is the *highest*, and $97,000 a year still means living in an apartment. You have no prayer of owning a house, in those cities, on $97,000 a year.

In Republican-heavy places, however, $97,000 might actually be quite comfortable.

Posted by: GK | Nov 27, 2007 9:53:11 AM

It's really criminal that tax policy is made by looking at income as if $97,000, or any figure, has anything like a universal significance in different regions of the country.

Posted by: Ron Coleman | Nov 27, 2007 9:22:53 AM

It seems that whenever Democrats are begging for votes they say Im poor and should support them but whenever they are talking about taxes Im rich and should pay them more.

Posted by: vivictius | Nov 27, 2007 9:15:48 AM

Let's see. The usual rule of thumb is that your home's price should be 3 times your gross salary, putting a "rich" person's home at 300k. In San Jose, that won't even get you started, with the median home price (as of 11/26) being 630k. Renting is no bargain either. I'm currently renting a 1100 sq ft 2 bedroom house for 2200 a month. With utilities the number comes close to 2600, which is 31,200 a year. That would be at least half the take home pay of someone with a salary of 97k.

Posted by: Noah Nehm | Nov 27, 2007 9:13:56 AM

I used to be a Gothamite (NYC to you in the 'burbs) for my first 43 years on this planet. I then moved to a state that is considered 'backward' by us.

I am no longer paying for the unions to fleece me, the locality and state to stick me up, the non stop fees and taxes to fund patronage jobs, etc.

So to put it bluntly, those of you in NYC and Chicago and Boston and San Fran, etc, I have no sympathy for you. If you choose to live there don't come with your hand out to me to subsidize your liberal lifestyle and mindset.

Guess what, I get all the services you get and have a tax bill that is 1/5 of my former self. If I lived on Long Island probably 1/8. Vote in some fiscally conservative lawmakers, have them hold the line for a year or two and voila! I won't be hearing your whine about how you can't afford to live on $250K a year.

Nah, won't happen. You'd prefer to go back to the 90% top bracket. Think I'll go sit by the pool now cuz I only have to work 40 hours a week to live.

Posted by: kingronjo | Nov 27, 2007 9:01:22 AM

What you do with income CAN create wealth.

True, unless government takes too much of your income.

Posted by: David R. Block | Nov 27, 2007 8:43:25 AM

For a dual income household in NY that would be two lower middle inciome jobs....

Posted by: McA | Nov 27, 2007 8:21:44 AM

Lets see S-CHIP poor was $84,000 Obama rich is $97,000 therefore middle class is button holed between $84-97K. Yeah that's it.

When 'political hacks' talk income are they talking AGI or Taxable income. That can make a big difference. Or does it depend on the phase of the moon.

Posted by: Dasher | Nov 27, 2007 8:01:35 AM

But think about all the *imputed* income!

- My employer doesn't make me pay for parking space. Ditto Publix, etc.

- How much are my fringe benefits worth? Millions! (If I get cancer.)

- I own my home (well, the bank does, but you get the idea), so I'm not paying rent.

- I'm married, so no need for regular relief at the hands (as it were) of a local sex worker.

- I'm pretty sure my wife put my darks in the washer this morning, so I guess I have a servant (as does she).

- I'm not paying alimony or child support to anyone.

My God! When I add it all up, upper class begins at, oh, about $25K. So pay up, you whiners!

For the children.

Posted by: Patrick Carroll | Nov 27, 2007 7:55:10 AM

Obama shoud know better, he represents Chicago which no-one would call a low-rent neighborhood. Points off.....

Posted by: Ted B. (Charging Rhino) | Nov 27, 2007 7:45:53 AM

I agree with Retread. 97K is the gross number. Remember you have to give 1/3 of that off the top to the government already. Then use the remaining to live on and build wealth if you have any left.

Posted by: Debbie | Nov 27, 2007 7:43:57 AM

The mortgage on my two bedroom condo in Silicon Valley is $2050 a month (at 5.125% interest). Taxes are another 500 a month. Condo fees, 400 a month. That means that I have to earn about a hundred grand in order to afford my tiny condo, using roughly 34% of income spent on housing. So according to Obama, I'm rich? What has he been inhaling?

Posted by: Anonymous | Nov 27, 2007 7:33:25 AM

Where I live, $97,000 is barely middle class (and that's if you don't have kids; it's barely a living wage of you do). Of course, I live in a city where people pay mansion taxes on studio apartments, where deduction phase outs kick in before a person makes enough to own a car, where people in the 28% tax bracket struggle to pay the rent.

Such are the inequities of our one-size-fits-all set of federal tax rules.

Posted by: tim maguire | Nov 27, 2007 7:32:40 AM

Some one needs to give these people a dictionary and a lesson in economics. Income does not equal wealth. It is income that people use to pay bills and buy things. What you do with the income CAN create wealth

Posted by: DPW | Nov 27, 2007 7:14:37 AM

$97,000 per year isn't even upper middle class, let alone rich. For large metropolitan areas, it's lower middle class.

Obama really needs to get out more.

Posted by: Rex | Nov 27, 2007 6:53:29 AM

Interesting that in this context 97K is rich but in the SCHIP context three, or was it four, times the poverty rate would qualify for government health care. A plague on all their houses!

Posted by: Retread | Nov 27, 2007 6:51:14 AM

Yeah, I'm rich now! Who knew? Way I figure it, I made my first million before age 45. The fact that I spent it before age 35 is immaterial.

Posted by: Daveg | Nov 27, 2007 6:51:11 AM

Some scientist once observed that all discussions without numbers were just theology. It interesting that we use the terms "rich","poor" and "middle-class" continuously in political debates yet we lack any concrete consensus about what those words mean.

In any case, we can predict that todays taxes on the "rich" will be tomorrows taxes on the "middle-class." Every income based tax without exception has started as a tax on the "rich" and then rapidly expanded to encompasses almost everyone. The elasticity in the definitions of the economic classes no doubt helps this process.

Posted by: Shannon Love | Nov 27, 2007 6:47:36 AM