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What a Difference Two Thousand Dollars Makes

In this first of two articles, the author explains why the $250,000 tax relief cutoff is unfair -- and offers a suggestion for what to do about it.

 

If you made $249,000 last year, then you probably spent this past weekend mowing your own lawn, clipping coupons and changing your car’s oil. If you made $251,000 last year, then you probably spent last weekend cruising Newport. Or perhaps you attended Wimbledon, or relaxed in your Italian villa.

According to President Barack Obama, families earning less than $250,000 are middle income Americans, while families making more than this number are “the wealthiest Americans.” Yet, despite the President’s depth and breadth of expertise in all matters concerning the economy (sic), I have a feeling that there are plenty of families living in expensive areas who would argue that a $250,000 income makes a wealthy lifestyle not only improbable, but impossible.

Look, we all know that earning $250,000 in an area where the average home price is more, well, average means living a better lifestyle. Earning $250,000 in Topeka goes a lot further when the average home costs less than $181,000. Earning $250,000 in Greenwich or Ridgefield or Trumbull -- or anywhere in the New York metro area -- well, you undoubtedly know your way around the plumbing aisle at the Home Depot.

Even Congressional leaders Nancy Pelosi and Chuck Schumer argue that the tax cuts should be extended (or, dare we say, made permanent?) for families earning less than $1 million in earned income.  Could it be that they understand that earning $250,000 -- especially in a major metro center -- in no way predicts a “wealthiest” American? To their credit, they have walked away from Obama’s seemingly arbitrary tax cut cutoff, which paints him more as a stubborn ideologue and less as a compromise-loving leader.

Our nation is lucky enough to enjoy a wide range of diverse economies. Some depend on technology or finance, while others depend on manufacturing, a local hospital, or a blend of them all. And yes, it’s true, areas that contain a large percentage of high-paying jobs tend to be located in high-cost areas. But taxing everyone the same rate without an eye on the local economy unjustly punishes some and rewards others.

One could certainly argue that a family earning more than a quarter of a million dollars in a suburban Mississippi town is probably pretty comfortable money-wise and may very well lead a luxurious lifestyle. Yet in Los Angeles -- or New York, or Washington, DC -- a two-earner $250,000 will cover your mortgage (maybe), your car payments (if you can afford a new one), your taxes (figure $13,000 at the low end), groceries (how much can a teenager eat? A lot), and maybe, just maybe, retirement contributions, travel soccer fees, a new fridge and a trip to the vet when little Rocky eats a pound of chocolate.

And don’t even get me started on higher education costs.

As I stated many weeks ago, at its heart. The reason the real wealthiest Americans get a big tax break is because they’ve saved enough to take advantage of loopholes in investment income rules, such as living off tax-free income. Does anyone really think that a family making $250K per year should pay a greater percentage in income taxes than a Rockefeller-esque tycoon? Of course not. But blaming the rich for having the good sense to take advantage of our current laws ignores the real problem.

The flat tax, an idea first put forth years ago, is worth pursuing as an option. Are you loaded and you want to buy a yacht or a waterfront home in Sagaponack? Awesome. Fork it over, big spender. Are you the manager of a tire plant, your wife is a school teacher and you’re really excited about your upcoming trip to Disneyworld or the pretty new rug in the den? Cool. Pay accordingly.     

It is infuriating when news reports surface that state General Electric paid zero taxes or that Warren Buffett’s secretary paid a higher rate than the Oracle himself. But remember: they are playing the game the way it’s meant to be played.

Let us remember an important lesson that Steve Jobs taught at Apple: do not be afraid to get rid of a product -- in this case, the IRS -- that doesn’t work right, no matter how invested we are in it. Let us not whine, but we’ve always done it this way! Let us make sure that every single American -- legal, illegal, law-abiding, non-law-abiding -- pays their fair share. Period.

Jerry McTigue July 12, 2012 at 02:52 PM
Aw, my heart goes out to those who can't maintain a wealthy lifestyle, indeed have to "scrape by," on $251,000 a year. What an injustice. What deprivations they must suffer. Are you kidding me? My family lives very comfortably in Fairfield and we make way less, and I emphasize way less, than $250,000 a year. And we have two kids in college simultaneously. No, it's not a cakewalk. But do I feel deprived? Exactly the opposite. I wake up every day thanking God I live in such a great town with great people, amenities, schools, services, and recreational facilities. All of which I consider an incredible bargain for the modest taxes I pay. I already feel like I'm one of the wealthiest Americans. Yes, I agree the tax code needs an overhaul and the loopholes closed. But if I were to make over a quarter million dollars a year, with all the added comforts and luxuries that would come with it, I couldn't imagine complaining about paying a little more in taxes. It seems the more people make, the more they whine and throw hissy fits. I'll take the $251,000 and the higher tax rate any day.
Pi July 12, 2012 at 03:54 PM
If Romney is elected, I'm sure he'll close all those offshore banking loopholes.
KEVIN DILLON July 12, 2012 at 04:12 PM
I would extend the unfairness of our tax system to Fairfield as well. Where is the fairness in taxing one asset category over any others? Our town budgets rely on one source, homes, as the way to balance the budgets. While some may live in a nice home, for many of those, that is all they have. No pensions, no trust funds, no gold, silver or other commodities, no six figure salaries. Yet we only focus on the home. It is this backward thinking that will be chasing families out of town or at a minimum, downsizing and selling their home. You may say if you can't afford your home any longer, you should sell it. And you would be right. But the town can't afford many of us to do that. I have no kids in the public school system, so the taxes the town collects on my home is mainly profit to the town. If I sell my home to a family with 4 kids, the cost to educate the kids will be about 60K annually. So now the town is losing money at my address. Imagine if this occurs town wide. I am not one to normally suggest a new tax. My approach is always to look to cut spending. But the leaders of this town either can't or choose not to cut spending. All they do is cut requested increases. Well done. But if town "leaders" are intent in seeing an ever increasing budget, maybe a local income tax would be more equitable. I don't know if state law precludes this but we are on a path where one day we will be considering the decisions that 3 California cities and Scranton, Pa have made, bankruptcy.
p July 12, 2012 at 04:14 PM
You do realize that the higher tax rate only applies to income earned above $250K? In your example the person making $251K would only pay the higher rate on the last $1K of income? Under Obama's plan, which is supported by Pelosi and Schumer, everyone, including those making more than $250K would pay less in taxes than they did prior to the Bush tax cuts as all of the income that they earned up to $250K would be taxed at the lower rates. When Bush passed his tax cuts his stated rationale was that there was a surplus and that Americans had overpayed. Now, after two wars that weren't paid for, a prescription drug benefit that wasn't paid for, and a global economic collapse that has increased spending on the social safety net programs in place that has contributed to a huge budget deficit you want to cut taxes further? This is from the Washington Post based on a recent CBO study: "Americans paid the lowest tax rates in 30 years to the federal government in 2009, in part because of tax cuts President Obama sought to combat the Great Recession, congressional budget analysts said Tuesday." Returning to the tax rates that were in place for the top % of taxpayers during the last time we had our fiscal house in order makes sense to me. And to more than 60% of the population according to recent surveys.
Frederick Klein July 12, 2012 at 05:18 PM
I do believe the flat tax is an issue worthy of further exploration. It sounds more fair than what we have, and it would be much easier to compute how much you owe.
G Hoffman July 12, 2012 at 05:20 PM
As of 2009, IRS data show 97% of filers have less than $200k of adjusted gross income, so statistically, anyone making over $250k is at the top of the scale. Also, we shouldn't confuse income (what you make) with wealth (what you have).
Bill July 12, 2012 at 07:39 PM
"all of which I consider an incredible bargain for the modest taxes I pay" Of course you feel that way. If you make considerably less than $250,000 and live comfortably in Fairfield, you probably pay modest taxes because you don't have much of a house or land. You should be happy folks like us who pay a larger amount in taxes to support the town's amenities it provides people like you. Until you make $251,000 and pay the higher tax rate, just say to us "Thank you"
Pi July 12, 2012 at 08:11 PM
Hey Bill, let me get my violin out for you.
Brian July 12, 2012 at 08:19 PM
The town makes a profit on your taxes? Who maintains the roads you walk? Or the beach, library or fire department all of which contribute to your home's value? Do local businesses pay taxes? I bet even some of the larger ones do. (GE aside on the federal level).
Jerry McTigue July 12, 2012 at 09:12 PM
Bill, you make assumptions about which you know so little, and are, Oh, so wrong. I'm not going to boast about the size of my home or the amount of land it sits on or the neighborhood it's located in. That's what guys like you do. But I assure you, no one in this town is subsidizing me for anything, and I owe thank-yous to no one, least of all you. You assume that someone who doesn't complain about their taxes must not be paying very much of them. And then make disparaging comments based on your ignorance of the reality. I characterized the taxes I pay as "modest" relative to the value I receive for them. I think everyone should stop and think about that. In New York, many are paying twice as much in taxes for houses half the size, and getting lousy services to boot. You seem resentful that people who may not be paying as much as you are getting the same services as you are. If that bothers you so much (and I can't imagine spending my life agonizing over such things), why not move to Greenwich?
Lisa Bigelow July 12, 2012 at 10:17 PM
Thanks to all for reading and commenting. First, G Hoffman, I agree -- what we make and what we have are two different things altogether. And second, thanks to those who continued to debate the topic without lowering themselves into nastiness. Kudos to you! Look for an update next week, and thanks again for reading! Lisa B.
MAC July 12, 2012 at 11:53 PM
Obama is waging this class warfare because his record is one of dismal failure, he believes in a fixed pie theory of the economy, and that government should run our lives! "Rubio To Newsmax: Obama’s New Tax Policy Will Cost Jobs" ..."Obama’s intention to raise taxes on some Americans directly contradicts what he said just a year and a half ago, when he 'thought it was a bad idea for taxes to go up on anybody.' "'He himself said when the economy’s not doing well is not the time to raise taxes on anybody. Those were his words.' “'Well, the economy’s just as bad today, if not worse. So why is it a good idea now? And the answer is because the liberal base of his party, the left-wing extremists in his party, are demanding that taxes be raised on somebody.'"... "'He believes the economy grows because of government. We believe the economy grows because of the American people and the work they do in the private sector as small businessmen and women. Someone’s going to have to decide which road we’re going to go on, and that’s what elections are about, especially the one in November.'”... http://www.newsmax.com/newswidget/rubio-america-obamacare/2012/07/10/id/444948?
Newtotown July 13, 2012 at 01:24 AM
That is a general statistic. In most of Fairfield County, $250k is not considered a huge income. Whereas, NE or IA it is easily near the top. There are many taxpayers here in town that make over $250k and most are not considered rich by local standards. This is purely class warfare rhetoric launched by a desperate political candidate.
Newtotown July 13, 2012 at 01:26 AM
Without the "rich" taxpayers you cannot have teachers and other public sector employees earning such hefty salary and gold standard benefits packages. Be grateful you have a few "rich" around.
JimH July 13, 2012 at 12:10 PM
I totally agree. Flat tax is the most equitable. If it goes up or down we all feel the effects and all have a stake in the outcome of the debate rather than pitting rich against poor.
G Hoffman July 13, 2012 at 06:13 PM
A more specific statistic: only 16% in Fairfield have income over $200k. (Source: http://www.city-data.com/income/income-Fairfield-Connecticut.html) In my opinion, $250k is a huge income and I know only a few households who make that much. Our opinions differ on this point... What evidence do you have for your claim of "purely class warfare"? Everyone, as p points out above, gets the reduced tax rate on income below $250k. In my view, we can't keep tax rates at the lowest they've been in 30 years and maintain a fiscally sound nation; it's unsustainable.
Lisa Bigelow July 13, 2012 at 06:21 PM
G Hoffman, While everyone gets a "break" on earned income up to 250k, keep in mind that most tax credits phase out at a little over 100k (for example, the child care credit). So, suggesting that someone who earns 250k pays the same effective tax rate as someone who earns 100k is incorrect. Lisa
G Hoffman July 13, 2012 at 06:27 PM
Alan Blinder, professor of economics at Princeton and a former Fed vice chairman, has an op-ed in the Wall Street Journal from last November on this topic. http://online.wsj.com/article/SB10001424052970204358004577032311610518008.html While a flat tax is appealing from a simplification perspective, it is a regressive tax. Fairness is subjective...
Jim Eastwood July 13, 2012 at 06:50 PM
Solve it simple NO bama in 2012 !!!!!!!
iamspartacus July 13, 2012 at 07:08 PM
lisa also remember that social security is taken out only on the first $106K. This means that someone earning under that pays a full 6% of their salary where someone making $251K only pays less than 3%. So there is a "break" for the high income earners. Lets also be realistic someone claiming an earned income of $250K is earning alot more than that or they had better get a new accountant. So that magic $251K number is in reality over $300,000 .
iamspartacus July 13, 2012 at 07:11 PM
heafty salaries for public sector employees? First you say $250K is middle class then in the next breath a teacher making $70 K is overpaid...well which is it? If 250 is just so so then 70 must mean poverty. Can't have it both ways
G Hoffman July 13, 2012 at 07:24 PM
Lisa, I'm not a CPA, but isn't effective tax rate a different measure that is calculated by dividing tax paid by taxable income? I understood the point as being about nominal tax rates, thus was not suggesting anything about effective rate comparisons. I should have been more specific in this regard. From a nominal tax rate perspective, all taxpayers receive the same nominal rate reductions on the first $250k of taxable income. Wouldn't you agree that the complexities of the tax code make it possible for effective rates that would be in a wide range, even for the same taxable income amount?
G Hoffman July 13, 2012 at 07:34 PM
There are 535 other people that have a say on the tax code and they are the only ones who can change it...
KEVIN DILLON July 13, 2012 at 10:04 PM
Brian, your list applies to whomever lives at my address. These expenses would be added to the cost of educating kids that are currently not a cost the town pays for my address.
KEVIN DILLON July 13, 2012 at 10:06 PM
Amen Jim.
BlueMaize July 14, 2012 at 01:22 PM
I'm sorry, I find it difficult to feel sympathy for you. I'd like to add that my family makes significantly below $250,000/year. We have a nice house, we live in Ridgefield, and we've managed to pay veterinary fees, sports fees (really - my sister and I both played on elite teams that cost over a thousand dollars, not to mention travel fees to Boston and Philly and North Carolina and whatnot), and college costs. Recently, after eleven years, we got a new car. We belong to a golf club. By all standards, our lives are pretty damn upscale - despite the fact that we make way below $250,000 per year. I attend an expensive college out of state (mercifully, on financial aid) and every day I am reminded how privileged I have been to grow up in Ridgefield. Yes, $250,000 is "worth" a lot more in other parts of the country, but even the "middle class" in many other places does not live as comfortably as we do here in Fairfield County. I'm sure many of my "middle class" friends from Michigan, Minnesota, and even Chicago or California would be amazed at my lifestyle here. There are people in the USA who struggle to feed and clothe their children every day, and your biggest rationale against a slightly larger tax rate - which, for the record, is still lower than the pre-Bush taxes - is that you can't live comfortably enough to pay excessive sports fees, take care of your (expensive) pets, go on nice vacations, and buy yourself new appliances and cars? Really?
MAC July 14, 2012 at 03:16 PM
The bigger point, that most seem to be missing (like the forest for the trees), is that raising people's taxes is NOT going to solve the problem of overspending by the federal government! Those who were controlling congress, and this president, seem to believe that our earnings are THEIRS, to take as much of as they want!! They call tax rate decreases, such as the current rates (now in effect for over a decade) "expenditures"! Excuse me congress and Obama, but what we earn is NOT yours to take as much of as you want! These tax INCREASES PBO is calling for would not even run the government for more than a few days!! The government does not have a revenue problem, they have a SPENDING problem!!! Obama has added 5 TRILLION $$$ to the national debt in less than 4 years!!! Also, the federal government BORROWS 40 cents of every $$ it spends, and is spending 25 % of the entire GDP!!!
Bill July 14, 2012 at 08:19 PM
Jerry- I certainly agree with you that it's not worth spending my time agonizing over such things - because I don't. My point to you is "don't.bite the hand that feeds you." Which is the reason I replied to your post. "Aw, my heart goes out to those who can't maintain a wealthy lifestyle, indeed to have to scrape by, on $251,000 a year. What an injustice. What deprivations they must suffer." Why are you so resentful towards those that are financially more successful than you? You stated "I wake up every day thanking God I live in such a great town with great people, amenities, schools, services and recreational facilities. All of which I consider an incredible bargain for the modest taxes I pay. I already feel like I'm one of the wealthiest Americans" If you truly feel that way, and I sincerely hope you do, why would you care about what other people make? Why would you care if they are disappointed or upset that more of their money- that they worked for, is being taken due to higher taxes?

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