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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 even 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.

Bernard July 12, 2012 at 12:25 PM
So let me get this straight, if I make $251,000 but end up buying a 5m house in Greenwich and send my kids to Yale or Bentley then I should be considered just making it? As someone who is very fortunate to have a family income over $150,000, I can tell you that this explanation is utter crap. Wealth is relative and by most world standards my family is very wealthy. Compared to most of my neighbors, we still do very well, especially in this economy. Do we struggle? Not like a lot of Americans do now. The idea that an arguement is being made that $250.000 is middle class is laughable and insulting. We can afford to pay more in taxes and anyone that tells you otherwise is spouting ideology rather than fact. We are not all struggling in the same ways and its time for a little gratitude from the "rich" guys - myself included.
Glenn Wildman July 12, 2012 at 12:33 PM
You've got to be kidding! What a load of crap! The higher rate is on wages over $250,000. For a person making $251,000, the first $250,000 is taxed at the lower rate, and $1,000 is taxed at the higher rate. And if your family is making over $250,000 a year, your doing VERY well in ANY part of the country! Wealthy people got that way because they're better savers?? Paying taxes should not be a game to be played! Your right about the IRS though, it doesn't work right... Unless your wealthy.
Liza Zajac Whitehead July 12, 2012 at 12:36 PM
I agree with the author that our current tax system is a holy leapin' mess and can understand the initial attractiveness of a flat tax. But a simple flat tax is regressive, meaning it takes a higher percentage of low incomes than high ones. I strongly encourage everyone to take a good look at the FAIR TAX plan. It's simple, transparent, fair and most importantly EVERYONE pays their fair share. Please please please take a few mintues to check it out here: http://www.fairtax.org as you owe it to yourself to at least be informed about it.
Liza Zajac Whitehead July 12, 2012 at 01:02 PM
John, You are right that wealth is relative. The author thinks $250k is too low, you think it's plenty high. While I personally think a family can live quite well on $150,000 I know enough to admit that's just my opinion. Again, like you said - It's relative. That's why no one should be able to pick a special number (like, say, $250,000) and decree all incomes below are "middle class" and all those above are "wealthy". It's fair, reasonable and intuitive for folks to connect LIFESTYLE (i.e. what we buy - homes/boats/cars/jewels, etc) with how much taxes we should pay. That's what consumption taxes are all about! We don't need a three-million-word-plus word income tax code with thousands of loopholes. Sadly those loopholes are all about decreasing the tax bill of the very wealthy. Our current tax code is broken beyond repair; it's time for more than just reform, it's time for replacement.
Glenn Wildman July 12, 2012 at 01:38 PM
Lisa, The problem with a consumption tax, is that "wealthy" people don't have to spend all the money they make. It can be just "sat on" or invested, making more and more money completely untaxed.
Liza Zajac Whitehead July 12, 2012 at 01:58 PM
Glenn, I agree that consumption taxes do encourage personal savings, but that's a huge positive! Lack of personal savings (and it's associated personal debt) is a major problem in America. Are you really thinking that the truly wealthy (again, I admit that's a relative term) are going to forgoe their LIFESTYLE (luxury planes, boats, jewels and multimillion dollar homes)? No, eventually it's ALL going to get spent as you can't take it with you. And there won't be any more games about earned vs. unearned income, short vs. long term capitol gains, roth vs. traditional IRA's etc. It would all be treated equally and fairly - if and when you spend it, you pay the tax. If you want to pay less taxes, then spend less. If you want to pay no taxes, don't spend it. Government (and their lobbyists) can stop controlling our behavior through tax penalties and incentives and we can control our own financial house.
Bernard July 12, 2012 at 03:02 PM
We cant do the things we need to do as a nation without a relatively stable and predictable revenue source. Income taxes are the most reasonable and stable source of this revenue. While it would be nice to decide what we would want to contribute, doing things collectively cannot be based on wildly divergent and individual decisions on what is sufficient. People do not like to pay taxes and look to contribute as little as possible even though many of the things we we pay for collectively are funded. Heaven help the person who suggests that contributing to the common good of the nation is a patriotic duty. A progressive tax code, simplified is fairest though everyone should contribute something because that is ultimately what determines the strength of a nation.
Glenn Wildman July 12, 2012 at 04:27 PM
Its a huge positive IF you have money to save. Planes, boats, jewels, and homes can be, and are, bought overseas. And yes, they will forgo spending. I agree, the tax code is a royal mess, but it needs to be fair, not just simple.
Liza Zajac Whitehead July 12, 2012 at 05:05 PM
Hi Glenn, I agree the Fair Tax is simple (at least compared to our current code), but it's certainly not simplistic. I disagree that the wealthy (or anyone else, for that matter) will forgo spending. Why do people want to be rich? It's not the cash itself, it's WHAT the cash can buy us. It's the LIFESTYLE. We want the STUFF. Both the folks that work their tails off for it and those who just step in it (let's say they win or inherit their $$$) still SPEND it on our lifestyles. Buying things overseas and then importing them for personal use is both cost prohibitive and plain old tax evasion (punishable by law). Think about it, today legal tax avoidance is as easy as using any of the thousands of loopholes and illegal tax evasion is as simple as NOT reporting your income (or, even easier, exaggerating your deductions). You can do this completely privately and it's sadly rampant. Under the Fair Tax it would be much more difficult to avoid or evade. You buy the stuff, you pay the tax. You want to cheat? You'll need to jump through all manner of hoops to do so, including getting at least a second person / collaborator (presumably a retailer) to help. And it would still be illegal and punishable by law. I encourage you to keep an open mind about The Fair Tax. Respectfully, Liza
Liza Zajac Whitehead July 12, 2012 at 05:19 PM
Hi John, It seems my reply to this post is lost in Patch-land. I'll give it a few more hours to show up and then reconstruct it if need be. In the meantime, have a great afternoon! Liza
Glenn Wildman July 12, 2012 at 05:54 PM
Sorry, I got off topic. My outrage was over this article. I'm only sceptical about The Fair Tax. I'll read more about it, I promise.
Lisa Bigelow July 12, 2012 at 09:57 PM
Thanks to all for reading and commenting. Lisa, I am eager to learn more about the Fair Tax and I will spend a large portion of this weekend preparing my follow up to this piece. And Glenn, you are right to be outraged. Our system is just screwed up. Period. Thanks again. Lisa B.
Liza Zajac Whitehead July 13, 2012 at 01:48 PM
John, I guess my original is forever lost in Patch-land so I'll restate what I can remember. 1) I'm not sure why you think that income taxes are somehow more reliable and stable than consumption taxes. I admit I haven't thought of that so I'd love to hear more about that. So far though, I'm not afraid of the "wildly divergent individual decisions" you speak of. People consume. We buy. The rich buy more, the poor buy less, but we all buy. We can't take it with us so eventuall it's ALL going to be spent, even if it's by our heirs. 2) The Fair Tax plan is progressive, not regressive, thanks to the pre-bate element. 3) I think we can ALL agree that everyone should pay something and therefore have "some skin in the game" - this is not the case with our tax code today. 4) I agree that paying taxes (contributing to the common good) is a moral and patriotc duty. May heaven help us all! Please consider giving the Fair Tax a decent looksie. Liza

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