Wednesday, September 15, 2010

How Do You Define Rich

I have been reading a lot about the income tax cut/tax increase debate recently.

One proposal that seems to be gaining ground is to keep the Bush era tax cuts in place for individuals earning $200,000 or less and a couple earning $250,000. The Bush era tax cuts would expire for those earning $200,000+ or a couple earning $250,000+.* It seems, from the reading I have done, that most people consider a couple earning $250,000+ "rich" and worthy of higher tax rates.

I'm not so sure I agree that a couple earning $250,000 should be lumped in with the millionaires and billionaires. First, as a married person I am seriously annoyed at the marriage penalty. I might agree that an individual earning $200,000, with no dependents, might be rich. But, I don't agree that two working professionals who each earn $125,000 is also subject to higher taxes. That is a major marriage penalty and I don't like it. If I were in charge I would up the threshold for a married couple to at least $300,000.

Second, many of these folks are folks who financed their futures, these are your medical school, law school, business school graduates and most of these folks took out big student loans to pay for their education. Some of these folks will be paying off their student loan debt for many years and they can't deduct the interest. I have friends who have $1000 per month student loan payments. Third, this working couple likely has a mortgage, a car payment or two, in addition to the student loans. Throw in a child or two and they are also likely paying big bucks in child care costs.

Yes, these folks are in the top 5% of the country's population in terms of income, and I agree that they should pay more in income taxes than a couple earning $50,000 a year (which they already do). But I don't see these folks at rich or worthy of disdain or punishment.

Furthermore, the top fifth of households already pay 69% of all federal taxes. I was also surprised to learn that 43% of tax "units" (that is an IRS term) pay nothing in income tax or will have a negative income tax (of course they do pay other kinds of taxes). I fully support our progressive system and I believe that those who benefit the most, those who earn the most, those who have profited the most, should pay the most. But is it fair for the income tax burden to be so uneven, 43% paying nothing in income tax and the top fifth paying 86% of the income tax collected? See this article for more information.

What do you think?

* The tax cuts would expire for earnings above the $200,000 or $250,000 threshold, so the higher rates would apply only to those monies above the threshold.


Honey said...

The world is overpopulated, so there should be a severe tax penalty for having children. And I am not sure that debt load should be a factor in determining tax brackets. But I do think the married couple amount should be double the single person amount, for a variety of reasons.

Stephanie said...

One could also consider the cost of living in different parts of the country. Where I live in Kentucky, $125,000 will buy a family of 4 a VERY nice lifestyle. However, that same family would be near poverty if they lived in some of the east coast cities or California.

Nicole said...

I'm professionally ambivalent.

The role of government isn't about fairness. The big questions are empirical. Will renewing tax cuts on those who make 250K or more impact the economy positively enough to offset the lost revenue to taxation?

The answer is empirically very clear for people who make barely enough to live on and don't pay all that much into taxes as individuals. Extending the tax cuts makes sense for the government-- people don't cut back their spending, government loses revenue, but not so much per person, and government doesn't have to worry about other programs that might get increased use (WIC, SCHIP, etc.)

But for people who make 250K or more, it isn't so clear. They're not as constrained, an additional dollar isn't worth as much to them, they don't have to spend every additional penny, and more precautionary saving/debt payment might be good for them. So it's not as clear for them as it is for lower income folks.

p.s. As a family of 3 we lived very nicely on less than 125K (120 including savings goals and mortgage prepayment on our out of state property, to be exact) in a very fancy CA suburb (one of the most expensive in the country), in a lovely rental house 3 miles from the beach (rent: $3K/month). 90K would have meant less eating out or a less nice house, but 125K still allowed retirement and 529 saving, daycare, one car (and 4 new tires and an alignment fix for it), internet, cable, travel, eating out 2x a week, fancy cheese, shopping at whole foods etc. It was NOTHING like poverty.

There's real poverty in CA cities but not among those making 125K.