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The rich are not bad. Just rich.

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Here's a riddle: Todd Henderson's household makes north of $400,000 in a city where the median household income is $46,748. Yet Henderson says his family is "just getting by despite seeming to be rich." How can this be?

The Hendersons don't "seem" rich. They are rich. They are one of the richest families in the country. Their country is the richest country in the world. And the world is richer than it's ever been before. The Hendersons are thus one of the richest families in the richest country in the richest era the world has ever known.

Which doesn't mean that they don't worry about money. The implication of our rhetoric about taxes is that no one making more than $250,000 will feel a tax increase. That's not true. Our economy has adapted to having rich people, and now there's lots of stuff for them to buy. Private school, for instance. Fancy cars. Dinners at Alinea. Only a very select few make so much money that they cannot figure out how to buy enough stuff to make them feel financially stressed. This is Henderson's argument, and he's right: You can make $400,000 and still worry over the checkbook. You can make $400,000, in fact, and be terribly in debt.

Now, most of the things you're buying at $400,00 aren't the bare necessities. Your house is fancy, and in a desirable location. Your television is large, and flat. Your kid's school is only available to those with a lot of money, because you're paying for a wealthier peer group and higher-paid teachers. These purchases may seem like luxuries to people making $60,000, but a family making $60,000 a year will seem to be living in incredible luxury when faced with the median family in Mexico. It's all relative.

And it's relative to Henderson, too. "The super rich don’t pay taxes," he complains. "They hide in the Cayman Islands or use fancy investment vehicles to shelter their income."

And so there it is: Henderson may be rich. But he's not "super rich." That's where the president should be focusing. Not only do they have a lot of money, but they're cheats, too.

This is one of the problems with the debate over tax cuts. The effort to separate support for popular middle-class tax cuts from unpopular upper-class tax cuts has let a sort of moral language creep into the conversation. As if rich people "deserve" higher taxes because they're somehow bad, rather than because their share of the national income has gone up and their tax rates have gone down.

Which is all to say that this debate has gotten a bit confused. The argument for taxing people who make more than $250,000 isn't that they're bad people, and it isn't that they won't notice the tax increase. It's that we've got a very large budget imbalance, and we're going to need to do a lot of things to correct it. Taxes on the rich have dropped even as the incomes of the rich have skyrocketed. So one of the obvious things to do is update the tax code to correct for that drift. But eventually, we'll need to do much more than just increases taxes on the rich, and though politicians have tried to sell this one as a change that most Americans won't notice and needn't worry about, eventually, they're going to have to start talking about changes that people will notice, and should worry about.

By Ezra Klein  | September 20, 2010; 9:30 AM ET
Categories:  Inequality, Taxes  
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Comments

If Obama and the Democrats are successful in raising the tax rates on the quasi-rich, then they too, like the super rich will work hard to avoid paying taxes. I met a woman this weekend who has a doctor husband who makes more than $250,000. She was planning on starting an alpaca farm so that they could use the expenses as a tax write off. Her only motivation for this was to counterbalance the tax increases coming next year. I am sure that people like the Hendersons will meet with a tax attorney before they sell their house or cars, and come up with ways to deprive the Obama administration and the Democrats of the revenue that they think that they will get by raising the taxes on "the rich".

Posted by: cummije5 | September 20, 2010 10:05 AM | Report abuse

Excellent post, Ezra. Frequently people from both sides of the political spectrum spin a tax increase on the rich as some kind of punishment. We are constantly, in good times and bad, trying to find the right balance of taxes and spending and taxes to keep the economy growing and the lives of our citizens improving. Even if we grant that extremely improbable argument that at some point we arrived at the perfect balance of those two factors, changing circumstances change the balance. Reasonable taxes and spending in good times are likely to need adjustment in bad times, and vice versa. That's going to mean tax cuts from time to time, but it also means tax increases at others. The rich have enjoyed increasing incomes and lowering taxes for a while now, eventually circumstances dictate that this will need to change.

The expiration of President Bush's tax cuts are also not some kind of mean act against anyone. It's the way the cuts were designed.

Posted by: MosBen | September 20, 2010 10:06 AM | Report abuse

Most Americans wouldn't notice or worry if we stopped throwing money away on military misadventures. So I say start there. Of course we won't b/c the key to have that happen is for most Americans to notice and worry and make it happen.

Posted by: eRobin1 | September 20, 2010 10:11 AM | Report abuse

--"The effort to separate support for popular middle-class tax cuts from unpopular upper-class tax cuts has let a sort of moral language creep into the conversation."--

The "moral creep" is reflected in Klein's obsession with other people's money. It's his life now, and that isn't healthy.

Has Klein ever been caught recommending that one or another government program be cut or eliminated?

Why should anyone be in favor of more government theft in the name of bailing out the stupidities of earlier government thefts?

Posted by: msoja | September 20, 2010 10:15 AM | Report abuse

While I'm working hard at trying to empathize with Mr. Henderson's desire to keep up with the Jonses, the first $250k of his income still will not be subjected to higher taxes. Even at a straight $300k income with absolutely no deductions, his taxes will go up no more than $2300. Much less once he does itemize his deductions (which I'm certain he does).

Posted by: nomadwolf | September 20, 2010 10:24 AM | Report abuse

I think one of the ways Dems miss on this issue is to talk about the tax increased being on PEOPLE with income over $250,000 vs. on INCOME over $250,000. In other words, everyone would 'benefit' from the continuation of Bush era taxes rates ON UP TO $250,000 OF INCOME, the higher rates applying only to the marginal income above that level. It's an argument which I think is easier to understand and doesn't require demonizing anyone, just making the case you make about who has received relatively greater benefits from being able to be part of the American economy, and therefore should be expected to contribute a SLIGHTLY higher percentage of those greater benefits.

BTW, I think the argument about the 'poorer rich' (i.e., the $300,000) incomes) moving into tax evasion if rates are raised is way overblown. Before we retired, hubby and I were very close to the $250,000 joint income category, and believe me, there is nothing beyond maxing out 401Ks that will provide significant tax savings at that level. The real deals are for the really rich. And as for the Dr's wife who thinks she is going to have a net savings from running an alpaca farm, I sure hope her hubby is smarter than she is - if he's not, I sure would not want to be his patient.

Posted by: guesswhosue | September 20, 2010 10:27 AM | Report abuse

They are probably baby-boomers, the 'I want everything, but won't pay for anything' generation.

My family won't initially be hit by the upper income tax hike, but we likely will eventually (under the cap a bit, and mort deduction will keep us under for a while -- but certainly not forever). I don't care. I'm in it for the country to not be a joke. I actually care about the larger picture. Who's with me?

Crickets?

Posted by: rat-raceparent | September 20, 2010 10:30 AM | Report abuse

@msoja - Klein comments on the political debate that makes news. His "obsession with other people's money" is driven by the coverage news organizations lend to tax policy debate.

I agree with the point that the debate should be about both sides of profitability; tax debate only covers revenue, and there should also be debate about costs and government spending. You don't necessarily have to talk about them both at the same time.

Posted by: JChaps | September 20, 2010 10:32 AM | Report abuse

I don't think the rich deserve a tax hike like it's a punishment. But when they complain as though they can barely make ends meet, I wonder how they think people making $30k make ends meet. We sacrifice. We cut coupons and budget everything. I plan meals 2 weeks in advance to make sure we always at least have enough to eat. Deciding what my family can do without is like second nature to me. But do I deserve it? No. I just think that's life and this Todd Henderson fellow sounds spoiled.

Posted by: GrrrlRomeo | September 20, 2010 10:47 AM | Report abuse

Ah, Ezra, there you go, sounding reasonable again when many of us were ready to get out our pitch forks... To be fair the outrage at Prof. Henderson is that he is not only really wealthy anyway you slice it but that he then tries to lump himself in with the plumber and nurse and exhibited virtually no sense of the common burden or how much he benefits from tax-payer subsidized programs (i.e., mortgage interest deduction, tax-deferred savings, tax-exempt donations to his high-priced university, etc.) not to mention the law-and-order benefit and low-wage labor pool those terrible schools he pays for provide. Nothing against rich people, but the "I got mine, you get yours" crowd is insufferable.

@msoja, I am pretty sure that I have read E. Klein suggesting that revising if not eliminating the mortgage interest deduction (one of the biggest categories of foregone revenue in the federal budget), oil and gas subsidies (another biggie, if not the biggest taking into account effects of climate change and the environmental degradation of public lands), and farm subsidized that favor unhealthy foods and unhealthy farming practices. They may not be the top of your list, but he has in fact suggested reforming (corporate and middle/upper class welfare) programs.

Posted by: kcar1 | September 20, 2010 10:48 AM | Report abuse

Henderson doesn't understand the extent to which his way of thinking is only available to a small class of people. For example:

"Our next biggest expense, like most people, is our mortgage. Homes near our work in Chicago aren’t cheap and we do not have friends who were willing to help us finance the deal. We chose to invest in the University community and renovate and old property, but we did so at an inopportune time."

Fine, "just like most people." But they could certainly have found a place to live a lot cheaper, with schools good enough so their kids didn't have to be sent to private schools and their property taxes were less and so on. It would have cost them in inconvenience (commuting) and lost status (not having a nice house near the university) and so on, but that's the kind of choice people making <$300,000 make without even thinking themselves ill used.

Posted by: MarkP1 | September 20, 2010 10:50 AM | Report abuse

The rich are clearly miserly. They are looking at the slight increase in their taxes in the wrong way. The way to look at it is as an investment. If the increased 'investments' lead to more people staying on jobs or more teachers and firefighters and cops on the street, this is good. The more the number of unemployed, the greater the burden on the government and this in turn affects their investments. For e.g., recall that the superrich make their money by using hedge funds and the like that deliberately short the stock market to make big bucks in a short span of time. The ones that pay for this are the people with regular 401s that are told to invest consistently and hope for a return over a period of decades while the hedge fund managers and their investment group make hay in a single day. So the super rich would want a large thriving middle class so that they can make gobs of money by investing in financial shenanigans on Wall street.

Posted by: ns3k | September 20, 2010 10:59 AM | Report abuse

"It's that we've got a very large budget imbalance, and we're going to need to do a lot of things to correct it"

Yes. But the current tax system already hits
high-earning professional families in the $250K-$500K range with higher total tax rates than anyone else, once you count the regressive payroll taxes. Wouldn't it make sense, both politically and morally, to increase capital gains taxes first, and to close the various loopholes which allow billionaires to pay a shockingly low percentage ?

Then phase out the mortgage interest deduction, which causes massive distortions of the whole economy - too many big houses being built, too many buying houses when they should be renting, people unable to move to find work because they're tied down by owning a house.

And then get the Pentagon and the intelligence agencies back down to the $300B/year which gave us total world domination in 2000, rather than the $700B+/year which gets us a bunch of humiliating and futile foreign entanglements.

Add to that the fact that a lot - perhaps
the majority ? - of those $250-500K families are dual-income middle-aged families with kids, who are probably getting hit by the AMT already - so fiddling with their tax rate won't make a damn bit of difference.

Substantively and politically, the $250K figure is a poor target to choose.

Posted by: richardcownie | September 20, 2010 11:01 AM | Report abuse

It would be interesting to see how many government programs would be reduced or eliminated if everyone had to pay more when they were created as opposed to making only some people pay more.

Posted by: jnc4p | September 20, 2010 11:17 AM | Report abuse

Part of the problem is the "hockey stick" nature of the income distribution. At the lower 95 percentiles, you are looking up at people who may make 2, 3, maybe 4 times what you do. But in the top 3% and up, it rises very steeply, so that someone with $400,000 knows there are still people up there who make not just 10 but 100 and even 1000 times as much. So if you are constantly looking up, you don't feel rich.

Which is the problem with caring too much about money. Studies show that beyond about $75,000, more money doesn't really make you happier.

Posted by: Mimikatz | September 20, 2010 11:32 AM | Report abuse

"My family won't initially be hit by the upper income tax hike, but we likely will eventually (under the cap a bit, and mort deduction will keep us under for a while -- but certainly not forever). I don't care. I'm in it for the country to not be a joke. I actually care about the larger picture. Who's with me?"

rat-raceparent,

Why wait until you are forced to pay higher taxes? If you think it is a good idea to send more of your money to the government, you can do so now.

http://www.treasurydirect.gov/govt/resources/faq/faq_publicdebt.htm#DebtFinance

"They are looking at the slight increase in their taxes in the wrong way. The way to look at it is as an investment."

ns3k,

That's ridiculous. If it were actually an investment, the rich would be willingly opening their pocketbooks without the coercion of the state.

That being said, if you want to make any investments in this manner, feel free to do so at the link provided above.

Posted by: justin84 | September 20, 2010 11:36 AM | Report abuse

******If Obama and the Democrats are successful in raising the tax rates on the quasi-rich, then they too, like the super rich will work hard to avoid paying taxes******

Frankly, this is beyond stupid. Obama is only proposing to raise taxes on wealthier taxpayers by what, 3 or 4 percentage points? So is your argument that higher-earning households currently expend ZERO dollars or efforts at tax minimization schemes, and will suddenly be moving to the Cayman Islands en masse because, horror of horrors, they'll once again be paying the slightly higher rates they paid during the Clinton Depression?

American conservatism jumped the shark about ten years ago, but now it's official.

Posted by: Jasper999 | September 20, 2010 11:44 AM | Report abuse

Maybe more people will avail themselves of the cheaper tax rates of Rhode Island, and park some of their property there, as did Kerry with his yacht. It's true what a previous poster said -- Klein, and his patrons in the administration have one and only one obsession -- getting a hold of people's money. That is the reason why social issues that progressives like have gotten very little attention. There is no money to be had in gay rights, gay marriage, the end of the don't ask don't tell policy, and so on.

Posted by: truck1 | September 20, 2010 11:53 AM | Report abuse

To justin84: The reason the rich are not interested in the 'investment' aspect of higher taxes is that they have been getting the benefits of the investment without paying the cost for the past 30 years. The excessive Social Security taxes paid by working stiffs since 1986 have kept income taxes below what is needed to support the level of services that the country has demanded. Now that the bill for the use of that excess revenue is coming due, of course they don't want to pay it.

Posted by: guesswhosue | September 20, 2010 11:57 AM | Report abuse

justin84, there's a difference between feeling that it's your duty to pay your fair share of taxes within the rules as currently configured and wanting to give charity to the government. As Ezra notes, few people at any income level set up their expenditures so that they won't notice any change in their tax rates. People budget for their whole income.

Posted by: MosBen | September 20, 2010 12:18 PM | Report abuse

Michael Lewis identified the basic class anxiety of people like Henderson: "upper-middle-classness [...] isn’t really a class. It’s a space between classes. The space may once have been bridgeable, but lately it’s become a chasm."

Avoiding the piddle from the soggy paddler, the problem with the $250k upper rate is that it lands squarely in that chasm, and as mimikatz says, it encourages people to calibrate their lifestyles by the few with $25m coming in, as opposed to the many living on $25k.

Posted by: pseudonymousinnc | September 20, 2010 12:39 PM | Report abuse

guesswhosue,

The top 1% alone contributed $451 billion to the treasury in income taxes in 2007. Throw in their FICA and estate taxes and we're around $500 billion, more or less.

Assuming 60 million taxpayers in the bottom 50% and average FICA earnings of $30,000 (probably too high), that would be $275 billion. Add that to the $32 billion in income taxes, and the bottom 50% paid $307 billion.

Now consider the relative distribution of benefits. Which group - the top 1% or the bottom 50% - receives most of the benefits from:

Social Security
Medicare
Medicaid
TANF/Food Stamps
Unemployment Insurance
Military (I'm pretty sure wages/benefits + VA benefits trump procurement)

Yeah, there is some corporate welfare garbage in the pot but it is a lot smaller than the social insurance and defense programs.

In all probability, the top 1% is putting in more than they are getting back, whereas the bottom 50% receive more than they put in.

By the way, given that you think current low wage workers are getting a raw deal from Social Security, would these same workers be better off today had Social Security not been enacted in the 1930s? If not, why not?

Could it be because Social Security benefits are highly progressive, and thus the issue of Social Security being regressive is a bit of a red herring?

Posted by: justin84 | September 20, 2010 1:04 PM | Report abuse

"justin84, there's a difference between feeling that it's your duty to pay your fair share of taxes within the rules as currently configured and wanting to give charity to the government."

MosBen,

I wasn't responding to comments talking about a duty to pay taxes per se, but support for higher taxes on consequentialist grounds ("good for the country" or "investment with positive returns for the taxpayer").

I am merely pointing out that if it is a good idea to send money to Washington for such reasons, there is no need to wait for higher taxes to be imposed.

Posted by: justin84 | September 20, 2010 1:23 PM | Report abuse

For the record. Henderson complains "Homes near our work in Chicago aren’t cheap." The median price of a home in Hyde Park (his U of C community) is $211,000. That is 13.88% lower than the median home price in the rest of the Chicago area. So, homes in his community are cheaper than for others working in different neighborhoods. This is disingenuous whining. You can get a mansion to renovate (like the Obama's) for -- well, for a lot less than comparable homes would sell for in either Chicago at large or other major metropolitan areas. The question is whether they should have bought a mansion.

The Hendersons don't feel rich because they have chosen a lifestyle that was sold to all of us during the 1990s and 2000s (and of which we were all guilty of buying into on one level or another ... though mostly another): where $100,000 kitchen makeovers and the latest in technology, the best in education, and a yearly vacation to a nice place were sold as the basic American dream. A lot of it was bankrolled on home equity loans and funny money we thought existed in our retirement plans. (I say "our," but we actually don't own a flat-screen TV or take vacations. We do have a larger mortgage than we'd like, and we'll be paying off our kids' college educations for years.) I understand they don't feel rich, and don't have a lot left over. But that doesn't mean their income isn't still in the very upper echelons. Prof. Henderson is going to have to start mowing his own grass, god forbid. And stop complaining about his property taxes. As a proportion of income and home value, I'm sure they take less of a chunk out of his income than the property taxes of someone making 1/3 of what this family does.

Posted by: JJenkins2 | September 20, 2010 1:44 PM | Report abuse

justin84, of course voluntarily paying more in taxes is an option, but it is by no means required that those who think margainal tax rates should be higher should personally opt to pay more as a sign that they're serious. It's perfectly acceptable for people to follow the current rules while advocating for a rules change.

Posted by: MosBen | September 20, 2010 1:58 PM | Report abuse

justin84: "I am merely pointing out that if it is a good idea to send money to Washington for such reasons, there is no need to wait for higher taxes to be imposed."

True, but I can reason that my extra money won't make much of a difference unless many other people do the same--a classic free rider issue. If most of think that money for a bridge is a good idea, we don't choose to fund it only from the people who think it's a good idea and exempt those who don't want to pay for it, even if the latter are a minority.

Posted by: dasimon | September 20, 2010 5:47 PM | Report abuse

"eventually, they're going to have to start talking about changes that people will notice, and should worry about"

Ah me, Ezra. I sometimes forget how young you are.

Posted by: bgmma50 | September 20, 2010 6:59 PM | Report abuse

I was ready to agree with Ezra until I read Henderson's post. He really is bad.

I'm probably among the richest fifth of American households, or close to it. Which means that while I am rich compared to most Americans, I'm still poorer than Henderson. So how is it, unlike Henderson, I could easily "afford" a tax increase?

Maybe it's because I'm not too good to clean my own toilet. Or maybe it's because I'm not delusional. Or both.

But Henderson is a rare window in the mindset of the rich. They steal the wealth created by the rest of America and call it income, then give back a fraction and call it charity. Honestly, it's about time the government disabused them of the notion that they're any more entitled to a nanny than their nanny, or a maid than their maid, or a gardener than their gardener.

Posted by: dcamsam | September 20, 2010 9:45 PM | Report abuse

"This is one of the problems with the debate over tax cuts. The effort to separate support for popular middle-class tax cuts from unpopular upper-class tax cuts has let a sort of moral language creep into the conversation. As if rich people "deserve" higher taxes because they're somehow bad, rather than because their share of the national income has gone up and their tax rates have gone down."

It seems Ezra carefully chose his words here in order to mislead without being factually incorrect. Yes, tax rates on the rich have gone down, as have all tax rates. But the share of taxes that the rich pay, even when adjusting for their increasing wealth, has not gone down. It went up due to the Bush tax cuts. In other words, the Bush tax cuts made the tax code more progressive. Therefore, the argument that we need to correct the imbalance caused by the Bush tax cuts does not hold up: http://sovereignmind.wordpress.com/2010/09/16/the-bush-tax-cuts-for-the-middle-class/

With that said, yeah, Henderson needs to stop whining. He's not helping his cause.

Posted by: adelinesdad | September 21, 2010 12:28 AM | Report abuse

Mr. Klein,
What is the chart you included from? I can't read the small type.

Posted by: JimNova | September 21, 2010 8:08 AM | Report abuse

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