Looking out for the wealthy
The New York Times is always very interested in the travails of the wealthy, which may explain their interest in the “Debate Over the Definition of Rich” that is allegedly being kicked up as part of arguments over the fate of the Bush tax cuts. The discussion on that topic, according to David Kocieniewski, “has also veered into a more basic matter of fairness, whether a person who earns more than $200,000 a year should be taxed at rates similar to those who make $5 million.”
At his New Republic blog, Jonathan Chait points out that this story “seems to be based entirely on a misunderstanding about how the tax code works.” This is something we took pains to spell out in our most recent editorial:
In keeping with his campaign pledge, President Barack Obama wants to extend the Bush tax cuts only for annual income below $200,000 for individuals and $250,000 for households. For those who make more than this, he proposes to let the top two tax rates return to their pre-Bush levels: 35 and 39 percent—up from 33 and 35 percent. Historically, these higher rates are still quite low (in the 1950s and early ’60s, a period of sustained economic growth, the top marginal tax rate was more than 90 percent). Only the part of a taxpayer’s income above $200,000 would be taxed at the higher rates, and the president’s plan preserves some of the Bush tax cuts for capital gains and dividends. This means that the wealthiest Americans would still pay less in taxes than they did before the Bush tax cuts went into effect.
Chait breaks it down this way:
When you go from $250,000 to $250,001, you only pay a higher tax rate on that one extra dollar. Your taxes will go up by a few cents. If you earn $300,000, you will pay a slightly higher tax rate on the last $50,000 of your income — less than a couple thousand dollars.
Even people making half a million dollars a year won’t be “taxed at rates similar to those who make $5 million,” because only half their income will be taxes at the top rate.
One thing the New York Times is certainly right about:
The dispute over what income level qualifies as rich is caused, in part, by the tendency of people to gauge their own wealth by comparing themselves to those closest to them.
That explains why the Times often runs stories that read like self-parodies about the challenges of being wealthy in the city and its suburbs (keeping up with decorating trends; getting into private schools; finding a nanny who speaks Mandarin). They know their audience. But click to the second page of the article and you’ll read this useful corrective:
J. Bradford DeLong, an economics professor at the University of California, Berkeley, said many of the top earners in the United States did not consider themselves rich because they compared themselves to the statistically small segment of the people who earned more than them, rather than the much larger segment who made less.
“It is pathetic and embarrassing that somebody with five times the median household income, someone in the top 2 or 3 percent of the population, thinks of himself as just another ‘average Joe,’ ” said Professor DeLong, who was a deputy assistant secretary of the Treasury Department in the Clinton administration. “Why don’t you ask someone who makes $40,000 or $50,000 a year if they have a lot in common with a family making $250,000?”
Asking people if they think they’re “rich” enough to pay more taxes is a winning political strategy. Very few will say yes. (It’s like asking people if they consider themselves bigots.) But although it has populist cachet, “Who counts as ‘rich’?” isn’t the relevant question when pondering the future of tax cuts for the wealthy. “Who can afford to pay more?” is better. But the best question may be, “Who needs a break the least?”
Molllie –
Years ago I read that union negotiators know very well that what the ordinary union member cared about was not the profits the owners were making but, rather, the difference between their own wages and those in a wage slot closer to their own, and then they cared fiercely. Thus, if somebody in your department in a category different from your own got a 10 cent an hour increase and you didn’t, you might be livid with anger, but it your boss’ salary went up 50% you probably wouldn’t care.
I used to work in an industrial relations office, and I suspect that is still true. Human nature is very weird.
“One thing the New York Times is certainly right about”
No – the New York Times is wrong that most well-off people compare themselves to others to determine their status as rich or not – some people planned and worked hard and have personal desires – sure they have a better car than most and a pool in the back yard, but they also have larger students loans and three kids in private college – those were their dreams, their plans, and worked hard to achieve them – the TV commercials are not after the “well off” to keep up with the Joneses; they are meant for those who want to be well-off – they are the ones who are comparing their lot with others to determine who is rich or not
Jim, if I’m interpreting your comment correctly, you’ve misread the quotation from the NYT. The point is not that well-off people habitually compare themselves to others. What it says is that, if they are asked to judge their relative level of wealth, most people’s point of comparison is “those closest to them.”
In the meantime, 44 million, one in seven, live in poverty.
See the current NCR editorial about thinking about that!
Today I made phone calls for the state-wide Democratic candidates for governor and senator in Pennsylvania. What’s clear is that the elderly people of modest means are scared. Republican blather has gotten to them. Some of them think that the Democrats pose a greater risk to their future than the Republicans do.
All we hear from both parties is talk about the needs of the middle class. I am a Democrat and will vote for the Democratic candidates, but the failure, from President Obama on down, to talk about poverty, real poverty and to get all caught up in making sure that well-to-do people like me don’t have to face up to the poverty of our fellow citizens is maddening.
As for the rich, there is no satiating them.
I hope I don’t hear the words ‘class war’ from those opposed to this small increase to 39%.
Mollie – I think the Times is saying that people are making comparisons to those around them before gauging their wealth status – if that is so, I disagree – if you asked me to gauge my wealth, I look to see if I can put any money from my paycheck into savings and do not look to see if the house down the road has nicer flowers – I also wake up during the night more when things are tight – I never talk money with anyone – I just do not think people compare unless you are filthy rich and haver little else to do but count your money and attend the inner circle cocktail party.
People complain about liberal bias at the Times. I assume they are thinking of the op-ed page. Personally, it is the Sunday Styles, where your examples come from of the travails of the rich, that I have always found utterly alienating. Not to mention that one would think Jews and gays make up the vast majority of the population, rather than a tiny minorities.
I’ve noticed that it sometimes cuts the other way, too. I know people who are technically low-income, but consider themselves middle class; they would be appalled to be labeled ” working poor”. Sort of like how so many people consider themselves “moderate” politically, whether they really are or not. It is a little odd, our urge to be average.
For the record: I believe strongly that income taxes need to be progressive, and I don’t think it’s a terrible thing if well-off people have to go from 35% to 39% for some segment of their annual income. Given the dire state of the deficit and the accumulated government debt, clearly we can’t close off the possibility of increasing tax revenues.
Having said that: if I were in the proposed 39% tax bracket, I’d be looking with an extremely skeptical eye at government expenditures.
What has the Obama administration done to curtail expenditures? Why, before eating this tax increase (think “price increase” – it’s the price the country pays for government services), should I assume that the government, which supposedly works for my benefit, has done everything – not one or two publicity-stunt things, but *everything* – to live within the means of my current 35% tax assessment?
The Obama Administration’s two signature legislative accomplishments, the stimulus and the health care bill, are both enormously expensive. The two very expensive wars he inherited continue – drawn down somewhat in one, but the other ramped up.
It’s helpful to recognize, too, that taxpayers pay taxes to other taxing bodies. If the federal, state, county and municipal governments are all running large deficits and considering raising taxes, then all taxpayers could be facing cumulative tax increase that is substantially higher than the portion levied by the federal government. Rich persons could pay nearly, or even more than, half their income in taxes. That sounds like a large percentage. It sounds like too much. I doubt I’d roll over and accept it without an argument, were I in their shoes.
It’s not unreasonable – in fact, it’s necessary – to expect the government to self-impose, and stay within, a sustainable budget. My impression of the Obama administration and the current Democratic-led Congress is that it has zero – zero! – interest in taking seriously this kind of basic fiscal responsibility – living within its means – that every family and business struggles with every single day.
Unless you’re Warren Buffett or the Sultan of Brunei, there is always someone who is richer – a lot richer.
If you’re middle class in the US, then by the standards of most people who have ever lived on planet earth, you’re indescribably prosperous, taking for granted luxuries and spending hours in leisure that have been beyond the grasp, or even the imagination, of most humans.
“Ben Zoma said: … Who is rich? He who rejoices in his portion, as it is written (Psalm 128:2) ‘You shall eat the fruit of the labor of your hands; you shall be happy, and it shall go well with you.’ ‘You shall be’ refers to this world; and ‘it shall be well with you’ refers to the world to come.”
Mishnah, Pirkei Avot, 4:1
The obsession with who’s got what, does he have more than me, and how do I get me some more of that good stuff, only serves to corrupt the souls of those inexorably drawn into it. Sad.
Unlike Professor DeShort, I do not think it is “pathetic and embarrassing that somebody with five times the median household income, someone in the top 2 or 3 percent of the population, thinks of himself as just another ‘average Joe,’ ” On the contrary, I think that’s part of what makes America great. The professor seems to believe that true worth is measured by net worth. Is that a characteristic of the far left?
Mark’s right. I won’t be hit by this tax, so I don’t have a dog in the fight, except to the extent that I care about the economy. That’s the first thing about this debate that always strikes me as nuts. People who are against this tax increase are accused of pandering to the wealthy. I don’t know exactly how a party can stay in power if its goal is to “pander” to 2% of the population.
Tax policy should be about the generation of revenue needed to run the government in a way that does not overburden the productive capacity of the country. A tax policy that has as its principal aim the redistribution of wealth is doomed to make everyone worse off. It has been thus since Julius Caesar tried it.
When it comes to this particular debate it is also interesting that the GOP are agreeing with the Dems on a fundamental principle of tax policy that liberals apply to absolutely everything except the production of wealth. If you tax something, you get less of it. Liberals apply this principle to everything from cigarettes to moving production off shore to controlling global warming. Why, I ask, do they assume that people will adapt their behavior to tax burdens in everything they do except the most important thing they do – making a living?
That people do adjust their behavior to tax burdens is a demonstrable fact. For example, in 1975, when the highest marginal rate was 70% and more than 60% of Americans paid income taxes, tax revenues as a percent of GDP were 26% and in 2006, under the current system (which supposedly favors the wealthy) and when only half of Americans pay income tax, the rate is 28%. Maryland imposed a “millionaire tax,” and guess what, the millionaires moved out in droves. So instead of making an additional $100million in revenue as promised, the state lost $100million in income taxes on millionaires.
Finally, as Mark points out, this class warfare rhetoric is harmful. The tenth commandment doesn’t say not to covet your neighbor’s goods unless he has more than X percent more than you.
There have been some reports that the Bush tax cuts for the wealthy didn’t stimulate spending, but instead increased savings rates for the very wealthy. According to a Moody’s analyst, “Spending by the top 5 percent of households seems much more closely tied to business- cycle issues than it does to tax-cut issues” If that’s so, it’s a little hard to see why extending the tax cuts would be beneficial to the economy.
http://www.bloomberg.com/news/2010-09-13/rich-americans-save-money-from-tax-cuts-instead-of-spending-moody-s-says.html
Irene,
What does that mean, increased savings rates?
I don’t know about you, but when I save money, I don’t stuff it in a mattress. I can darn near guarantee you that your garden variety millionaire doesn’t either. The wealthy don’t just need to buy blenders, vacation homes, and yachts to have a stimulative effect. If they put money in stocks there is greater money for investment, if they buy municipal bonds there is more money for public improvements, etc. etc.
Sean, I think it means that those who project consumption-related growth from these tax cuts might be off the mark as far the cuts relate to the top 5%. It would spur spending in certain lower-income brackets, though.
Irene,
I don’t think anyone who supports the idea that letting people keep more of what they earn – regardless of their income – limits the extent of the economic benefit of doing so to consumer spending. That’s what the article you linked to was talking about – consumer spending or personal consumption. In fact, if you listen to the rhetoric from the GOP right now, they are more frequently saying that the lower tax rate for top earners will make more money available for investment, not consumption. None of the economists I know of who support the lower tax rates have called it necessary for consumption driven growth.
Our inability to save was one of the root causes of the ongoing economic crisis. It appears that Americans are saving more now. That means that GDP grows at a slower rate, but ultimately, it will be much better for the economy (and society).
Aw, come on! We are arguing about minimal changes in our tax law and we will still be way short of the tax revenue we need to accomplish all our goals. In fact the private sector is NOT stepping up to the plate and the poison spread by the tea partiers and neocons is definitely poisoning the atmosphere for everyone. Altogether now, everyone reread Matthew 25…
John Maynard Keynes believed that the most practical man of business is usually the slave of some defunct economist. For today’s liberal elite, that slave master/defunct economist is none other than…Keynes himself. The October issue of First Things has a timely article on just how wrong Keynes can be:
http://www.firstthings.com/article/2010/09/the-keynes-conundrum
A subscription may be required for the link but, if a Commonweal reader is not already seeking diverse points of view, what are you waiting for?
Mike
What are “our goals”?
“John Maynard Keynes believed that the most practical man of business is usually the slave of some defunct economist. ”
Mark –
Where did Keynes ever say such a thing?
Ann–
I understand the actual quote, which is much better than my recitation above, to be:
“Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”
–John Maynard Keynes (1883-1946) in The General Theory of Employment, Interest and Money
“The wealthy don’t just need to buy blenders, vacation homes, and yachts to have a stimulative effect. If they put money in stocks there is greater money for investment, if they buy municipal bonds there is more money for public improvements, etc. etc.”
Sean –
There is “investment” and “investment”. If you buy stock in a start-up company (the kind that the really rich buy on advice from financial advisors) that is true investment as the economists use the term. If you buy Microsoft or WalMart you will not help the economy to recover because those companies are already established. You/ve merely switched ownership, you haven’t helped to create jobs, and there is little risk there, as opposed to a new, small solar energy company which will create new jobs..
Mark –
Here is the whole quote including some context. Obviously, Keynes did not think it was a *good* thing to be led blindly by defunct economists.
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.
Ch. 24 “Concluding Notes” pg.383″ (From the Wikipedia article on KEynes)
Ann–
Agreed. In fact, that was my point. If Keynes were alive today I think he’d be the first to mock those who are still slavishly devoted to his now defunct ideas.
Mark –
I DO wish you’d read Skidelsky’s new book on Keynes, the short “Keynes: the Return of the Master”. I”m sure you’ll be surprised. Skidelsky is not a slavish admirer of Keynes. He is quick to say (what Keynes *himself* said that economics cannot ever predict the future with any confidence because there are too many unknowns. What it can do is look back and help us avoid blatantly destructive choices.
As for his being irrelevant, I believe it was Milton Friedman himself who first said, “We are all Keynesians now”. (Whether he said it first or later is really irrelevant — what is relevant is that he said it at all.) Add to that the conservative hero Allan Greenspan admitting in 2008 he was dead wrong about markets correcting themselves, and the evidence is clear that Keynes (whose basic thrust is that economies must be regulated *to some extent*) is as relevant as ever. What I also admire about Keynes is that his theory is morality based — he saw that fairness is a motivating factor in some players in some economic systems, and it *ought* to be. (If the capitalists rip off everyone and end up with *all* the capital and then they have no markets.)