We’re still waiting to hear the official proposal, but you’re bound to hear a lot of talk this week in the mainstream media about the U.S. budget, deficit, and the plan to let the “Bush tax cuts” expire. Reporters are going to use the phrase “people earning more than $250,000 a year” with respect to tax rates increasing.
You probably heard this phrase a lot during the campaign in 2008. It was misleading then, too.
To put things in perspective, from bloomberg.com:
Obama has proposed allowing the top two tax rates of 33 percent and 35 percent to revert to what they were during the Clinton administration, or 36 percent and 39.6 percent, respectively.
In other words, tax rates may go up between 2 and 4 percent for the country’s higher earners. So, who does this affect? It’s not “people earning more than $250,000 a year.”
The answer is: people with a taxable income of more than $250,000 a year. Taxable income is your adjusted gross income minus your exemptions and either itemized deductions or the standard deduction. And if you’re earning that much every year, you’re probably itemizing.
Is this a good plan? I can’t say. I do know that when the middle class does well, everybody else does well, too. I think we’ve proved under Reagan and George W. Bush that giving tax breaks to just the wealthy people doesn’t stimulate the economy like it’s supposed to, but if you’ve got statistics that prove otherwise, please tell me in the comments.
But more importantly, I wanted you to know that the “250,000″ number that you’re going to hear will affect a lot fewer people than the mainstream media would have you believe. There’s a definite difference between income and taxable income.
Published or updated February 23, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.
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Wait, before I respond to the rest, I said you were “non-prejudiced” but not everybody is.
I don’t care what you said, your follow up commentary made it clear that I MUST be prejudiced because I can’t envision how others live.
What I do know is that most of what you said is simply not my experience, and I have worked in 7 different companies in 23 years, so I have a broad base of knowledge from which to judge.
Further, it’s ludicrous to assume that things are easier for white males. You were right in assuming I am one. What you aren’t aware of is that I’ve lost job opportunities simply for being a white male due to quotas. I’ve been the most qualified person for the job – of that I am 100% sure. I know I’m the best at what I do, my resume always generates a positive response and a great deal of interest.
So to say I don’t know how it feels is foolish and ignorant.
Hi, Squeezer:
Here’s what I know about Presidents and the increase in GDP:
http://www.fivethirtyeight.com/2009/02/clinton-economic-record-and-rising.html
Here’s what I know about Presidents and the budget deficit:
http://zfacts.com/p/318.html
In my original article, I asked for statistics that prove that cutting taxes for only the wealthy stimulates the economy. So far nobody has provided any. (Though I see we’re having a stimulating debate about racism and whatnot. Not sure where that came from.)
Smithee,
one of the flaws in these studies is they simply correlate the years the presidents are in office with economic performance.
The benefit/detriment of a president DOES NOT immediately accrue the minute a president steps into office. After all, his first budget doesn’t get created for 9 months, and won’t have an impact for at least 6 months AFTER that. So to be fair, all economic performance should be shifted about 15 months to be accurate.
As a result, Reagan’s, Bush 1 AND Bush 2 would all see improvements. Clinton would see a decrease because he’d pick up 2001, which this author conveniently left off for dubious reasons.
It is also unclear whether the president should get credit for growth or Congress. Frankly, I’m a believer that Congress should get credit for all economic performance – they pass the budgets, which are ALMOST NEVER what the president wants (Bush 2 was the only president who got what he wanted for 6 years).
One thing that is VERY CLEAR is that a Republican Congress and a Democratic President produce remarkable results. Probably because that particular Congress was very much a responsible Congress (very different from the Republicans who replaced them by 2002) when it came to fiscal aptitude.
Oh, by the way, the debate on racism was unintended on my part. I was affronted by some comments about race in this country. How we can have our first black president and still be told we are racist, or view race in a demeaning fashion, is simply beyond me. I may not have voted for him, but it certainly wasn’t because of race – based on his current bumbling, I’d say he’s doing just about what I’d have expected – infusing too much government into our lives.
Rick,
I don’t mean to offend you and I hope you will regard my comments not as attacks on you, but to debate your points. I appreciate your arguments too, but I think you’ve read into many of my comments beyond what I meant.
Sure race relations have come a long way. Obama is proof of that. I never said things haven’t gotten better. But in my opinion dismissing racism or any other form of prejudice can be more damaging to race relations than being aware of it and being sympathetic to those who experience it. My comments and observations do not perpetuate racist behavior. Hatred and misunderstanding does. To think that prejudicial behavior has been eradicated is a dream that simply isn’t true. Regardless of somebody’s worldly experiences and learnings, how can anybody exactly know what it’s like to be of a different ethnicity? I can’t. You can’t. To stretch my argument to an extreme, we both can’t know what it’s like to be pregnant. Sure we can be sympathetic, but we don’t completely know. I agree that reverse racism isn’t right either.
I don’t advocate hiring purely based on minority status over hiring on skill. Diversity does make companies better able to cope with globalization though. For example, if one our sales engineers wasn’t a Chinese American, it would be harder for us to do business in China due to language and cultural differences.
I never said 9/11 made my job searches more difficult, but you don’t know how some people looked at me a few days after the event. I may have been hypersensitive but it wasn’t all from my imagination. It’s not fair to use one anecdotal story from your friend as proof that it didn’t affect people. Right after 9/11 , people were shot and killed for wearing turbans! There are hate groups still in existence today. That’s all the proof you need. Contrary to what you might think, I don’t dwell on the idea that somebody else might be racist. I live my life open to people by treating them as individuals, just as you do.
I didn’t say that tax structures were or should be religiously ordained. I just said religions want us to take care of our fellow humans.
Our economy and innovation has come a long way, but a lot of where we’ve come recently was based on a bubble of debt and fake wealth. I could live like a millionaire to if I maxed out my credit cards and kept paying the minimum balance. I would call this current economic crisis more than a blip. Investments of just about every kind are down, we’re seeing deflation, jobs are being lost, companies are dying, consumers don’t have confidence, credit isn’t flowing, home prices are down and foreclosures are rampant. Now we’re resetting ourselves to reality. The government has to do something. We’ll turn things around, but it will be tough as the world becomes more global. I hope I’m wrong but I’d be willing to bet money that the standard of living in the U.S. will go down in the next 10 years and even more in 25. My generation, (Gen X), is the first generation that is less well off than our parents. I don’t see things turning around for Gen Y.
RE: Racism – racism is perpetuated by hatred and misunderstanding. These are also perpetuated by overstating the impact of things. Racism in the US is virtually unheard of. This isn’t to say it doesn’t exist – only a fool would say that – but it is also foolish to continually assault people with claims of racism when none is truly apparent. The cases in which racism is employed as a means to an end remain as plentiful today than 30 or 40 years ago, yet nobody debates that racism has decreased – so why are cries of racism so prevalent? I don’t say we shouldn’t discuss it, but to continually lay blame on “the white man” or things of that nature perpetuate reverse racism, which breeds further racism. The best way to move forward is to stop blaming problems on racism, using it as an excuse, or accusing people of it. I was, no lie, told that I was racist if I didn’t support Obama. This is true. But clearly not supporting Obama in and of itself is not racist, as he has proven out our worst fears of being a big spending Democrat. Yet it remains a rallying cry, and I have heard it used yet again when I said I didn’t support the “stimulus” package. Somehow, if you don’t support him, for many people, you must be racist. If you don’t support diversity, you must be racist. These are lies which perpetuate racism in and of themselves.
I rarely discuss race, because I never see it as a factor in my daily life. As a person of Irish ancestry, I am well aware of the old “no Irish need apply” signs in my family’s past. I am sensitive to items of this nature. But I can deal with a good demeaning Irish joke, too (What is a Irish 7 course meal? A 6 pack and a potato.) Sadly, many others are incapable of accepting who they are and realizing a good demeaning joke can sometimes infer friendship and acceptance.
I disagree that this is more than a blip. This depends on how you choose to view things. If you view things from a negative standpoint (and it seems you do) then things will never get better. I refuse to accept negativity as a point of view from which to base my judgements. I see things improving all the time, even now. We can choose to focus on things that are bad, and thus make them worse, or we can focus on things that are good and help improve them. My situation today, despite a massive sell off in the market, is 100% better than it was 9 years ago. So is my children’s situation and their future. Sure, I was better off 1 year ago – but if I gauged everything based on recent past, I’d drive myself insane. I prefer a holistic view.
As for religions telling us to take care of others – wow, what insight! Yes, that’s facetious…but fairly so. Your comment added nothing to the discussion. My point was that while religions tell us to take care of others, religions ALSO point out that it has to be a conscious CHOICE to take care of others in order for this to have value in our lives. At what point does having the government do the work for us (inefficiently, unfairly, and full of corruption I might add), provide value and benefit to our lives? We’re not making the conscious choice to help – we’re being coerced into it by a kleptocracy! This is where the infusion of religious thought and care within politics and economics FAILS BADLY!!! Never allow your religious beliefs or understandings overwhelm common sense from a political point of view. They are very different things.
You can say racism is unheard of when you arent the one being discriminated against. Let a minority tell you when they are or arent being discriminated against.. Not you. White males still make more in general than other minorities, including women. Heterosexual white males fair the best, however gay males have focused on fairly lucrative jobs, ie computers, graphics etc, so their earnings on average are higher than heterosexual males. That doesnt mean they arent still discriminated against, only that they focused on jobs where homosexuality wasnt a factor.
You can’t know for 100% what the motivations were behind your not being hired. Companies dont only hire based on qualifications, they usually take numerous criteria into account. There may have been a personality conflict, they may have thought you wouldnt fit in.
It seems like you may suffer from the inability to identify with anything outside of your immediate sphere of influence, which is quite common among the 20 something crowed.
You sound like my Tea Party uncle! Do you automatically make the right choices or did your parents set rules and guidelines for you? They do that not because they know for 100% you are going to break certain rules, but because they have learned from history that those arw issues that parents and children have been faced with ib the past. Government regulations based on race arent there for the non discrimatory, they are there stop or deter those who are racist & discriminatory. Without have those laws and regulations, we have no recources when someone is discrimatory. They deter racism, but we know they dont always stop it, so we have the laws and regulations to address it when we do come accross it.
Dang…I got pulled back in.
Atul…I am also a Gen X’er (or about there…I honestly am not sure where the lines start and stop for the X, Y gen).
I am by FAR doing better than my parents were at my age without any question. Even during this economic “blip”. And even with losing 50% of my retirement account. I STILL have more retirement savings than my mom.
My father had a double Masters and my mom had her Master of Science and became an RN. Both were doing better than their parents at 30.
And today I am doing better than my mom. I don’t even have a masters degree and I make more at 30 than she did (even adjusted for inflation).
To make a statement like that is just ignorant of reality. Nearly every single generation lives better than their parents did. Are things difficult right now? Sure. But it is nowhere near the level of Depression era. And this situation is NOT permanent. Even with the asinine actions of the Obama administration, things will eventually pull around.
I agree that people lived beyond their means and that there was a huge bubble. But WE did not and now WE (my husband and I and all those who paid their bills and followed the rules) are being punished by those who did not. We’re still doing fine and even if I lose my job we’ll still do fine. Because we plan and we save and we know how to live within our means…we didn’t buy a bigger house than we could afford, nor did we fall for the line about an adjustable ARM mortgage. Those who did, weren’t paying attention and were greedy.
Oh…and this economic environment COULD have been a blip. Now I’m not so sure. I work in the investment world. My company is looking to lay off 20% of the company in the next month. The last year has been very tough but it will turn around eventually. This company was started DURING the great Depression. It has a solid vision and will come through this. I just hope that the damage Obama is doing (and that Bush II and the Democratic congress did the last two years) doesn’t make this Blip a much bigger hurdle. What we really need is a true economic conservative…not the spend crazy Socialist big government guy in charge right now.
Since he’s taken office the market has hit its 10 year low (not saying it’s ALL his fault, but the last 2,000 point drop is all his) and gas prices at the pump have risen because of his anti-drill policies. That’s not exactly helping the common middle class person.
Meg: A number of studies have shown that middle class families have less income left for discretionary spending and savings than 30 years ago. That’s great that you’re doing better than your parents — I may be, too, but probably only due to my “second job” and the fact that I don’t have children — but your experience doesn’t necessarily reflect the majority of the country when taken as an average. I’ve discussed this at Consumerism Commentary in the past. Generation X, or likely the younger part of Generation X plus Generation Y, is right now the first generation that on average is not keeping up with the past.
But that may not hold forever; if the economy cycles back strongly, age groups that are now finding it difficult to make ends meet while living a life similar to their parents will likely surpass the previous generation in living standards and expendable income.
The thing about statistics is that we often find they disagree with our immediate personal experiences. (“That can’t be true because it isn’t true for me.”) There are a lot of people in this country, and a good percentage of them are not like us.
Flexo,
I would dispute your argument on whether or not this generation is better off than the last. I rarely see a child without Nike (or some high end brand) sneakers, some kind of IPod or music player, a home without a DVD player or even a small flat screen TV. Fact is, our expectations are SO high, we come to believe we are “worse off” today than our parents because we don’t have what we WANT as opposed to what we NEED.
My parents were divorced. My father was a surgeon and lived a middle class lifestyle until the 1980′s, when his salary and prospects improved dramatically (due to some risk taking on his part, entering a region underserved in the medical field because people said it was depressed…it wasn’t). My mother and her husband lived a VERY POOR lifestyle with 6 kids (I was one). I never went without, but we didn’t have a lot. I loved visiting my dad once every 6 weeks or so – I got a few new clothes, he bought us books, and I saw how the “other half” lived. It was a good dichotomy to grow up with.
I was motivated to do well, and I have. My father couldn’t offer any assistance in getting employment, I’m not in medicine. My mother couldn’t either. I had to go off and make it on my own. Which I did.
Today I look back on what my mom had and realize that I couldn’t get much worse off, so comparatively I’m doing much better. But I’m also doing better than my father and I’m not making as much money as he did at his peak. How could that be?
Truth is, when my compatriots were off taking vacations the first 5 years of employment, I was staying home and visiting family. I was maxing out savings and 401(k). I didn’t advance as rapidly as some of my compatriots (some of whom are now looking for work – advancement doesn’t always correlate with skill), but I was smart with my money. That is why I’m better today than my father at the same stage, and it’s why I’m better off today with 2 kids than I was 15 years ago with 0 kids (or 10 years ago with 2).
I have an MS now in Econometrics, with a heavy emphasis on statistics. I have found most statistics are misleading because they are delivered in a fashion to make a point – usually whatever point you want to make.
But a good statistician can spot flaws and objectively analyze the real back stories. Truth is, while real wages have stagnated over the last 20 years, the real prices for almost everything have fallen significantly. Only housing, in the last 7 years, has risen in real terms.
Truth is, if a person is not living as well or better than your parents, the causes are probably limited to a few reasons:
1. they haven’t been smart with their money
2. they don’t value certain things in a similar fashion to their parents (by taking 2 or 3 vacations a year, which their parents never did, they fail to recognize the improvement in their life…or by going out every Friday, which their parents never did, they fail to see the differentiation in lifestyle)
3. they took jobs that don’t pay as well as their parents (even then, as my case points out,this is NOT a one-size fits all reason)
4. they view their WANTS as NEEDS as opposed to the other way around and have a very skewed view of how to manage money.
I can point to people all around me who have these problems, and they don’t recognize it until it’s pointed out to them. Once they see the reality, the usually become more optimistic and their demeanors improve dramatically.
In addition, I usually point out things they can do to improve their lives. One story I found especially interesting occurred a few years ago. My sister ran into a woman I once worked with. The woman told my sister to thank me. My sister asked why. The woman replied “I’d always wanted to open my own business, but never thought I could. Your brother told me to set aside 10% of my income and I wouldn’t miss it, but I’d save enough in a short period of time to start it. He was right, and now I have a thriving business.”
Attitude and following solid advice is important. Since most people ignore good advice, they typically get angry and depressed with how things turn out, and then say they’re not doing well. Perhaps they’re not doing as well as they’d like, but almost always they’re doing better than people in the past.
Our current economic environment is very reminiscent of the 1970′s. It was only natural that we’d eventually have a turn of events that led to this. Anyone who thinks this is abnormal or unexpected is simply someone who hasn’t been paying attention or is poorly informed.
That said, thinking it HAS to go on for years is also foolish. Individually, we are capable of overcoming this if we work hard and use our money wisely. The problems we face are what I’ve often termed the “waste associated with plenty”. We’ve done well for SO long, we’ve forgotten what we need as opposed to what we want….and therefore can’t differentiate them or plan for them properly. So we view this in a very negative light.
I view it very positively. I have always lived carefully and spent/invested wisely (by the way, I DID NOT convert to cash because I don’t believe I’m capable of timing the market, and any good market watcher will tell you that the gains that you will get when the market turns will be ASTOUNDING). As a result, I remain cheerfully optimistic – barring a massive socialist takeover, which is possible – about my childrens’ prospects. And if the socialist future proves out, who cares? Nobody wins in that scenario – so anything I do now to “preserve capital” is wasted effort. In that scenario, the government will provide….
The best thing to do is remain optimistic, remain calm, and keep working hard. That almost always pays off.
“As for cutting pay to avoid taxes, nobody does that and if anyone does they’re terminally stupid. ”
___________________
Don’t over-generalize. It all depends on the tax rate, the nature of the work, and a person’s particular circumstances. There are plenty of cases where a person isn’t “stupid” because of “cutting pay to avoid taxes”– they just have different values.
Would a salaried person quit her job and pursue a lower-paying one over an increase from 35% to 39.6% at the margin? Highly doubtful.
But consider this scenario: let’s say we’re talking about a 50% marginal tax rate (quite modest by post-war historical standards– e.g. compared to the 91% rate [!] under Eisenhower or the 70% rate under Carter), and we’re talking about a professional who charges hourly or per-project fees to clients, and we’re talking about a high earner who has more than enough income and savings. Would that person consider “cutting pay to avoid taxes”? Possibly, depending on what else he/ she could do with that time– though that’s not how he/ she would probably describe it. Rather than say “I’m cutting pay to avoid taxes,” he/ she might well express it (for example) as: “That $400 per hour I can charge SOUNDS good; but life is too short to work that marginal hour for only $200, because I don’t need $200 and I do have friends I’ve been neglecting, after all.” (These figures are, obviously, only examples).
That person thus is willing to sell a marginal hour in order to acquire income he/ she doesn’t need… if the price is right. But if the price (after tax) goes down, then he/ she prefers to keep that marginal hour for non-remunerative purposes. This is EXACTLY the sort of behavior that can be characterized by an observer as “cutting pay to avoid taxes”, though obviously it’s not the “avoiding taxes” that’s the motivation. Nor is this person “stupid.” He/ she is, though a perfect illustration of the idea that increased taxes can be a disincentive to working that marginal hour per week– or those marginal 10 or 20 hours per week– depending on his/ her personal circumstances.
Calling it “cutting pay to avoid taxes” is not the best way to phrase such behavior. But behavior with exactly that result does, indeed, take place. But how widespread such behavior is, that’s another matter.
Very nicely put, Rick (quoted below).
___________________________________
In your circumstance it may appear stupid but consider this:
My wife cuts two days of work out of her week to help remove us from the AMT. How much money does she really have if she didn’t cut her hours?
Federal taxes 25%.
State taxes 5%.
Social Security 7.65%.
Tithe (voluntary) 10%.
She ends up with almost half her pay gone (47.65%). But monetarily we are not finished. We now pick up deductions that we did not qualify for before as well as reduced commuting costs.
With two more full days a week my wife spends a lot more time with her children (all grown now), grandchildren, siblings, and ailing father. She is less tired and enjoys life more. Who can say what the monetary value of this is?
You point out that your wife “has no incentive to find work” because the benefits of not working outweigh the benefits of working. In our instance when we factor in taxes, the AMT, and the value of my wife’s time, she also has no incentive to work those two days a week. Your other points about cutting taxes I agree with, well said.
Taxation, when coupled with other factors (for example the value of your time), becomes a powerful dissuader to work.
This is an interesting discusson.
We seem to be discussing a few things:
1.) A philosophical discussion of about progressive tax rates. I believe that those who have achieved more should shoulder a higher burden. Not everyone agrees with this.
2.) A practical discussion of whether progressive tax rates deter work, accumulation of marginal profit, and by extension economic growth. Taken to the limit, I can see this might be true. However, I just don’t buy and have not seen any evidence that an increase of the marginal tax rate from 35% to 39.6% will deter any of the above.
I don’t know the limit and perhaps it is personal, but I think anytime I increase my income and get to keep the majority of it, I would. I hear people saying there is a point where they will stop working if there is too much tax. Why would these same people not quit working earlier if they kept more marginal income?
Dave
It has risen ridiculously high.
Also, education.
Also, health care.
Yes, these have also risen, BUT you ignore several factors which offset these (and do not effect housing).
1. Growth of community colleges. This has helped keep the overall cost of post HS education down. In all likelyhood, my kids will attend a community college or state school. And this isn’t a bad thing. Fact is, my first two years of college were spent completing a Liberal Arts Core which is just as easily finished elsewhere, for less money. Ivy League schools are now actively combing community colleges for students. A large cost to many colleges has been the amount spent on what could be termed as “remedial” education – helping to bring students up to speed. Oddly, though I am very good at math, I managed to FAIL the math aptitude test my first day at college. I missed by 1 point! Laziness, I guess. I wound up in a remedial class which I aced – 3 easy credits I really didn’t have to take, but everyone else in the class did.
2. Grants and scholarships – certainly these haven’t completely offset costs, but they have grown and have helped to make attending college less prohibitive. When I attended, only about 40% of all scholarships were utilized (I remember this number because I was always looking for another scholarship). Today that number has risen dramatically.
3. Growth of Employer based Health care benefits and COBRA – my benefits today are WAY better than they were even 5 years ago. It’s often lost on many employees that the “reduction in wages” they claim they’ve had are more than made up for improved health care. While many people in the US today are “without” health insurance, the reality is that nobody really is. What they are referring to is basic coverage – the ability to go in for checkups. Only private hospitals are allowed to refuse service based on lack of insurance, but you’d be hard pressed to find any that would in a catastrophic situation. As a result, the costs of my care go to cover the costs of those who are incapable of paying.
4. Neither education or health care are really everyday expenses in the same form as housing, food, heat or clothes. Education typically is termed post HS education – since we can all send our kids to public schools, this doesn’t effect us until our kids turn about 18. Health care is important, but if we are careful and maintain a healthy lifestyle it is diminished. My mother and stepfather NEVER had health insurance while I grew up, we simply were too poor. We also led very active lifestyles and rarely had health related issues. The few times we went to the doctor, my mother worked out acceptable payment plans.
I had major surgery 2 years ago when I was unemployed and on COBRA. My insurance was minimal. I worked with the hospital to reduce fees and develop a payment plan that worked for both of us. Too many people are unaware they can do this. It’s unfortunate, but all they have to do is ask. The hospitals, for some reason, won’t tell you. But I told them upfront of my difficulties, and they worked very closely with me to sort out all the financial issues. I finished paying them off this month.
When these items are factored in, housing remains the only true impactful area of real price increase.
I was talking with someone regarding Health Care today and he directed me to this, which I checked with my father. He corroborated and added one other point:
“If we wish to get health-care costs under control, then we should at least be honest with the American people and admit that we are all paying a collective fortune largely for three reasons: (1) to keep functioning into their 60s those who drank, smoked, and ate too much and in a past era would have passed on at 60; (2) to give us all an extra three to five years of mobility and functionality after we reach 75; (3) to fit us up with IVs, feeding tubes, and respirators so that in our last six months of life we can die in a rest home or among machines and specialists in a hospital rather than in our own home with a few morphine tablets for pain and a bowl of soup with a straw on the nightstand.”
My father then added one further point – if lawyers were not allowed to work purely on contingency fees, and lawsuits required plaintiffs putting up some kind of bond, then it’s likely that malpractice payouts and insurance fees would fall. Lawyers like to point to the “fact” that about 90% of all malpractice suits are found against the doctors, somehow using this to justify their position. They neglect to point out that only 10% of all cases make it to court and the other 90% are settled prior to reaching court simply to keep costs down – even winning a case would cost doctors huge sums of money to defend themselves.
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