Progressive Nature of Tax Code

[lets-retire]

Most people are not middle class. The middle class is only the tail end of an income distribution that has its mode in the working class.

Looking at Census Bureau data shows the number of households in the middle three quintile is more than the total of the households in the top and bottom quintiles.

 

[aenlighten]

Looking at Census Bureau data shows the number of households in the middle three quintile is more than the total of the households in the top and bottom quintiles.

That would be true by definition since 60% is greater than 40%; that is what a quintile means.

 

[lets-retire]

That would be true by definition since 60% is greater than 40%; that is what a quintile means.

So then by definition your statment, that most people are not middle class, can't be true.

 

[samclem]

There's no single definition of what constitutes "middle class." Obviously, if someone chooses to define it as "the middle three quintiles", then 60% of people will be middle class.

Here's what Wikipedia says:
"The American middle class is an ambiguously defined social class in the United States.[1][2] While the concept remains largely ambiguous in popular opinion and common language use,[3][4] contemporary sociologists have put forward several, more or less congruent, theories on the American middle class. Depending on class model used, the middle class may constitute anywhere from 25% to 73% of households."

Class distinctions seem to be most important to those trying to pit people against each other or to lump unique individuals into convenient batches for ease in making generalizations.

 

[ladelfina]

everyone has a different idea of what defines the "middle class":
Think Progress » McCain Jokes About His Definition Of The Rich: ‘How About $5 Million?’

If you are less well-to-do your definition skews downward and if you are richer it skews upward. On TV Maria Bartiromo claimed that those with a household income >$250k were not rich, but middle class. Even though those families are in the top maybe 3% percent of earners. So go figure.

There is no standard definition, so it's kind of a diversion to argue it. If you want to define or delimit it by something quantifiable like the middle quintile (the exact middle 20% of earners), that would be households that have an income ranging from about $35k to about $55k, as of 2004.
Household income in the United States - Wikipedia, the free encyclopedia

That would be true by definition since 60% is greater than 40%; that is what a quintile means.

aenlighten, right on.. and thanks for my laugh of the day.

I think "middle class" evokes a status where people have some margin of stability.. they are not forced to grovel and compete for the lowest wages, but neither are they truly 'rich' enough to employ household help or have other extraneous trappings (second homes, pleasure boats, more bathrooms in their house than inhabitants, etc.). That said, middle class is more a state of mind than it is a number. And I would go back to Elizabeth Warren's video that I posted months back to trace the fortunes of the so-called middle class.

I'm a frugal person and have a hard time getting by on less than $35k.. so it's mildly alarming to me that 2/5 of households have to get by on less than that. It just shows how income disparity is vastly increasing.

---
I agree w/sam, and if you were to take the middle 3 quintiles you would be talking a household income range of $18.5k to $88k (again, 2004 figures from the link above). A big range.. but even at the higher end having little to do with the way the 'middle class' is portrayed on TV and in other media, or by certain politicians. There's been both (real) deflation and (perceived) inflation in what it means to be middle class.

 

[Alan]

Merriam Webster states the Middle Class definition more in social terms than purely by wealth or income, which is more in line with my definition.

characterized by a high material standard of living, sexual morality, and respect for property

 

[FIRE'd@51]

On TV Maria Bartiromo claimed that those with a household income >$250k were not rich, but middle class. Even though those families are in the top maybe 3% percent of earners. So go figure.

IIRC, Maria was talking about Obama's tax proposal, and simply pointing out that a family with a household income of 250K who lives in New York is not necessarily rich, while one who has the same household income in Cleveland probably is.

 

[ladelfina]

Since the Federal income tax is valid for 300 million Americans and not just the small number who live in desirable sections of the island of Manhattan... I fail to see your point, or Maria's.

I could move to Monte Carlo tomorrow but that in itself would hardly make me 'poor'.

Of the three million households in New York City in 1999, only about 110,000 (or about one in 26) had incomes above $200,000.

The Affluent Of Manhattan (Gotham Gazette, June 2003)

"...as of 2002, Manhattan had the highest per capita income of any county in the country." yet... in 1999 the median hh income in Manhattan was $47k.
(US 2000 census)
Manhattan - Wikipedia, the free encyclopedia

The Manhattan ZIP Code 10021, on the Upper East Side, is home to more than 100,000 people and has a per capita income of over $90,000.[102] It is one of the largest concentrations of extreme wealth in the United States. Most Manhattan neighborhoods are not as wealthy.

I don't really see the relevance of reporting on essentially the richest zip code in the US and pretending that that has some kind of meaning for overall US tax policy.

She could "simply" be pointing out that it's 'necessary' to spend many hundreds of dollars per year to tip the doorman... or that it is 'necessary' to send your kids to schools that cost $20k year for elementary.. and that would have equal relevance (which is to say near-zero) to anyone who lives anywhere normal. These people also feel it is 'necessary' to throw weddings and bar mitzvahs that run into the hundreds of thousands of dollars. I should care about lightening their tax burden, why?

 

[FIRE'd@51]

Nice rant, ladelfina, but are you denying that a family with a household income of 250K living in New York has the same lifestyle as a family with the same income in Cleveland? The difference is primarily the cost of housing. You could buy a house in a nice Cleveland suburb for about one quarter of what it would cost in a comparable New York City suburb. A family making 250K in New York who didn't buy a house or co-op many years ago is probably living a relatively middle-class lifestyle.

 

[Marquette]

If you are less well-to-do your definition skews downward and if you are richer it skews upward. On TV Maria Bartiromo claimed that those with a household income >$250k were not rich, but middle class. Even though those families are in the top maybe 3% percent of earners. So go figure.

Just how rich is rich, really? - MSN Money

According to Gallup, the public's median definition of "rich" was an income of $120,000 -- or assets of $1 million. We asked the same question of money-savvy MSN Money readers, and a majority of the more than 11,000 who responded felt that they would need at least $5 million to consider themselves rich.

Personally, without dwelling on it too much, I'd put "rich" at $10 million in assets. However, I think someone can be wealthy enough to retire and live a life that is very rich in other ways without needing anywhere near $10 million, $5 million, or even $2 million.

Even $10 million might be low these days.

I'd say you're wealthy once your passive income exceeds your living expenses. A lot more people on this board are wealthy than are rich.

If you're a high-income wage-earner, then you're still just a high-income wage-earner. You're way better off than a heck of a lot of people. If you want to stratify it, then that'd classify you as upper middle class, in my opinion.

To put it another way, even if my wife and I, say, made $300k this year, we'd be doing pretty darn well by almost anyone's standard. However, if we both lost our jobs we'd be hurting... just like any other middle class family.

 

[ladelfina]

FIRE'd, I still don't get YOUR point.. why should we take as our "middle-class" sample a tiny number of people living in pockets of the most extreme wealth? And base our national tax policy on that? That was the context of the discussion.

No one is forcing these folks to live in Manhattan with all of that terrible exposure to culture and personal and financial networks beginning in kindergarten that obviously will only drag them down in the long run <snark>.

Why should I (or YOU) feel sorry for the $250+k income crowd in particular?

That's what I find fascinating. You can always find a certain number of people to stick up for the truly poor.. but somehow they seem to be outnumbered by those who would stick up for the well-to-do. We are all supposed to cry buckets over the unfair "death" taxes that hit Paris Hilton and the other heirs of people with estates >$2mm.. something like 1% of the population or even less.. why?

If you feel these people are hurting.. I urge you to make a personal, tax-deductible, donation to Fieldston or Dalton to ease their pain.

pre-kindergarten = over $32k/year

 

[FIRE'd@51]

FIRE'd, I still don't get YOUR point.. why should we take as our "middle-class" sample a tiny number of people living in pockets of the most extreme wealth? And base our national tax policy on that? That was the context of the discussion.

My point is simply that someone making 250K who lives in New York City or its suburbs is not necessarily rich. If that family has substantial other assets (from inheritance or whatever) they might be rich, but the earned income alone doesn't doesn't make them rich. The idea that we should single out folks who may not even be able to afford a home within an hour's commute of their workplace for a tax increase, because they make over 250K, when the cost of living varies wildly across the country, is ludicrous, IMO.

No one is forcing these folks to live in Manhattan with all of that terrible exposure to culture and personal and financial networks beginning in kindergarten that obviously will only drag them down in the long run <snark>.

Why should I (or YOU) feel sorry for the $250+k income crowd in particular?

It's not that I feel sorry for these folks. After all, as you say, they do choose to work and live there. However, if you are in the financial services business, New York is where most of the jobs are (or should I say, were ).

That's what I find fascinating. You can always find a certain number of people to stick up for the truly poor.. but somehow they seem to be outnumbered by those who would stick up for the well-to-do. We are all supposed to cry buckets over the unfair "death" taxes that hit Paris Hilton and the other heirs of people with estates >$2mm.. something like 1% of the population or even less.. why?

On the estate tax issue, I find it interesting that the candidate who wants to raise taxes on "high" earned incomes wants to exempt the first $7 million from estate taxes. So someone who inherits $7 million and puts it all in municipal bonds pays no taxes on his income, but the person who starts with nothing and earns >250K a year from his labor should have his taxes raised. I don't think so.

 

[Notmuchlonger]

My point is simply that someone making 250K who lives in New York City or its suburbs is not necessarily rich. If that family has substantial other assets (from inheritance or whatever) they might be rich, but the earned income alone doesn't doesn't make them rich. The idea that we should single out folks who may not even be able to afford a home within an hour's commute of their workplace for a tax increase, because they make over 250K, when the cost of living varies wildly across the country, is ludicrous, IMO.


It's not that I feel sorry for these folks. After all, as you say, they do choose to work and live there. However, if you are in the financial services business, New York is where most of the jobs are (or should I say, were ).


On the estate tax issue, I find it interesting that the candidate who wants to raise taxes on "high" earned incomes wants to exempt the first $7 million from estate taxes. So someone who inherits $7 million and puts it all in municipal bonds pays no taxes on his income, but the person who starts with nothing and earns >250K a year from his labor should have his taxes raised. I don't think so.

Try to remember you are talking to an expat who is out of touch.

 

[FIRE'd@51]

If you feel these people are hurting.. I urge you to make a personal, tax-deductible, donation to Fieldston or Dalton to ease their pain.

pre-kindergarten = over $32k/year

Oh, I missed your last "zinger".

No thanks, I'll decline on that one. When I lived in Westchester County, I paid egregiously high property taxes (higher than the tuition at Fieldston or Dalton) to support the public school system.

 

[Shawn]

[...]

When my daughter Tori stopped breathing, the paramedics siren was audible as I hung up with 911. I had a half dozen trained specialists in my house moments later tending to my baby.

[...]

So when I send off my state tax check, it's with a big "Thank you, thank you." And since I know your tax dollars were involved as well, I say thank you deserat. I hope you know you did some good.

It's easy to take a low tax, let me be attitude when you are strong and don't need anyone else. For those of us who have been weak, we appreciate those of you who have thought otherwise. DW and I are trying to pay you all back.

Few people argue that tax dollars shouldn't be used for emergency services such as 911. But how high should my taxes be to pay for these essential services?

As an analogy, how much should I pay a mutual fund company to provide essential services such as account maintenance and the purchase/selling of equities. Some companies charge a 2.5% annual fee and a 5% load (even for index funds). For the most part, companies selling these products are wasting my money. I can get a better overall product if I go with a company that has a 0.2% annual fee and no load. The government is like a mutual fund company. Unfortunately, their is no Vanguard equivalent when it comes to the government. Yes, the government provides essential services but it also wastes far more than it provides.

Four years ago, the State of California, with your tax-dollars, paid for the smog repairs for my car. I make over $180K/yr and my total net worth officially makes me a multimillionaire. Your tax dollars at work. I've owned two cars in my lifetime. I purchased one in 1982 and the other in 1985. In part, I purchased both cars using federally subsidized student loans. This was during the Reagan administration and its "war" against the educational system - students were forced onto the streets due to his evil administration. Thanks for the cars, Ron. Your tax dollars at work. Almost half of all college students in public colleges/university don't know the name of the vice president. Your tax dollars at work.

My marginal tax rate (all taxes) is almost 50%. If I get a raise, half of it goes to government. I paid about $70K in income-related taxes last year, compared to my own expenses of less than $30K. I gave more than twice what I spend on myself to the government. What incentive do I have to work hard and/or increase my productivity? In fact, the government gives me every incentive to decrease my productivity.

My plan is to early retire in less than 2 years when I'm eligible for lifetime medical benefits at 50. The cost-benefit isn't worth it. When I retire, my tax contributions will be reduced by more than a factor of 10. The government will get substantially less than it gets from me today. This is government incentives in action.

I don't buy your statement that you and your DW are trying to pay back the government for everything that the government has given to you. While yours is a feel good statement, your intentions suggest otherwise. A benevolent person wouldn't be a major contributor to an early retirement message forum. An able-bodied person who truly cares about all those essential tax-funded services provided by the government would insist on working until they're 67 and beyond. (And I'll wait until action before believing any claim about donating one's life to charitable work after retirement.)

Early retirement *is* selfish. Early retirement means less revenue for the government and is no different than those in the higher tax brackets wanting their taxes to be reduced (or wanting lower marginal tax rates). Perhaps the government should pass a law forbidding early retirement, or at least impute the incomes of those that do. The argument will be that if you early retire, you're not paying "your fair share." In fact, maybe the government should enforce a progressive retirement system. Those who squander their money or are otherwise financially dependent should be allowed to retire in their 50's. Those who are financially independent through hard work and life choices must work into their late 70's.

Me. I don't mind being selfish. I admit it. I'm much better able to decide how to spend my time and my money than the government.

 

[lets-retire]

Why should I (or YOU) feel sorry for the $250+k income crowd in particular?

We shouldn't, but conversely we shouldn't be targeting them for their higher income either. I read recently (within the last year) that the trend among wealthy French citizens is to immigrate out of France because the tax rate is too high. These people leave the country also take a huge chunk of government revenue with them.

 

[Independent]

Few people argue that tax dollars shouldn't be used for emergency services such as 911. But how high should my taxes be to pay for these essential services?

I make over $180K/yr and my total net worth officially makes me a multimillionaire.

My marginal tax rate (all taxes) is almost 50%. If I get a raise, half of it goes to government. I paid about $70K in income-related taxes last year, compared to my own expenses of less than $30K. I gave more than twice what I spend on myself to the government. What incentive do I have to work hard and/or increase my productivity?

I'll take a shot at the "what incentive do I have to work" question.

You didn't specify how many hours you work per year. If you work 2,000, then it looks like your average after tax income is about $55 per hour, and your marginal after tax income is about $45 per hour. If you work 3,000 hours the numbers drop to $37 and $30.

For comparison, the median worker in the US earns less than $20 per hour before taxes (figuring annual income a little below $40k and 2,000 hours).

I find it easy to believe that a 48 year-old multi-millionaire who lives on $30k per year wouldn't find even $55 per hour sufficient incentive to work another year. (I did a similar calculation for myself and came to a similar conclusion.)

But the great majority of Americans making 6 digit incomes haven't saved like you have. Fortunately, for the rest of us, even after tax they have high enough wages to justify working another year. From a tax-policy perspective, I'd guess we're still on the upward slope of the Laffer curve with them.

 

[laurence]

I don't buy your statement that you and your DW are trying to pay back the government for everything that the government has given to you. While yours is a feel good statement, your intentions suggest otherwise. A benevolent person wouldn't be a major contributor to an early retirement message forum. An able-bodied person who truly cares about all those essential tax-funded services provided by the government would insist on working until they're 67 and beyond. (And I'll wait until action before believing any claim about donating one's life to charitable work after retirement.)

Early retirement *is* selfish. Early retirement means less revenue for the government and is no different than those in the higher tax brackets wanting their taxes to be reduced (or wanting lower marginal tax rates). Perhaps the government should pass a law forbidding early retirement, or at least impute the incomes of those that do. The argument will be that if you early retire, you're not paying "your fair share." In fact, maybe the government should enforce a progressive retirement system. Those who squander their money or are otherwise financially dependent should be allowed to retire in their 50's. Those who are financially independent through hard work and life choices must work into their late 70's.

Me. I don't mind being selfish. I admit it. I'm much better able to decide how to spend my time and my money than the government.

So just so I'm clear, anyone interested in early retirement cannot be benevolent?

I've already donated a lot of time talent and treasure towards charitable work, why wait for retirement to do that?

As far as the ER is selfish/unpatriotic thing, I think that's been beaten to death on the board already. With any transaction there is supplier and demander, and those who save their money choose to be the supplier (either through bonds/debt investments or equity investments providing capital for business).

So you don't buy my statement, well, o.k., there is no chance I'm going to convince you either. I've never really resented my tax bill, despite the fact that DW and I will make almost as much as you did this year, and we've watched deductions fade out. Do I want my taxes to go higher? Not really. Do I get annoyed when I hear about things like the bridge to nowhere? Absolutely. But by and large I am o.k. with the current situation.

I'm still going to pay taxes when I retire, and I am sure it will be above the median, too. Again, not following the train of thought here.

EDIT: ah, re-reading it, I think your point is I'm not maximizing my tax burden - hmmm. O.K., does that mean average joes should get a second job, too?

 

[Marquette]

EDIT: ah, re-reading it, I think your point is I'm not maximizing my tax burden - hmmm. O.K., does that mean average joes should get a second job, too?

I'm on it! I don't know that it'll push me into the 35% bracket this year, though.

 

[Notmuchlonger]

I'm on it! I don't know that it'll push me into the 35% bracket this year, though.

Good man! Someone has to do it for the rest of us lazy sobs!

 

[NW-Bound]

...
Me. I don't mind being selfish. I admit it. I'm much better able to decide how to spend my time and my money than the government.

Yes, I am selfish too, and I will admit it. In fact, I strongly suspect all fellow forum members to be selfish also. I have read some time ago about one man who voluntarily wrote an extra check to the IRS as a donation. Has anyone here done that?

The fact is what we want is "enlightened selfishness", a concept first set forth by Alexis de Tocqueville, I believe. My interpretation is that selfish as we are, we do not want to live in a third world country, where the differences between the haves and the havenots are so great. We do not want to be rich in a decayed and lawless society, where the rich have to hire personal bodyguards to protect against kidnappers. I do not think any would disagree with me here.

To keep this thread in the "FIRE and money" forum, I would say how I saw both Shawn and Laurence were justified in their actions. Laurence saw that the services provided in CA justified the higher taxes, while Shawn did not. In an earlier post, Firedreamer preferred AL for its lower taxes and cost of living, and did not see that he missed any services. One has to act in his own interests, and I respect your choices. I am grateful to live in the US, a country with the most mobility in the world. Vote with your feet. It is still your right to exercise.

But, if taxes are a necessity for society to function, how should it be levied? That brings me up to my next rant.

Confusing, and opaque--that's our present tax code.
...
- A flat(er) tax that covers virtually all income (almost no deductions) and provides a healthy standard deduction.

An emphatic YES. Our tax code is so complicated that each time I discovered or read about a "special treatment", it raised my blood pressure. I'd rather we, as a nation, spend more time finding cure for cancer, alternative energy, or just fishing, then to confer with accountants and tax attorneys to play the shell game with the IRS.

In our more pedestrian middle-class world, we spend time figuring out these little tax savings in munis, Roth conversion, etc... and pat ourselves on the back if we get ahead by a few thousand bucks. Hah! As the middle class tax payers, I think we have been fooling ourselves with the mortgage interest deductions, thinking that we got ourselves a break. Hah! How do you know if the other guys haven't got some other much juicier special tax treatments you wouldn't dream about?

I suspect a simpler flatter tax with no special treatments may bring in more tax revenues from the uber-rich than the current system.

From a Web site:

"But at the top, the tax system has already become regressive. The super-rich pay proportionately less in federal income tax than the merely rich. In 2000, the nation's 400 richest taxpayers, making an average $173 million, paid an effective tax rate more than 5 percentage points lower than those making $1.5 million to $5 million, notes economist Martin Sullivan in Tax Notes magazine."

I think that the rich do not want a flat tax system because they would pay more, the middle class are still clinging to their "placebo" mortgage deduction, and the poor probably do not care. A simple and fair system that goes nowhere, because of "unenlightened selfishness".

 

[Texarkandy]

Progressive taxation, regressive taxation, whatever ... - but to think outside the box for a moment, consider for a moment the (radical?) philosophical argument that a rich person should pay no more tax in actual dollars (not percentages) than a middle class person. (as to the poor, well you can't get blood out of a turnip!)

It's not like a rich man's vote counts for more than a poor man's & does the government not belong to the poor man just as much as the rich? (or at least it's supposed to).

If I share an apartment with roommate who makes half as much as I do, am I obliged to more of the electric bill?

 

[NW-Bound]

No one can exist in a vacuum. The rich have more possessions to be protected by a well-functioned society. Therefore, they should pay more.

In fact, I have read that some countries have a tax levied as a small percentage of wealth, not income. That makes sense to me, but I have not got the time, nor inclination to research further. I am no economist, just a guy trying to reach FIRE to have time to BS on this forum.

About the vote, I have read proposals to weight it as a function of various things... Arghh, I do not want to go there, even philosophically here. Forget it...

 

[Texarkandy]

No one can exist in a vacuum. The rich have more possessions to be protected by a well-functioned society. Therefore, they should pay more.
.....

That's an unsubstantiated and poor man's argument IMO. (not saying you personally are a "poor man" of course)

Do the possessions of the rich officially receive (or are they legally entitled to receive) any more protections than the rest of us?

Following your argument, since they pay more taxes should the police then not be officially/legally required to respond to a crime at their house with greater priority than at a poor man's house - or to double the amount of officers patrolling their neighborhoods.

 

[NW-Bound]

Well, in my simple thinking, if society breaks down and reduces the value of everything, the rich have more to lose than the poor...