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Why The “Rich” Don’t Feel So Rich

In a country burdened with a lot of debt and a lot of unemployed citizens, there is going to be a battle to get the “haves”  to pay much more than the “have nots”.  In the last few years, the upper end of the “haves” are being defined as those families making more than $250,000.  The battle is usually waged about which families are defined as rich and should be forced to pay the highest percentage tax rate.  The truth is that those who are the most wealthy are exempt from the entire argument.

After we define the cut-off point for the rich, we soften the blow for those with the largest bill by stating the fact that even if we raise the top tax bracket by 5%, we are light years away from the 94% highest tax bracket of 1944.  The problem with most comparisons of the top tax bracket today versus the top tax brackets in the past is that the top tax brackets continue to apply to a larger  and larger percentage of the population.  As an example, take the 94% tax bracket in 1944 which applied to incomes above $200,000.  In inflation adjusted dollars, the top tax bracket in 1944 equates to a salary of $2.5M today.

What is most interesting about the debate is the large tail distribution in incomes.  As we move up on the percentile income levels, we linearly move up….until we get to the far right and then the data skyrockets.  What this shows is that the truly rich are leagues above the rest of the population.

Source: Rachel Johnson, Urban-Brookings Tax Policy Center Microsimulation Model (version 0509-7). Note: Distribution excludes dependents and units with negative income.

The guy in the 99th percentile does not feel very rich versus his 99.9th percentile neighbor.  You might be thinking they are all making too much money, but there is another interesting aspect to this story.  Most of those with incomes in the $1M and up range earn their incomes from dividends or have their own businesses.  The dividend taxes are explicitly lower than income taxes, but the owners of corporations are able to deduct nearly all expenses,  shelter as much income as needed from the IRS and are able to hire the best tax attorneys possible to achieve it.  The family making $250k-$500k will be paying their 35% federal income tax, state income tax and sales taxes directly after plugging their numbers into Taxcut.  The family making $10M will be paying effective tax rates that are lower percentages than those in the lowest income tiers.

I bring this fact up because the media driven battle is false.  The truly rich are unaffected by the top tax bracket, paying less taxes as a percentage of income than the lowest decile of earners and are laughing their way to their yachts while the taxpayers from the 80th percentile ($100K) to 99th percentiles ($500K) are truly going to be squeezed like turnips.

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4 Responses

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  1. Mark Wolfinger says

    ” In the last few years, the upper end of the “haves” are being defined as those families making more than $250,000. ”

    Assuming you meant to say the ‘lower end’ – I disagree.

    250k was merely the income level at which it was proposed that additional income taxes be paid. Sure, the conversation suggested that the wealthy pay more, but I don’t believe anyone suggested that this income level represented the ‘wealthy.’

    It was merely the starting point for the next tax bracket.

  2. SurlyTrader says

    It is true that $250,000 was the lower end of the highest tax bracket, but the argument was over $250,000 and up being defined as rich. The reason it was being defined that way in the media was to make an argument for letting the tax cuts expire on those with incomes over $250,000 but keeping the tax cuts for everyone below $250,000.

  3. Mark Wolfinger says

    If there is to be a new tax bracket, it has to begin somewhere.

    I don’t believe that the intent was to limit people in that tax bracket only to the ‘rich.’ The point was that it should include the wealthy, and at the same time, exclude as much of the middle class as possible. If the number chosen were not 250k, opponents would offer the identical arguments.

  4. Pretorian says

    I think you argument is on the spot. I don’t think the truly rich are affected by any increase in the marginal tax rate, especially since many derived their income from Capital gains, dividends or have the ability to create off shore structures to be shelter from the IRS. Even Warren Buffets says that he pays less taxes than his secretary. In my personal experience with really reach people, I have seen that they tend to get and effective tax bill between 10 and 15 % max.

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