BusinessWeek’s June 16 issue has a story on the “not-so-rich” rich. It asks “Just what does it mean to be wealthy these days? … Many facing higher taxes [if Barack Obama is elected president] don’t consider themselves part of the exalted crowd. They have good incomes, to be sure, particularly compared with the median household income of $48,200. Of the 149 million households filing federal income taxes for 2006, some 3% reported income between $200,000 and $500,000; fewer than 1% claimed income above half a million dollars.” The article goes on to cite comments by a few others in this income range who say they feel “stretched” and “middle class at best.”
It would help to have a sense of what a household budget at this income level might look like. Here’s an attempt at one. I assume two employed adults and two preschool-age children. I use a pretax income of $300,000, which comes to $25,000 a month.
A lot of this — loan payments, property taxes, savings, child care expenses, and others — will vary depending on household circumstances. But are there any significant errors or omissions here?
Calculations by the Tax Policy Center suggest that Obama’s plan would increase taxes for this type of family by perhaps $6,000 a year, or $500 per month (about 2% of pretax income). Is that too much to ask? You be the judge.
June 25, 2008 at 12:25 am
I make a pretty good wage (not on this scale), as does my wife, when she works full time (which, at the moment, is not the case).
If my taxes went up $250 per month, I could pretty easily cut out several nonessential items to cover the difference. I wouldn’t be terrible enthused about it, but I wouldn’t regard it as a major imposition if the economic policies of the country in general were a little more focused on long term sustainability, infrastructure upgrades, paying down debt, etc.
It’s kind of tough to evaluate if taxes are too much to ask if you’re not also taking into account where they’re being spent.
P.S. -> $75,000 in car loans, in my humble opinion, is personal financial idiocy… however much money you make.
June 25, 2008 at 1:37 am
Not a dime for charitable contributions?
June 25, 2008 at 7:03 am
I suspect that in order to generate such income, many folks live in relatively high tax states, and many folks live in high priced real estate areas.
June 25, 2008 at 8:15 am
On the other hand $1500 for childcare seems a bit low to me. We’re paying $2000 for babysitting (NYC rate, one kid) just so my wife can work full time. And we’re nowhere near $300K. These calculations seem reasonable to me.
Can we assume that health insurance costs will be lower?
June 25, 2008 at 9:14 am
David:
I left charitable contributions under “Other” (”gifts”). Didn’t want to presume a particular level of altruism.
Lane
June 26, 2008 at 8:59 am
I also note that the recent Jensen and Shore paper (Freakonomics blog link) indicates that many folks who reported income in that range have had highly variable income. They may report $300,000 in income, but that may not be an appropriate baseline budget for them.
June 26, 2008 at 6:48 pm
State and local taxes in New York City or California are closer to 10 percent than the 2 percent in your calculations. Home prices in Manhattan or the Westchester County suburbs are closer to 2 million than the $600,000 you are using, and the real estate taxes in the suburbs are more like 2,000 per month than the 1 thousand in your calculations. Also, it costs about $550 per month to garage your car in Manhattan if it is an SUV, $350 for regular cars. One of the big problems with our tax system is the failure to adjust the tax burden for cost of living variations. Someone with $300,000 in income in say, Dubuque, Iowa is wealthy while someone in NYC with that income is just another overtaxed working stiff.
June 26, 2008 at 8:19 pm
These “necessities” are more like life mistakes or unfortunate addictions, from the way you describe it here. Do you really find that you’d recommend to others with this income that they buy $75000 worth of cars? A $600,000 house? Or would you perhaps be willing to admit that these are the goals of class and status that go well above and beyond need? Should we pity you for wanting so desperately to be able to hold on to the symbols of bourgeois success in a time when scarcity is killing millions around the globe? It’s hard to find any rational way to identify with your position here unless we agree that the status items and lifestyle ($1600 for food?) are somehow “necessities” being taken from you by the government. But get this: we work to MAKE a nation. We work to MAKE communities. The government (and the taxes you donate to it) should ideally be an agent in this process of building. But if you think we work to make ourselves individual islands of wealth and status who can lie to ourselves that we’re somehow self-made and beyond the responsibility to others that the government is asking us to remember… well… perhaps this is the sign of a thorough infestation of decadence among the “educated” in our country that will ultimately mean its demise.
June 27, 2008 at 2:53 pm
Clearly this family is living very luxuriously, $500/month for a country club, $1,600/month for food, $9,000 per year for vacations — ever heard of camping, or driving to Six Flags and staying at the Holiday Inn. And a $600,000 house, I know in Orange county California this just buys a very nice middle class house in a nice suburb, but in the vast majority of the country you need less than half as much for such a house.
A key thing though is, it’s not that Obama would be making them pay extra taxes for no benefit in return. Even at their income level, the benefits from Obama’s tax increases would be substantial. These include a great decrease in their health insurance costs, and the health insurance costs of their employers, which should eventually be passed along in higher wages.
The tax increases would partly go to increase public health and safety, substantially benefiting the quality of life of them and their children.
College would become a lot more affordable, so their children wouldn’t be saddled with so much student debt like they are, and they would have to save less for their children’s education.
Public recreation would be better, so maybe they could play on the public tennis courts or send their children to a free public community center, instead of having to wall themselves off from the rabble like the elites in Honduras — and that is the path that the Republicans have already sent us down to a horrible extent.
The list goes on and on.
Even for a family this wealthy, I would guess that the costs substantially outweigh the benefits, and this is overwhelmingly true for the median family.
The main reason is that Obama’s and the Democrats spending programs, by and large, recognize what the scientific academic economics community learned long ago. An intelligent government role can greatly increase efficiency, wealth, and welfare, due to problems with the pure free market like externalities, asymmetric information, inability to perfectly price discriminate, inability to patent, large economies of scale and monopoly power problems, especially with idea, knowledge products, and more.
The Republicans of the last three decades have a hostility to science and thinking in general when it interferes with their ideology, and their simple-minded, the pure free market is always the best and magic, slogan economics has cost us greatly.
June 27, 2008 at 3:12 pm
One other thing, which is huge, is the prestige externalities, prominently researched and written about by Cornell economist Robert Frank.
The taxes would be paid by everyone in one’s peer group, by and large, so if you ended up spending $5,000 less on your car, on average, so would your peers, so you wouldn’t lose any prestige. As typically, the utility of a luxury car, versus an average one, is probably at least 90% prestige, the utility cost of that $5,000 less in spending would by more like $500, but the whole $5,000 in taxes would go to health care, education, public safety, cancer research, etc. (inconspicuous consumption as Frank would call it).
The same goes for spending on clothing and accessories, country club, and even vacation hotels are highly context related in their utility.
Furthermore, if their income goes down X%, so does their peers’ who bid against them for homes, so there will be a savings in home prices. It’s not a complete free lunch, because, for example, older couples moving from a larger home to a smaller one will on average pocket less of a difference, but there will be far more gainers from this than losers.
June 28, 2008 at 10:13 am
What is most instructive is reading the reader comments appended to the online version of the BusinessWeek article. There are several $300k/y earners who argue their case very forcefully
.
July 6, 2008 at 1:30 pm
$1,600 a month for food expenses for a family of two adults and two pre-schoolers? I have to assume that includes several eat-out-with-babysitting nights.
I’ll quibble the car costs. Unless you’re assuming the cars will only last four years (in which case, why did you buy them instead of lease), the cash flows you present assume (1) that you bought both cars at once and (2) that you did so right around when your expenses went up with one or both children.
Otherwise, you pay off the loans now and reduce the savings until years 5-?? (8?) when the car money goes into education funds.
Also, you quickly realize that you should pay off your student loans and car loans quicker, since you’re not making 7% on that money. Right now, you’re putting just under $35K a year into retirement/education funds that aren’t going to be returning anywhere near that amount.
Cut the meals out (which looks like at least $400-600/month of that food budget), pay down principal, and don’t impulse-buy two cars at once, or dump them the minute they are paid off.
If any increase in taxes is what’s required to get these people to look at their budget, then it’s probably a good thing.
September 2, 2008 at 7:42 am
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