Why some people are so rich that they can sustain a tax increase and maintain their lifestyle

Brooke’s Note: I was walking down the pier where my houseboat is berthed this weekend and ran into one of my neighbors, whose substantial income is a matter of public knowledge – more than $250,000. The conversation hadn’t gone too far beyond pleasantries when she began grousing about the difficulties of paying her daughter’s college tuition. I wasn’t able to summon much sympathy because I know her pay [not to mention her boat and car] far outstrips my own. But I hear well-compensated people complaining about these expenses all the time – and maybe it’s not because they all like to whine. A James Surowiecki article I read in the New Yorker over the weekend had some information that made me more sympathetic to the financial challenges of the merely affluent.

The New Yorker is pegged as a liberal publication, but its business columnist, James Surowiecki, made a good case last week for why households earning $250,000, or $200,000 for an individual, really are in no position to absorb an Obama tax increase.

Summer camp tuitions

For one thing, people earning this much — they are in the top 3% of wage earners — don’t feel rich, he points out in the article: Soak the very, very rich. The “American mythology” of what it means to be middle class presumes owning a nice house, somebody at home, summer camps, ridable lawnmowers, memberships, college educations, cottage by the lake, a boat and nice vacations. It puts a strain on any budget.

And rich people tend to be where the well-paying jobs are in places like Boston, New York, San Francisco or Seattle. In New York, the average apartment sells for $900,000, Surowiecki writes. That apartment is hardly the Taj Mahal.

The other factor — as established by economists Thomas Piketty, Professor of Economics at the Paris School of Economics and Emmanuael Saez, professor of economics at University of California/Berkeley – is that people who earn a few hundred thousand of income do much worse than their rich brethren further up the wealth ladder, Surowiecki writes. From 2002 to 2007 the bottom 99% of incomes increased on average 1.3%, discounting inflation. The top one percent accounted for 66% of the nation’s income increases during that time period, he adds.

People between the 95th and 99th percentile of earners have claimed a consistent sliver of the earnings pie for the past 25 years. Meanwhile, the crowd in the top one percent has seen its share double.

Ultra, ultra affluent

Here’s the kicker: The earners inhabiting the top 0.1% have seen their share of the pie triple during the same time period. This mere sliver of population now earns as much as the bottom 120 million of Americans.

“So at the same time as the rich have been pulling from the middle class, the very rich have been pulling away from the pretty rich and the very, very rich have been pulling away from the very rich,” Surowiecki writes.

This is where the advocacy of tax breaks for the “pretty rich”, “very rich” and “very, very rich” come in.

“At the moment we have a system of tax brackets well-suited to nineteenth-century New Zealand. Our system sets the top bracket at $375,000, with a tax rate of 35%. (People in the second-highest bracket, starting at $172,000 for individuals, pay 33%.) this means that someone making $200,000 a year and someone making $200 million a year pay at similar tax rates. LeBron James and LeBron James dentist: same difference.”

So apparently this is an area where liberals and conservatives can find common ground. A Quinnipiac poll found enormous support – even among conservatives – for taxing the heck out of people earning more than $1 million.

Silly idea

Of course, real conservatives see this as a silly idea, I’d note. While people earning $250,000 spend a lot, they don’t invest a lot. You need spare millions to make the kinds of investments that get the economy chugging again, a line of argument goes. Taxing away this pool of investible funds sends the wrong signal to these barons of commerce.

But the merely rich – including doctors, lawyers, accountants and even some journalists (like, probably, Surowiecki) — are beginning to feel the pain of truly mass affluent.

This bonding of the rich and the middle class could bring about a consensus about soaking the very, very rich, according to Surowiecki.

“The lower upper class exerts a cultural influence out-of-proportion to its size and so the anger toward the upper class – toward outrageous executive salaries and Wall Street shenanigans – could be a powerful force for reforming the way we deal with inequality.”

In other words, nobody wants to be opposite the lawyers, orthodontists and journalists of the lower upper class in this debate. They have too much clout.

LeBron James’ dentist arguing against their side in a political debate.