Relevant and even prescient commentary on news, politics and the economy.

Taxing the Upper-Middle Class: Is That A Small Violin I Hear Playing?

by Tom Bozzo

In BusinessWeek, Jane Sasseen’s “Taxing the ‘Not-So-Rich’ Rich” tries to make me feel, uh, well, here’s the lede:

By any measure, Dr. Howard Hammer and his wife, Hope, have a comfortable life. Hammer, 40, has built a thriving practice as an ear, nose, and throat specialist, while Hope, 39, has switched to part-time work as a real estate lawyer after years at a big firm in order to spend more time with [the kids]. Home is a four-bedroom house in the Philadelphia suburbs, and between them, they bring in over $300,000 a year. “We can’t complain,” he says. “We’re certainly not struggling.”

But are they wealthy? That’s far more debatable…

Granted, income is a flow and wealth is a stock. There’s nothing much beyond self-control that would prevent a family with a 97th-percentile income a la the Hammers from spending drunken sailors under the table (if perhaps in ways the drunken sailors would find dull), seeing as the modern economy’s undeniable talent is providing an array of goods and services capable of relieving anyone of their money for arbitrary values of “their money.”

Still, a regularity of the income-and-wealth data is that households with $300,000/year incomes also tend to be in high percentiles of the wealth distribution. In the Fed’s 2004 Survey of Consumer Finances, for example, households in the 75th-90th percentile range for the wealth distribution had a median income of $77,000 (in 2004 dollars) and a mean income of $87,800. So there’s some skew to the income distribution for people in that wealth fractile, but you can conclude that there aren’t too many people making $300,000/year who aren’t also in the top 10% of the wealth distribution. At least, they’re for the most part rapidly on the way there.

And, sure enough, most people would probably be glad to have the financial stresses of the $300,000/year set:

Ever-rising prices for gas, health insurance, and other expenses are hitting hard, as are the $3,000-a-month mortgage and the $2,000 he still pays monthly to whittle down his $160,000 medical school debt. A six-year residency gave Hammer a delayed start saving for retirement, so he worries if he’s stashing enough in his 401(k). By the time the couple contributes to the children’s college fund, there’s little extra at the end of the month.

Yes, that’s the horror of only having a little bit to save after socking away money for two of the main savings motives. If they actually had to get to the point of curtailing their other savings, I’m quite sure that they could sharpen their pencils before their credit cards got maxed out.

Now you might recall that the upper-middle and upper classes did relatively well in that long national nightmare of peace and prosperity known as the Clinton (I) years. However, Dr. Hammer would have us know that he’s not really a Republican but, he tells BW:

“I don’t mind paying my fair share, but people act like they’re just talking about Bill Gates,” he says. “We would definitely feel a hit if our taxes went up.” Although a year ago he would not have considered voting Republican in November, now he’s not so sure: “Do you vote your heart, or do you vote your wallet?”

This looks like rather narrow pocketbook-voting insofar as Republican policies haven’t exactly helped with stuff like education, transportation, and health insurance prices and costs. In a longer view the kids might be less than thankful for the taxes deferred to the next generation. Perhaps Dr. Hammer is persuadable.

The BW piece seems to predict a major line of attack against Obama in the fall, namely that he’s planning the biggest middle-class tax increase EVER. After all, a little rebranding (“death tax”) plus relentless marketing made a popular cause of relieving the super-rich of a tax burden nearly nobody is fortunate enough to bear, and if you’re a one-trick pony…

But many also live in high-cost areas with expenses to match — and feel burned by talk of “taxing the rich” that doesn’t recognize that $250,000 stretches a lot further in the South or the Midwest than in Manhattan or Silicon Valley. “There is a huge difference between what politicians define as rich and what many Americans would call middle class,” says Patrick Anderson, CEO of the Anderson Economic Group and co-editor of The State Economic Handbook.

The soaring deficit, along with the fact that the Bush tax cuts expire at the end of 2010, provide much of the impetus for the coming fight over high-end taxes. If Washington doesn’t act, tax rates on income, capital gains, dividends, and other areas will return to the higher rates in effect before the cuts were enacted in 2001 and 2003. Senator John McCain (R-Ariz.)… has said he would extend the cuts for everyone, while Obama says he’ll maintain them for all but the wealthiest. If Obama wins, some taxes could go up as soon as 2009.

It falls to Austan Goolsbee to remind everyone that you can get “many” by multiplying small fractions and the population of the United States, and besides the far upper tail of the income distribution is the only group that’s systematically done well under Bushonomics:

Austan Goolsbee, Obama’s top economic advisor, points out that only a relatively small number of high-end earners would be tapped, while the majority of Americans would see their taxes fall or remain the same. “Income growth in that group has been extremely rapid, while it’s been stagnant for everyone else,” says Goolsbee. “It’s hard to argue they face the same struggle to get by.”

No kidding. And the sob stories may even get a little much for Ms. Sasseen, who closes thusly:

“People think the President can just extend the cuts, but he can’t,” says Stanford Group’s [Anne] Mathias. All of which explains why Mathias has been warning her clients that the next couple of years “will be a very bad time to be rich.” Whatever, precisely, that means.

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Phil Gramm, McCain’s "Economic" Advisor, Speaks

James Pethokoukis interviews Phil Gramm, economic advisor to John McCain.

Here’s Gramm

The interesting thing about the economic debate that we are about to have in America is that nowhere in the world can the two Democrat candidates show an example of countries that have succeeded economically by raising taxes, increasing government spending, and instituting protectionist measures….

Pethokoukis highlighted this, so it seems he thinks Gramm was making a good point. I don’t check in on Pethokoukis often, but that isn’t a surprise that he would think it’s a big deal. It also isn’t a surprise these two would miss an example so close to home.

There are all sorts of gems in this interview, but I don’t have much time right now so let me just reach for the fruit that has actually gone through the effort of taking a bite out of my behind…

Here’s more Gramm:

When [Bill] Clinton took office, the economy was in a boom as the benefits of the Reagan economic program were being fully felt. Today, the economy is weaker, and also our competitors are stronger. One of the points you’ve got to understand is that what was good enough 25 years ago for America to be No. 1 is not good enough now. We want more growth, not less; more jobs, not fewer jobs….

(Highlights by James Pethokoukis.)

How come when GHW Bush was in office, the economy wasn’t fully feeling (felting? feeling up?) the benefits of the Reagan economic program? Why weren’t those bennies there when GHW was in office? As to faster growth, once again I suggest a look here.

Gramm continues…

Senator McCain agrees that we should have more spending on housing, nutrition, education, clothing—the things that American families want. He agrees with the Democrats on that. Where they differ is the question of who should do the spending. The Democrats want government to do the spending. Senator McCain wants families to do the spending.

That’s very nice. Give a janitor a tax cut that amounts to an added $20 in his pocket every month (all the while seeing his real income dropping due to these brilliant policies – I hate to sound like a broken record but Pethokoukis and Gramm really need to look at this) and just watch him increase his spending on housing, nutrition, education, and clothing.

More Gramm…

And let me go back a second. The Democrats like to make a big deal out of how people said that Clinton’s increasing the tax rates was going to produce economic problems, but actually it was the overall economic program of Clinton that they said those things about, including having government take over one eighth of the economy in healthcare and a stimulus package where the government was going to fund pork barrel projects all over the country, from alpine slides in Puerto Rico to ice skating warming huts in Connecticut. But the Democrats conveniently forget that because the Republicans were able to defeat the healthcare program and the stimulus package, the Clinton program as he called for it was not implemented.

So… basically Gramm is now saying that it was the stuff other than tax hikes that would have hurt the economy. Presumably this means Gramm no longer thinks raising tax rates hurts the economy.

Yet more Gramm…

There are a lot of things you can say about the Bush tax cuts, but you can’t say they didn’t work. Those tax cuts clearly were a factor in bringing us out of the 2000 recession at near-record speed.

What is it with these folks on the right and their fascination with the Great Recession of 2000 that Never Was? Have none of them heard of the NBER? Or even teh google? Its one thing to be incapable of performing any sort of analysis, but getting basic facts wrong is another thing altogether. Its a sign one is either completely ignorant or trying to bs one’s audience.

Gramm, toward the end of the interview…

Remember, there are a lot of Americans who have not yet gotten a piece of the pie. Maybe you could limp along in France with the policy of the Democrats and just become more and more irrelevant to world trade and less of a competitor, but in America, where we have a growing population and people who want their shot at the American dream, those policies won’t work….

Americans who haven’t gotten a piece of the pie, eh? But we all know what Gramm would say about policies that actually delivered a piece of the pie to many Americans that hadn’t had one before – he opposed them, and still opposes them, stating as much earlier in the interview.

Then there’s the dig at France, that bunch of limp-wristed beret-wearing frommage-eating pansy foreigners who like mimes. Oh wait, aren’t they the good guys to folks like Gramm again because of Sarkozy? Someone’s several months behind in reading his talking points.

I don’t have time to look up the figures, but I’d guess that “just become more and more irrelevant to world trade and less of a competitor” is a phrase that applies to the US from period from 1980 to 1992, and from 2000 to 2008, but perhaps not from 1992 to 2000.

Update… minor edits for clarity.

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