The blog entry below has caused quite a stir recently. It seems to hit a new low in narcissism and greed.
Posted by Todd Henderson on September 15, 2010
The rhetoric in Washington about taxes is about millionaires and the super rich, but the relevant dividing line between millionaires and the middle class is pegged at family income of $250,000. (I’m not a math professor, but last time I checked $250,000 is less than $1 million.) That makes me super rich and subject to a big tax hike if the president has his way.
I’m the president’s neighbor in Chicago, but we’ve never met. I wish we could, because I would introduce him to my family and our lifestyle, one he believes is capable of financing the vast expansion of government he is planning. A quick look at our family budget, which I will happily share with the White House, will show him that like many Americans, we are just getting by despite seeming to be rich. We aren’t.
I, like the president before me, am a law professor at the University of Chicago Law School, and my wife, like the first lady before her, works at the University of Chicago Hospitals, where she is a doctor who treats children with cancer. Our combined income exceeds the $250,000 threshold for the super rich (but not by that much), and the president plans on raising my taxes. After all, we can afford it, and the world we are now living in has that familiar Marxian tone of those who need take and those who can afford it pay. The problem is, we can’t afford it. Here is why.
The biggest expense for us is financing government. Last year, my wife and I paid nearly $100,000 in federal and state taxes, not even including sales and other taxes. This amount is so high because we can’t afford fancy accountants and lawyers to help us evade taxes and we are penalized by the tax code because we choose to be married and we both work outside the home. (If my wife and I divorced or were never married, the government would write us a check for tens of thousands of dollars. Talk about perverse incentives.)
Our next biggest expense, like most people, is our mortgage. Homes near our work in Chicago aren’t cheap and we do not have friends who were willing to help us finance the deal. We chose to invest in the University community and renovate and old property, but we did so at an inopportune time.
We pay about $15,000 in property taxes, about half of which goes to fund public education in Chicago. Since we care the education of our three children, this means we also have to pay to send them to private school. My wife has school loans of nearly $250,000 and I do too, although becoming a lawyer is significantly cheaper. We try to invest in our retirement by putting some money in the stock market, something that these days sounds like a patriotic act. Our account isn’t worth much, and is worth a lot less than it used to be.
Like most working Americans, insurance, doctors’ bills, utilities, two cars, daycare, groceries, gasoline, cell phones, and cable TV (no movie channels) round out our monthly expenses. We also have someone who cuts our grass, cleans our house, and watches our new baby so we can both work outside the home. At the end of all this, we have less than a few hundred dollars per month of discretionary income. We occasionally eat out but with a baby sitter, these nights take a toll on our budget. Life in America is wonderful, but expensive.
If our taxes rise significantly, as they seem likely to, we can cut back on some things. The (legal) immigrant from Mexico who owns the lawn service we employ will suffer, as will the (legal) immigrant from Poland who cleans our house a few times a month. We can cancel our cell phones and some cable channels, as well as take our daughter from her art class at the community art center, but these are only a few hundred dollars per month in total. But more importantly, what is the theory under which collecting this money in taxes and deciding in Washington how to spend it is superior to our decisions? Ask the entrepreneurs we employ and the new arrivals they employ in turn whether they prefer to work for us or get a government handout.
If these cuts don’t work, we will sell our house – into an already spiraling market of declining asset values – and our cars, assuming someone will buy them. The irony here, of course, is that the government is working to save both of these industries despite the impact that increasing taxes will have.
The problem with the president’s plan is that the super rich don’t pay taxes – they hide in the Cayman Islands or use fancy investment vehicles to shelter their income. We aren’t rich enough to afford this – I use Turbo Tax. But we are rich enough to be hurt by the president’s plan. The next time the president comes home to Chicago, he has a standing invitation to come to my house (two blocks from his) and judge for himself whether the Hendersons are as rich as he thinks.
Back in 2000, the U.S. government's long-term budget was out of balance--although not by all that much. The government had, you see, made promises--very popular promises--for Medicare, Medicaid, and Social Security without proposing sufficient funding streams to pay for those promises. So back in 2000, looking forward, we had a choice: raise taxes, or "bend the curve" by cutting the growth of spending.
Instead of doing either of these, we elected George W. Bush. Two wars. A big (and ill-advised) defense buildup that is very unsuited to protecting us from Al Qaeda and company. A huge unfunded expansion of Medicare. Plans for the unfunded expansion of Social Security that came to nothing. However, instead of raising taxes George W. Bush reduced them.
This simply does not work. As Milton Friedman liked to say, to spend is to tax. If the government spends somebody will pay for it. And if you don't levy the taxes to pay for it now all that means is that the person who owes the taxes does not know it yet.
So unless Professor Xxxxxxxxx (or whoever) has plans for serious cuts to Medicare, Medicaid, Social Security, and National Defense--and I see none on offer--his last point about government allocation is simply moot. George W. Bush has already allocated it with his defense buildup and Medicare Part D. Taxes are going up over the next decade--barring cuts of 1/3 to Medicare, etc. They can either go up smartly or we can pretend they don't have to go up, in which case they go up stupidly. The argument for small government was lost long ago, and was lost again and anew in the past decade with Medicare Part D and the wars of George W. Bush. I believe Xxxx Xxxxxxxxx was a deserter in that war--a supporter of George W. Bush, and of his unfunded Medicare Part D expansion, and of his wars of choice. So I don't think he has standing to make the small government argument--some people do, but he does not.
But Mr. Xxxx Xxxxxxxxx's (or whoever's) comment and his post were, overwhelmingly, not an argument for a small government.
They were an argument that whatever taxes were paid, he should not have to pay more than he is currently paying because it is unfair: he is not "rich".
As best as Michael O'Hare could determine (and Professor Xxxx Xxxxxxxxx or whoever it is does not challenge him), the Xxxxxxxxx annual family budget is this:
$455,000 a year of income, of which:
•$60,000 in student loan payments
•$40,000 is employer contributions to 401(k) and similar retirement savings vehicles
•$15,000 is employer contributions to health insurance
•$60,000 is untaxed employee contributions to tax-favored retirement savings vehicles
•$25,000 building equity in their house
•$80,000 in state and federal income taxes
•$15,000 in property taxes
•$10,000 for automobiles
•$55,000 in housing costs for a $1M house (three times the average price in the Hyde Park neighborhood
•$60,000 in private school costs for three children
•$35,000 in other living expenses
And of this budget, Professor Xxxx Xxxxxxxxx (or whoever) writes:
Like most working Americans, insurance, doctors’ bills, utilities, two cars, daycare, groceries, gasoline, cell phones, and cable TV (no movie channels) round out our monthly expenses. We also have someone who cuts our grass, cleans our house, and watches our new baby.... [W]e have less than a few hundred dollars per month of discretionary income. We occasionally eat out but with a baby sitter, these nights take a toll on our budget. Life in America is wonderful, but expensive. If our taxes rise significantly... the (legal) immigrant from Mexico who owns the lawn service we employ will suffer, as will the (legal) immigrant from Poland who cleans our house a few times a month. We can cancel our cell phones and some cable channels, as well as take our daughter from her art class at the community art center...
Now it is time for a reality check on this "most working Americans." The median household income in the United States today is $50,000. Half of all households make more than this. Half of all households make less. The big expenses in the Xxxxxxxxx family budget--their $60,000 a year in contributions to tax-favored retirement savings vehicles, their $25,000 a year savings building home equity, their $55,000 for housing, their $60,000 in private school costs, even their $10,000 a year for new cars--are simply out of reach for the overwhelming majority of Americans. Half of all households make less than $50,000 a year--the Xxxxxxxxxs make nine times that. 90% of households make less than $100,000 a year--the Xxxxxxxxx's make 4.5 times that. The Xxxxxxxxx's are solidly in the top 1% of American households, in the select 1% group that receives more than $350,000 a year.
By any standard, they are really rich.
But they don't feel rich. They have a cash flow problem. When the bills are paid at the end of the month, the money is gone--and they feel that they have to scrimp.
I know how they feel. My household income is of the same order of magnitude than theirs (although somewhat less) and we too had to juggle assets quickly when it developed that an error in Reed College's housing system had caused them not to charge us $5,000 that we owe. We too have chosen to put our income in places (tax-favored retirement savings vehicles, building equity, housing, private college costs) where we think it is better used than $200 restaurant meals, $1000 a night resort hotel rooms, or $75,000 automobiles. But I don't think that I am not rich.
Professor Xxxx Xxxxxxxxx's problem is that he thinks that he ought to be able to pay off student loans, contribute to retirement savings vehicles, build equity, drive new cars, live in a big expensive house, send his children to private school, and still have plenty of cash at the end of the month for the $200 restaurant meals, the $1000 a night resort hotel rooms, and the $75,000 automobiles. And even half a million dollars a year cannot be you all of that.
But if he values the high-end consumption so much, why doesn't he rearrange his budget? Why not stop the retirement savings contributions, why not rent rather than buy, why not send the kids to public school? Then the disposable cash at the end of the month would flow like water. His problem is that some of these decisions would strike him as imprudent. And all of them would strike him as degradations--doctor-law professor couples ought to send their kids to private schools, and live in big houses, and contribute to their 401(k)s, and also still have lots of cash for splurges. That is the way things should be.
But why does he think that that is the way things should be?
And here is the dirty secret: Professor Xxxx Xxxxxxxxx thinks that that is the way things should be because he knows people for whom that is the way it is.
Cast yourself back to 1980. In 1980 a household at the bottom of the 1% rich households in America had an income equivalent in today's dollars $190,000 a year. They know of 1000 people--900 of them poorer than they are in income brackets 90-99% and 100 people richer than they are in the top 1% income bracket. The 900 people poorer than them back in 1980 had incomes from $85,000-$190,000 a year. Those are, if you are sitting at the bottom of the top 1%, the middle class who are not as successful as you. You don't look downward much. Instead, you look upward. Of the 100 above you, 90 in 1980 had incomes less than three times their incomes. And they would have known of 1 person of that 100 who was seven times as rich as they were.
Thus Professor Xxxx Xxxxxxxxx in 1980 would have known who the really rich were, and they would on average have had about four times his income--more, considerably more, but not a huge gulf. He would have known people who were truly rich, and he would have seen himself as one of them--or as almost one of them.
Now fast forward to today. Today a household at the bottom of the 1% rich households in America has an income of nearly $400,000 a year--the income of that slot in the labor market has more than doubled, while the incomes of those at the slot at the bottom of the 10% wealthy has grown by only 20% in two decades. The 900 people he knows in the 90%-99% slots have incomes that start at $110,000 a year. Compared to Xxxx Xxxxxxxxx's $455,000, they are barely middle class--"How can they afford cell phones?" Xxxxxxxxx sometimes wonders.
But he wonders rarely. He doesn't say: "Wow! My real income is more than twice the income of somebody in this slot a generation ago! Wow! A generation ago the income of my slot was only twice that of somebody at the bottom of the 10% wealthy, and now it is 3 1/2 times as much!" For he doesn't look down at the 99% of American households who have less income than he does. And he looks up. And when he looks up today he sees as wide a gap yawning above him as the gap between Dives and Lazarus. Mr. Xxxxxxxxx doesn't look down.
Instead, Mr. Xxxx Xxxxxxxxx looks up. Of the 100 people richer than he is, fully ten have more than four times his income. And he knows of one person with 20 times his income. He knows who the really rich are, and they have ten times his income: They have not $450,000 a year. They have $4.5 million a year. And, to him, they are in a different world.
And so he is sad. He and his wife deserve to be successful. And he knows people who are successful. But he is not one of them--widening income inequality over the past generation has excluded him from the rich who truly have money.
And this makes him sad. And angry. But, curiously enough, not angry at the senior law firm partners who extract surplus value from their associates and their clients, or angry at the financiers, but angry at... Barack Obama, who dares to suggest that the U.S. government's funding gap should be closed partly by taxing him, and angry at the great hordes of the unwashed who will receive the Medicare, Medicaid, and Social Security payments that the government will make over the next several generations.
Do I wish that Professor Xxxxxxxxx had a little more self-knowledge? Yes. Is it pathetic that somebody with nine times the median household income thinks of himself as just another average Joe, just another "working American"? Yes. Do I find it embarrassing that somebody whose income is in the top 1% of American households thinks that he is not rich? Yes.
Do I hope to educate him so that he has a better grasp on reality and better understanding of America and of public policy? Yes.
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