New Republic: The Tragic Plight Of The Sort Of Rich The fight over tax hikes on the rich is heating up. Stories of families who would struggle if hit with tax hike are everywhere. But Jonathan Chait of The New Republic argues that in most cases, the fears of moving to a higher tax bracket and paying much higher taxes are unfounded.
NPR logo New Republic: The Tragic Plight Of The Sort Of Rich

New Republic: The Tragic Plight Of The Sort Of Rich

Many people are afraid of moving to a high tax bracket and being forced to pay substantially more in taxes. hide caption

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Many people are afraid of moving to a high tax bracket and being forced to pay substantially more in taxes.

Jonathan Chait is a senior editor at The New Republic.

Jerry and Helen Peterson are a married couple in East Orange, New Jersey, earning $252,000 per year. Jerry, a CPA, and Helen, a public relations executive, understand the need to close the deficit, but don't understand why their taxes have to go up. "I don't feel rich," says Jerry, as Helen frowns the worried frown of a woman who has been singled out by the Obama administration for brutal economic reprisal of the sort Stalin imposed upon prosperous peasants.

Jerry and Helen are not real people. I went looking for couples that earn a bit more than $250,000 and don't feel rich, and there are plenty of them out there, but it turns out all of them have already been quoted in the national media. It's a booming journalistic genre, and we've run out of real-world examples of the trend, forcing those of us looking to write still more stories chronicling the plight of those facing tax hikes on their slightly-more-than-$250,000 incomes to start making these people up ourselves. Otherwise we'd have to move on to finding people struggling to feed their children on food stamps, or other less-pressing humanitarian stories.

The most recent such story appeared last weekend in The New York Times, but the tragedy has gripped the consciousness of the news media and our elected leaders for more than two years now. The stories all tend to follow certain tropes. One is a lack of understanding of how the tax system works. News stories have focused on people close to the $250,000 threshold — Van Moore, an optometrist in Sevierville, Tennessee, tells The Wall Street Journal he earns "just above $250,000." ("I'm not poor, but I'm not rich.") The Times quotes "Mason," a Yahoo!-message-board poster, who claims an income of $262,000. The Washington Post has a heart-rending feature on a MasterCard vice president raising two children on $300,000 a year.

Obama's tax increase would apply to taxable income over $250,000 a year — taxable income meaning income minus deductions. Households with a taxable income of $250,000 earn, on average, about $315,000. You hear that, Ricky Metz, Manhattan hairdresser living on $310,000 a year? (The Los Angeles Times snapped her up for a quote — "We feel middle class" — before the hometown papers could swoop in.) You're probably in the clear, so stop kvetching.

An additional problem is that these tales of woe seem to ignore, or actively fail to understand, the fact that a higher tax bracket affects only the portion of income above the threshold level. Even if we ignored the distinction between total income and taxable income and conclude that families earning $262,000 were paying higher rates, they'd be looking only at a slightly higher rate on that last $12,000. That's like less than a dollar per day in higher federal income taxes.

But large numbers of Americans, including many economics reporters, seem to think that when you enter a higher tax bracket, your entire income is taxed at a higher rate. In 2009, ABC News published a story about people desperately trying to get their income under $250,000 in order to avoid the coming Obama tax hike (which, in any case, was not then due to take effect until 2011). "We are going to try to figure out how to make our income $249,999.00," one lawyer told the reporter. A dentist earning $320,000 pondered laying off staff and cutting hours to shave $70,000 off her income. The story presented their actions as a sensible tax-avoidance strategy.

The deeper problem here is misunderstanding of the rationale for increasing taxes on those unfortunate, over-$250,000 souls. The recent Times story sums up the rationale for raising their taxes like so: "Under $250,000, you're middle class; over it and you're wealthy." The story proceeds to ask, "Is it based on a statistical metric of wealth in America — a true dividing line?" The answer, of course, is no. But who cares? Drawing hard-line distinctions among data points arrayed along a continuum is a familiar and not terribly compelling problem. There's no such thing as a 100-meter time below which everybody is "fast" and above which everybody is "slow." Yet somehow track coaches decide which runners to slot in which race despite the lack of metaphysical clarity.

The heart-rending stories of the only-somewhat-affluent — "The car is more than a decade old, the vacation home in Sandestin, Florida, comes at a moderate weekly rate," to quote an actual news story from the Journal — all seem to presume that the important standard here is whether higher tax rates would impose any sacrifice at all. "The bottom line," the Fiscal Times reports: "It's not exactly easy street for our $250,000 a year family."

Of course, that's not really the point. Sure, many families that would face higher taxes under Obama can't just buy anything they want. But we have a large gap between revenues and outlays, meaning we'll need wide-scale sacrifice in order to get on sound footing. The question isn't whether raising taxes on the upper-middle class is completely painless, it's whether it's less painful than, say, eliminating college tuition subsidies for poor kids.

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