The Tax Battle Decoded: What $250,000 Gets You As Congress and the White House battle over a tax and spending plan before the end of the year, one number is at the forefront: $250,000. That's the income level above which the White House wants taxes to rise. Host Guy Raz speaks with Reuters personal finance columnist Linda Stern about where that amount of money goes a long way, and where it doesn't. Plus NPR's Mara Liasson weighs in on the state of budget talks in Washington.

The Tax Battle Decoded: What $250,000 Gets You

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In our cover story today, we're going to focus on a specific number: 250,000. That's $250,000. Because if you earn that much, it puts you and your family in the top 2 percent of income earners in America.

And in order to avoid the so-called fiscal cliff - the end-of-the-year deadline that'll trigger massive spending cuts and tax increases for everyone - in order to avoid that, the White House and Congress have to agree to a tax and spending plan they can all live with.

Now, the White House says under its plan, if you earn more than 250,000, your taxes will go up. We'll talk more about that number in a moment, but first, let's bring in NPR's Mara Liasson.

And, Mara, we spoke about this a couple weeks ago. There seemed to be optimism that a deal could be reached between the White House and Congress. Is that optimism still there?

MARA LIASSON, BYLINE: I think we're still there. I think what you saw this week was a lot of Kabuki theater, at least that's the optimistic interpretation of what you saw this week. You saw the Republicans angrily reacting to the opening negotiating bid that the president laid down, say he's not serious, things have really slowed down, I'm very disappointed. The president went on the road to rally his supporters. But I think it's really important that both sides show their bases that they fought as hard as they could before they buckle down and compromise.

RAZ: A big part of the president's plan hinges on this number that we just mentioned: 250,000 - $250,000. He wants to increase taxes on families who earn that much money and more. That seems to be a red line that the White House has laid down.

LIASSON: That is a red line. He did campaign on this. He said he wants the top 2 percent - 250 and above - he wants their tax rates to go back to the Clinton-era rates of around 39.6 percent. But he has signaled that maybe he could compromise somewhere in between the current 35 percent and the Clinton-era rates.

RAZ: I mean, a lot of economists, Mara, have looked at this and said you can't raise the kinds of revenue that you need to raise simply by capping deductions. You have to not just cap deductions, but you also have to raise rates on the highest income earners.

LIASSON: Well, that's what the president says. He says to Republicans: You say we can do all this through closing loopholes. Show me the math, because he doesn't think it adds up. You can do this mathematically if you take away every single deduction for every single taxpayer, including those making under 250,000.

RAZ: So is that the Republicans' response? I mean, have they been able to say, hey, here is the math, and we're going to show you exactly how you do it?

LIASSON: No, they haven't done that yet. They have mostly focused on the president's proposal. They haven't laid out specifics of their own. They have laid out principles. But both sides, I think, know that they're going to have to cave. The Republicans will have to cave probably on tax rates, not just tax revenues. The Democrats will have to give in on entitlements much more than they've talked about doing so far.

RAZ: Mara, let me ask you about the politics of this, and specifically about this idea floating around Washington of triangulation. Essentially, the president kind of playing Mitch McConnell, the Senate Republican leader, off of John Boehner, the speaker of the House.

LIASSON: Well, John Boehner is the most important Republican in Washington right now, and he's the one who's going to be making the deal with the president. Mitch McConnell is the minority leader of the Senate. He's facing his own re-election two years from now. He could get a conservative Tea Party primary challenge.

I don't think it's a matter of triangulation, but I do think that the politics of this has changed since Election Day. The president won. He did campaign on raising rates. And he is negotiating in a completely different way than he did last time. He's going out to the country to make his case instead of just sequestering himself in a closed room or on the golf course with John Boehner.

And this makes Democrats very happy, by the way. They thought he caved last time, and they like the way he's negotiating now. And this is going to help him bring his own Democrats to the ultimate compromise that I think Mr. Obama knows he has to make.

RAZ: That's NPR's national political correspondent Mara Liasson. So if a deal is reached along the lines of what the White House wants, a big part of the increased tax burden could fall on wage earners making more than $250,000 a year. Because at 250,000, the government considers you to be rich. But rich can also be a relative term...


RAZ: ...depending on where you live.

TRACY: ACCF. This is Tracy.

RAZ: Hi, Tracy. Is Jim around?

TRACY: He is. One moment, please.

RAZ: So we called up Jim.

JIM GALIPEAU: Hello. This is Jim.

RAZ: Hey, Jim. Guy Raz here from NPR.

GALIPEAU: Hi, Guy. How you doing?

RAZ: Good. Jim Galipeau, a certified public accountant...

GALIPEAU: ...with Junkemier, Clark, Campanella, Stevens in Missoula, Montana.

RAZ: Missoula, Montana. And then...


RAZ: ...about 1,000 miles to the West...

DAN MORRIS: Dan Morris.

RAZ: ...we called up Dan Morris who has a CPA firm in San Jose, California.

MORRIS: I have - my client base is global. So...

RAZ: So Dan actually lives in Oregon.

MORRIS: I commute long distance.

RAZ: Oh, OK. I got you.


RAZ: And it's cheaper to live in Portland than San Jose, isn't it?

MORRIS: It is. It is. So I understand the realities of these, you know?

RAZ: Anyway, we called up these two accountants - Jim and Dan - to help us run through expenses for a family of four earning $250,000 a year in Missoula and in the Silicon Valley. And the information you will hear is based on real families they serve.

GALIPEAU: Do you want me to kind of go down a list of the larger items?

RAZ: Now, near San Jose...

MORRIS: We've got engineers. You've got a very high educated workforce here.

RAZ: So that couple he's describing works for a company in high tech. But in Missoula, to make that kind of money, it comes from running a small business.

GALIPEAU: With that kind of income, they have a second residence, a lake place or - so we've got about $42,000 on those mortgages.

RAZ: That's $3,500 a month for two houses. But in San Jose for a single relatively modest home...

MORRIS: A statistically average kind of house in the Silicon Valley, let's call it $3,500 a month in a mortgage payment.

RAZ: While in Montana, take the car payment and throw in a boat at the lake.

GALIPEAU: Vehicles, a boat, camper, various things like that, and that's about $1,000 a month.

RAZ: In San Jose, the husband and wife each have separate commutes, so two separate cars.

MORRIS: So you're probably going to spend another $1,200 a month for cars, either between payments, interest, insurance and gas and maintenance.

RAZ: While in Montana, besides some savings...

GALIPEAU: They try to put away about $1,000 a month for college funds for the two kids.

RAZ: But in San Jose...

MORRIS: You've got day care or you have the nanny at home that you're doing legitimately. You're probably spending another $1,000 to $2,000 a month per child.

RAZ: And then those two high-tech workers? Advanced degrees, which means student loan debt.

MORRIS: So your student loan payments could be another, you know, between 500 and $2,500 a month.

RAZ: And we haven't even mentioned real estate taxes.

MORRIS: Another $1,000 a month.

RAZ: Much higher in San Jose. Same with utilities.

MORRIS: You probably have $500 in utilities. We haven't talked about your 401(k) or IRA money, they put away money for a rainy day.

RAZ: So after all that and daily expenses, in San Jose...

MORRIS: A quarter of a million dollars pretty much went away.



RAZ: Meanwhile, in Missoula, Jim Galipeau says you've still got four to $5,000 a month left in disposable income.

GALIPEAU: Two hundred fifty thousand dollars a year would definitely - easily in the top 10 percent, probably the top 5 percent of income earners in Missoula.

RAZ: So I put a question to Dan Morris in San Jose. Do you think that it's fair for, you know, somebody, say, living in Missoula, Montana, who earns 250 a year versus somebody who lives in San Jose or San Francisco and also earns 250 a year to pay the same amount in federal income tax?

MORRIS: Oh, what a loaded question. Yes, it's fair. And here's why. It's fair because the people who live in Missoula, Montana, made an election or a choice to move in Missoula, and most of them aren't making a quarter of a million dollars. But they also have to suffer really long winters. Silicon Valley has great winters. They have phenomenal weather. I mean, you can walk around in short pants generally on most January 1sts.

RAZ: Now, if that family in Missoula wanted to move to San Francisco and wanted to maintain that lifestyle, they'd have to start earning a lot more money. Because to live that way on 250,000 in Missoula would require 407,000 a year in San Francisco. And that's not even the most expensive place in America, according to Linda Stern, a personal finance columnist with Reuters.

LINDA STERN: The most expensive place to buy a house is Los Altos, California.

RAZ: Oh, it's not Manhattan.


RAZ: Los Altos, California, which is in the Silicon Valley.

STERN: Well, the average price for a four-bedroom, two-bath house is something like 1.7 million.

RAZ: Hmm.

STERN: Not a fancy house.

RAZ: Wow.

STERN: That was Steve Jobs' neighborhood.

RAZ: All right. So 250K doesn't take you that far in Los Altos, California, compared to the cheapest place in America to live, which is?

STERN: Fort Smith, Arkansas.

RAZ: Huh.

STERN: Sixty thousand dollars for the same house.

RAZ: Where is Fort Smith?

STERN: It's near the Oklahoma border.

RAZ: But if you lived there, you could get a pretty good house for 60,000 bucks?

STERN: Right. There's ways. The best way to manage your money is to get somebody from Los Altos to pay you their scale but do your work, you know, on the computer from Fort Smith.

RAZ: So like telecommute from Fort Smith, Arkansas.

STERN: Telecommute from some place that's not rich but get paid by a place that has a higher standard of living.

RAZ: All right. Let's talk about what might happen if, say, taxes are increased for people making $250,000 or more. Some people have argued that the segment of the American population that is going to take the biggest hit are people making between 250 and 500, but that the ultra wealthy, really, their burden isn't going to change a whole lot.

STERN: Well, they're talking about changing the top tax rate from 35 percent to 39.6.

RAZ: Thirty-nine, yeah.

STERN: Right now, the top tax rate doesn't hit you until you're at almost $400,000. So the people between 250,000 and 381,000 or something like that, their tax rate would go up from 33 percent to 39.6 percent. They would have sort of the biggest marginal increase in their tax rate. Of course, the way marginal taxes work, it's only on that higher level of income that you're paying the higher amount.

RAZ: That you're paying that rate. Right.

STERN: So if they raise taxes on people earning over 250,000 and you only earn 260, you'll have to pay a marginal amount more on the amount between 250 and 260,000.

RAZ: Is it fair to say the bottom line is that after January 1st, the vast majority of Americans will pay more tax or just the top 2 percent?

STERN: Well, there's also the payroll tax, which was a temporary tax cut of two percentage points on your Social Security tax. Everybody that works got that break for the last two years. And it's not impossible, but it's unlikely that that will be continued next year. So people will see an immediate effect on their first paycheck in January because their paycheck will probably be reduced by bigger Social Security tax.

RAZ: All right. OK. Linda Stern, thanks.

STERN: Thank you.

RAZ: Linda Stern. She writes the personal finance column for Reuters. Oh, yeah. Can you give me some personal...

STERN: Yeah.

RAZ: I'm just looking for some personal tips.

STERN: Yeah.

RAZ: Stay with us. Anticipating the big NASA announcement tomorrow, plus how the CIA became gay-friendly. It's ALL THINGS CONSIDERED from NPR News.

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