$250,000 Income – A Witchhunt for the Rich

The government wants to tax the evil, malicious, no-good, downright dirty dog, bottom dwelling, sap sucking rich people.

According to government decree, that’s everyone making over $250,000 a year.

To help yourself understand why $250,000 a year in annual household income is not that much, you should take a few minutes and sketch out a calculation on the back of a piece of paper…

The numbers in my example below (click on image to view larger) are very conservative estimates.  I am assuming a family of four which includes two working adults and two children in an average house.  Each person’s math will be a little different, so you could argue any one or a few of my numbers are too high or too low, but on net…I think it’s a fair calculation.

The 401k and probably the 529 withholding amounts are in excess of what is permissible, but since we should all be setting aside 20% to maintain our standard of living, and for most people 20% doesn’t exceed the total dollar limitation, then even the $250k  families should be setting aside 20% for their standard of living.  When they reach the maximum dollar amount, then the additional amount we can assume would be other investment vehicles, perhaps even after-tax vehicles, for their retirement purposes.

Chart

There are a few things we can take away from this example.  The first is that this family is doing what they are supposed to be doing.  By that I mean, they are maxing out their 401k plans, setting aside money for their children’s education and saving for a rainy day.  We should all be doing that, but most of us are not.  Their debt load is low, limited to a mortgage and two car payments.  The rest of their lifestyle is paid for in cash.  The difference between this hypothetical family and everyone else is the amount of debt they are willing carry.

In the old days, circa 1950 when personal finances were a little more commonsensical, i.e. before the widespread use of credit cards, you actually had to save up cash for most major purchases.  These days, it’s the other way around…we borrow from future earnings to finance today’s purchases.  A house used to be about 23% of household income.  That has since moved up to 33% and starting several years ago with the housing bubble is now over 50% of incomes.  Down payments were 20% of the house price, now you can get in for 3%.   In a little over 50 years we’ve doubled the amount of our paychecks we hand over for the roof over our heads and do it now on two paychecks instead of one back then.

That causes some significant problems.  Since we are handing over 25% more of our incomes than we did in the past, that leaves less money for other things like savings accounts and shopping.  So what have we been doing to make up for this lost cash flow?  Two things; avoiding our responsibilities and taking on debt.  We are responsible for our children’s education and so we should be saving for it, but we aren’t.  As a result, as soon as our kids turn 18, they join us in debt bondage by taking out a student loan…all because we failed as parents to provide for their future and keep them out of debt.  Second, we don’t plan for retirement like we should, so we take out a very small amount, if any, for retirement accounts, always hoping that we can make up for lost time in the future.

Alternatively, we will rely on our kids to take care of us assuming we have some, that they outlive us, that they have the means to do so and have spouses who are willing to do it.  That’s a lot of “if’s.”  Even then, since they are trapped in the same cycle of not saving enough for their kids college or their own retirement, and now additionally strapped with taking care of some old folks, they will inevitably reduce whatever savings they were doing for college or retirement and/or increase their own debt so support these new elderly additions to the family…and the cycle continues.

Also, if we don’t have enough to do the right thing and save for retirement or college, then we certainly don’t have enough to buy things like TV’s, cars and vacations. If you are saving like you should for retirement and college, then you have even less money available to buy stuff than those that are not saving.  So what do we do…use credit cards or take out loans, and borrow even more money from the future.  Then we pay interest on those debts that we should be putting into retirement or college funds.

I haven’t even mentioned the Rainy Day Fund.  We should all have one.  We should have enough money in a relatively easy to access investment, a cash equivalent like a Money Market Fund that will cover at least six months of the family’s expenses if both earners lose their jobs or something bad happens, an accident or a large expense.  How many people have that?  About as many as are saving responsibly for college and retirement…so I’m going to say just north of nil.

Remember also that in my calculations above, the figures are based on a two-income family.  That means we have already agreed to sacrifice the benefits of having someone be a stay-at-home mom/dad for raising good children.  I am not saying good children can’t come from dual-earner families, but I believe most of us would, if we had the option with no loss in income, agree that it’s generally a good idea that someone be home with the kids.  Apples to apples, a parent home raising the children is just a good idea.

With that in mind, this family makes about $25K a year in net income.  Now, at first that seems pretty darn good but let’s think about it for a minute…according to Wikipedia, only 1.5% of the population make $250k+.  We are not going to pay off our soaring national debt with an extra $25K a year from 1.5% of the population.  The national debt is about $12 trillion dollars.  We’d need 480,000,000 families in the U.S. to agree to hand over $25K for one year…problem is there are only 111,000,000 families in the U.S. in total anyway, and that’s not the $250K earners…that’s everyone.  Okay, let’s assume the 1.5% of those 111,000,000 families making $250K+ a year is willing to hand over their $25K a year.  It will take those families 288 years to pay off the debt and that is assuming we don’t add a penny more to it.  Add health care reform to this debt and the dinosaurs will return to roam the earth long before those $250K families ever pay off all our debt.

Also…we are talking about two-earners working an average working life.  What happens if one gets sick or dies?  What about a divorce?  What if their kids get sick?  That’s quite a lot of pressure we are asking from those families by asking them to pay off all our debt by not getting sick, dying or divorcing and to work for 35+ years straight.

Lastly, my numbers are conservative.  If you had an extra $25K a year you might buy a little bit nicer cars, maybe spend more on your family vacation, etc…  If this theoretical fiscally conservative family actually spent with cash what we spend on credit, I would say they would be closer to $5-$10K a year extra and I don’t care how you cut it, that is nothing.  That is certainly not “the rich” that our government likes to toss around as the evil enemy of all of us working class rabble.

To me, rich means you can avoid debt and pay for an average lifestyle in cash…what we used to do in the 1940’s and ’50’s on just one income.  In my mind, rich is not the same as wealthy.  Wealthy means you never need to get up in the morning.  You can live an extravagant lifestyle and never lift a finger to earn it.  That percentage of the population is so statistically insignificant that it’s irrelevant.  Not to mention the fact that if the government tried to squeeze them they would just physically move to another country that appreciates their wealth more than we do and hire the best tax people to avoid paying as much tax as possible.

All roads lead to bad.  The rich, who are just average, will pay more in taxes.  That won’t be enough, so the rest of us will be taxed too.  Taxes will go up across the board and across the country.  Federal, state and local taxes must increase to service this rapidly rising tide of debt.  More taxes mean less income for you and me and less income means less spending.  Less spending means less fuel for an economic recovery which means less tax revenue for federal, state and local debts which means more taxes.  Add into this the inflationary cycle everyone is calling for in the near future and…

Where are we going?



Categories: Government Failures

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