Should We Pity Rich People As Much As They Do?

A bizarre piece in the WSJ today gives us a chance to review a couple key questions about taxes and the wealthy, including: Are $250K-earners middle class? Did rich people think Obama was kidding about raising their taxes? And should we pity those burdened with the indignity of renting their beach house?

Meet Donald and Ellen Parnell. They pull in around $250K a year. He drives an Infiniti (but it's sort of old) They vacation at a beach resort every year (but it's owned by other people). They own a large home (but are reluctant to renovate). Why are we writing about them again?

Their feelings. As Ms. Parnell puts it: "I'm not complaining, but the reality is Obama may call me wealthy, but I thought we were just good old middle class...Our needs are being met, but we don't have a load of cash to cover wants."

Middle class? Not according to the Census. Out of approximately 116 million households in the United States, about 2.2 million earn more than $250,000. That's 1.9%. It is simply impossible - statistically and intuitively - that the 98th percentile of anything is a part of the "good old middle." It is quite literally like saying that living in the western suburbs of Philadelphia -- which is about 98% of the way between San Francisco and New York -- is like living in the middle of the country.

Also, there's a good chance that people in the top tax bracket aren't paying back the highest percent of their earnings. Take a look at this graph below, which my colleague Conor Clarke highlighted yesterday. The 98th percentile is not exactly bearing an extraordinary tax burden when you factor in state, federal and capital gains taxes. As Conor pointed out, there's a dip you can see around the top 5% because the richest Americans get a larger source of their income from capital gains and dividends, where are taxed at a lower rate.

conor map.png

Then the article shifts into demographics and seems to make the argument that raising taxes on rich people is a terribly risky move.

The political calculation is dicey. The White House needs the additional revenue to cover some of its ambitious policy agenda, especially a health-care revamp. But some polling data suggest households that earn above $200,000 went heavily for Mr. Obama in November.

In other words the political calculation isn't dicey at all. During the campaign and in his book, Obama promised to raise taxes above the $250K mark . Rich people knew that, and voted for him. He won, and now he's going to raise taxes above the $250K mark. This is not exactly a shoot-the-moon strategy. Wealthy voters pre-approved this tax increase months ago.

I don't want to intimate that the people in this article aren't facing real stress despite their high salaries. I am intimating that the people in this article don't have a leg to stand on. Almost all of them voted for Obama. They all chose to live in high-cost counties where a couple hundred thousand doesn't go as far these days. They also knew that the Bush tax cuts were unlikely to last forever and that federal taxes on their highest dollars would return to around 39%.

I'll reserve sympathy for any family struggling with high property taxes, expensive tuitions and the like. But that sympathy is stretched by the case of James Duran, a human-resources director in Silicon Valley who claims he's "barely getting by" with $400,000 in Silicon Valley. Barely getting by on $400K? The rich are different, indeed.