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What a Difference Two Thousand Dollars Makes

In this first of two articles, the author explains why the $250,000 tax relief cutoff is unfair -- and offers a suggestion for what to do about it.

 

If you made $249,000 last year, then you probably spent this past weekend mowing your own lawn, clipping coupons and changing your car’s oil. If you made $251,000 last year, then you probably spent last weekend cruising Newport. Or perhaps you attended Wimbledon, or relaxed in your Italian villa.

According to President Barack Obama, families earning less than $250,000 are middle income Americans, while families making more than this number are “the wealthiest Americans.” Yet, despite the President’s depth and breadth of expertise in all matters concerning the economy (sic), I have a feeling that there are plenty of families living in expensive areas who would argue that a $250,000 income makes a wealthy lifestyle not only improbable, but impossible.

Look, we all know that earning $250,000 in an area where the average home price is more, well, average means living a better lifestyle. Earning $250,000 in Topeka goes a lot further when the average home costs less than $181,000. Earning $250,000 in Greenwich or Ridgefield or Trumbull—or anywhere in the New York metro area—well, you undoubtedly know your way around the plumbing aisle at the Home Depot.

Even Congressional leaders Nancy Pelosi and Chuck Schumer argue that the tax cuts should be extended (or, dare we say, made permanent?) for families earning less than $1 million in earned income.  Could it be that they understand that earning $250,000—especially in a major metro center—in no way predicts a “wealthiest” American? To their credit, they have walked away from Obama’s seemingly arbitrary tax cut cutoff, which paints him more as a stubborn ideologue and less as a compromise-loving leader.

Our nation is lucky enough to enjoy a wide range of diverse economies. Some depend on technology or finance, while others depend on manufacturing, a local hospital, or a blend of them all. And yes, it’s true, areas that contain a large percentage of high-paying jobs tend to be located in high-cost areas. But taxing everyone the same rate without an eye on the local economy unjustly punishes some and rewards others.

One could certainly argue that a family earning more than a quarter of a million dollars in a suburban Mississippi town is probably pretty comfortable money-wise and may very well lead a luxurious lifestyle. Yet in Los Angeles—or New York, or Washington, DC—a two-earner $250,000 will cover your mortgage (maybe), your car payments (if you can afford a new one), your taxes (figure $13,000 at the low end), groceries (how much can a teenager eat? A lot), and maybe, just maybe, retirement contributions, travel soccer fees, a new fridge and a trip to the vet when little Rocky eats a pound of chocolate.

And don’t even get me started on higher education costs.

As I stated many weeks ago, at its heart. The reason the real wealthiest Americans get a big tax break is because they’ve saved enough to take advantage of loopholes in investment income rules, such as living off tax-free income. Does anyone really think that a family making $250K per year should pay a greater percentage in income taxes than a Rockefeller-esque tycoon? Of course not. But blaming the rich for having the good sense to take advantage of our current laws ignores the real problem.

The flat tax, an idea first put forth years ago, is worth pursuing as an option. Are you loaded and you want to buy a yacht or a waterfront home in Sagaponack? Awesome. Fork it over, big spender. Are you the manager of a tire plant, your wife is a school teacher and you’re really excited about your upcoming trip to Disneyworld or the pretty new rug in the den? Cool. Pay accordingly.     

It is infuriating when news reports surface that state General Electric paid zero taxes or that Warren Buffett’s secretary paid a higher rate than the Oracle himself. But remember: they are playing the game the way it’s meant to be played.

Let us remember an important lesson that Steve Jobs taught at Apple: do not be afraid to get rid of a product—in this case, the IRS—that doesn’t work right, no matter how invested we are in it. Let us not whine, but we’ve always done it this way! Let us make sure that every single American – legal, illegal, law-abiding, non-law-abiding – pays their fair share. Period.

m July 11, 2012 at 01:50 PM
Look, this misinformation has got to stop. The Obama proposal CONTINUES the Bush tax cuts for the first $250,000 of everyone's income. So, if you're making $251,000 you only pay the higher rate (which is just the rate you paid during the Clinton years, hardly Draconian) on $1000. That's it. Did you hear that? YOU ONLY PAY THE HIGHER RATE ON $1000. Big whoop. So that's 39.5% instead of 35% in that $1000. Of course, the more you earn, the more of your salary is taxed at the higher rate. But then, the more you earn, the wealthier you are, right? The line has to be drawn somewhere and this line is a good one. I live in Fairfield County too, with a family, a house, and a salary of a lot less than $250,000, so believe me, if you're making $251,000 you ARE pretty darn wealthy and you should stop your whining about vet bills and travel soccer costs. Yes, the current tax code is complicated and wacky, and should definitely be overhauled, but the flat tax has been proven time and again (basically, everytime a new Republican runs for office) to increase income inequality and unfairly hit the poor and middle class. It's possible that a consumption expenditure tax, based on the difference between a family's annual income and savings could work, but it also has some problems, and besides, no Republican is going to approve a new tax at this point in our divisive government, so any re-working is probably out.
Lisa Bigelow July 12, 2012 at 10:13 PM
Hi, and thanks for reading and commenting -- Yes, I understand how the tax works. The point is that President Obama calling everyone who makes under the 250k threshold "modest" and everybody over "the wealthest" is just foolish. That's why Schumer and Pelosi don't support it. Look for an update next week! Lisa B.

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