This past weekend there was uproar in the blogosphere over something a law professor said. However, it wasn’t in the legal blogosphere that the uproar erupted, but rather the economic blogosphere. The offending post was this one, by Todd Henderson, Associate Professor of Law, University of Chicago Law School. Here’s most of it, but go read the whole thing if you want:
The rhetoric in Washington about taxes is about millionaires and the super rich, but the relevant dividing line between millionaires and the middle class is pegged at family income of $250,000. (I’m not a math professor, but last time I checked $250,000 is less than $1 million.) That makes me super rich and subject to a big tax hike if the president has his way.
I, like the president before me, am a law professor at the University of Chicago Law School, and my wife, like the first lady before her, works at the University of Chicago Hospitals, where she is a doctor who treats children with cancer. Our combined income exceeds the $250,000 threshold for the super rich (but not by that much), and the president plans on raising my taxes. After all, we can afford it, and the world we are now living in has that familiar Marxian tone of those who need take and those who can afford it pay. The problem is, we can’t afford it. Here is why.
The biggest expense for us is financing government. Last year, my wife and I paid nearly $100,000 in federal and state taxes, not even including sales and other taxes. This amount is so high because we can’t afford fancy accountants and lawyers to help us evade taxes and we are penalized by the tax code because we choose to be married and we both work outside the home. (If my wife and I divorced or were never married, the government would write us a check for tens of thousands of dollars. Talk about perverse incentives.)
Our next biggest expense, like most people, is our mortgage. Homes near our work in Chicago aren’t cheap and we do not have friends who were willing to help us finance the deal. We chose to invest in the University community and renovate and old property, but we did so at an inopportune time.
We pay about $15,000 in property taxes, about half of which goes to fund public education in Chicago. Since we care the education of our three children, this means we also have to pay to send them to private school. My wife has school loans of nearly $250,000 and I do too, although becoming a lawyer is significantly cheaper. We try to invest in our retirement by putting some money in the stock market, something that these days sounds like a patriotic act. Our account isn’t worth much, and is worth a lot less than it used to be.
Like most working Americans, insurance, doctors’ bills, utilities, two cars, daycare, groceries, gasoline, cell phones, and cable TV (no movie channels) round out our monthly expenses. We also have someone who cuts our grass, cleans our house, and watches our new baby so we can both work outside the home. At the end of all this, we have less than a few hundred dollars per month of discretionary income. We occasionally eat out but with a baby sitter, these nights take a toll on our budget. Life in America is wonderful, but expensive.
Which elicited this response from Michael O’Hare (an excerpt):
Because Obama proposes to let the Bush tax cuts expire only on “incomes above $250K”, I was surprised that Prof. Henderson expected to be importantly worse off under the president’s plan, so I went here and plugged in what seemed to be reasonable numbers. He says his family’s “combined income exceeds the $250,000 threshhold for the super rich (but not by that much)” . I tried $140,000 each for him and his wife, $5000 in charitable deductions, and a 5% mortgage on a million-dollar house, which is what would cost about $15K in property tax per year in Chicago, with 80% 20% down [thanks JHA]: $40,000 per year in mortgage interest.
Under Obama’s plan, his federal tax would be $48,333, and his Illinois tax about $8400 (3% of AGI). Under current law (Bush tax cuts), $55,600 + $8400. Oops; what happened? Obama will greatly ease his AMT hit, and his taxable income is less than the $250,000 cutoff. If all the Bush tax cuts expire, his income taxes will be the same as now, $55,600, again because of AMT changes.
But wait a minute: he says he’s paying “nearly $100,000″ in state and federal taxes, not including sales tax; let’s say $95,000. Leaving out his property tax, that’s $80,000 in income tax. How much income would lead to this kind of tax hit? I had to experiment with the calculator a little, but it’s a little less than $170,000 apiece. So his pretax family income exceeds $250,000 by at least $90,000. But this doesn’t include tax-free contributions to their 401Ks: anything they are socking away for retirement adds to his actual income; unless they’re at the $33,000 limit they must just like to pay taxes, or are too stupid to be walking around professing and treating sick kids. So we’re pretty close to $400K gross income, and on top of that their employers are surely putting money into their retirement funds. I guess $150,000 is “not that much” in some circles.
He is also whining about his and his wife’s education loans, $500,000, which are costing them about $50K per year in interest. Let’s just sketch out the family budget here:
Housing* $65,000 mortgage + 15,000 insurance & maintenance = $80,000
Two really nice cars $.70/mile x 15,000** miles = $10,500
Student loan payments (20 year amortization at 10%) = $60,000
*Why a couple with a half-million dollars of debts decides it needs a million-dollar house in Chicago, where the Hyde Park average price ” near their work” is a third of that, is not entirely clear. Also note that $25,000 of this is going into their own pockets, building equity in their house.
**They live near their work, so this is probably generous.
This leaves about $90,000, a lousy $245 a day, for food, clothes, vacations, cable TV, and like that. You can walk into Nordstrom’s on Upper Michigan and spend that in a minute, and for stuff you really need. Really, I don’t know how these people get by; their adaptive skills, economical habits, and modest living style is an inspiration to all of us. Perhaps they are careful to tip no more than 15% at the Sizzler when they splurge.
Berkley Economist Brad Delong (an excerpt):
Now it is time for a reality check on this “most working Americans.” The median household income in the United States today is $50,000. Half of all households make more than this. Half of all households make less. The big expenses in the Henderson family budget–their $60,000 a year in contributions to tax-favored retirement savings vehicles, their $25,000 a year savings building home equity, their $55,000 for housing, their $60,000 in private school costs, even their $10,000 a year for new cars–are simply out of reach for the overwhelming majority of Americans. Half of all households make less than $50,000 a year–the Hendersons make nine times that. 90% of households make less than $100,000 a year–the Henderson’s make 4.5 times that. The Henderson’s are solidly in the top 1% of American households, in the select 1% group that receives more than $350,000 a year.
By any standard, they are really rich.
But they don’t feel rich. They have a cash flow problem. When the bills are paid at the end of the month, the money is gone–and they feel that they have to scrimp.
I know how they feel. My household income is of the same order of magnitude than theirs (although somewhat less) and we too had to juggle assets quickly when it developed that an error in Reed College’s housing system had caused them not to charge us $5,000 that we owe. We too have chosen to put our income in places (tax-favored retirement savings vehicles, building equity, housing, private college costs) where we think it is better used than $200 restaurant meals, $1000 a night resort hotel rooms, or $75,000 automobiles. But I don’t think that I am not rich…
… Today a household at the bottom of the 1% rich households in America has an income of nearly $400,000 a year–the income of that slot in the labor market has more than doubled, while the incomes of those at the slot at the bottom of the 10% wealthy has grown by only 20% in two decades. The 900 people he knows in the 90%-99% slots have incomes that start at $110,000 a year. Compared to Henderson’s $455,000, they are barely middle class–”How can they afford cell phones?” Henderson sometimes wonders.
But he wonders rarely. He doesn’t say: “Wow! My real income is more than twice the income of somebody in this slot a generation ago! Wow! A generation ago the income of my slot was only twice that of somebody at the bottom of the 10% wealthy, and now it is 3 1/2 times as much!” For he doesn’t look down at the 99% of American households who have less income than he does. And he looks up. And when he looks up today he sees as wide a gap yawning above him as the gap between Dives and Lazarus. Mr. Henderson doesn’t look down.
Instead, Mr. Henderson looks up. Of the 100 people richer than he is, fully ten have more than four times his income. And he knows of one person with 20 times his income. He knows who the really rich are, and they have ten times his income: They have not $450,000 a year. They have $4.5 million a year. And, to him, they are in a different world.
And so he is sad. He and his wife deserve to be successful. And he knows people who are successful. But he is not one of them–widening income inequality over the past generation has excluded him from the rich who truly have money.
And this makes him sad. And angry. But, curiously enough, not angry at the senior law firm partners who extract surplus value from their associates and their clients, or angry at the financiers, but angry at… Barack Obama, who dares to suggest that the U.S. government’s funding gap should be closed partly by taxing him, and angry at the great hordes of the unwashed who will receive the Medicare, Medicaid, and Social Security payments that the government will make over the next several generations.
Tyler Cowen asks at Marginal Revolution, Does the well-off law professor have cause to complain? (an excerpt):
This guy is the blogging topic of the weekend; his family earns $455,000 a year (addendum: this number seems not to be true) and yet he worries about his taxes going up and the resulting diminution of real income. I think we cannot permanently extend the Bush tax cuts; nonetheless, being a contrarian, I would like to explore the question of when a wealthy person has cause to complain. I read about this guy and his pitchfork and it genuinely scared me, especially his description of Ben Stein and his intermingling of the political and the aesthetic.
Let’s say you live in a country which has some rich people, some people in the lower middle class, and some very very poor people. Or let’s say you are a non-nationalist cosmopolitan. Or let’s say they discovered the indigenous people in Alaska and New Mexico were worse off than we had thought.
In such societies, do the *lower middle class but not very poor people* have cause to complain? After all, some large group of others has it much, much tougher. Doesn’t everyone who might suffer a loss have a potential claim to complain? At what percentile of wealth does your claim to complain go away or diminish? Even if it’s an exponential function, can’t Henderson’s complaint lie within the shaded area, small though that region may be? Can’t a rich person point out that he has a higher MU of money than a non-rich person might think? Or must that necessarily offend others? What kind of genuflections must he package along with that information, so as to avoid being considered offensive?
Not directly related, but serendipitously timed, Krugman’s latest column is about the Angry Rich as well. There is a firestorm of comments at each link as well – hundreds of them. Many bemoan the plight of the poor professor while some agree with his argument and perspective. Also coloring my thoughts in regards to the whole discussion was last week’s NYT article that reported that $75,000 is the magic number of diminishing returns in regards to happiness, discussed in length at Simple Justice.
So, does the professor have a right to complain? Would this even be a discussion if we weren’t in the Great Recession?