Does This Sound Rich to You?

Over the past decade, there’s been an increased focus on income disparity, the pay gap between the “rich” and the “poor.”  This is, at least in part, a justification for some of the proposed tax policies being presented by the Administration. 

There are several problems with the focus on income.  The first is that income is only one measure of wealth — assets are of at least equal importance.   Contrast, for example, 1) an individual who earns $300,000 tax free from a $10 million portfolio of municipal bonds, with 2) a dual income family earning $300,000 in taxable income, the expenses associated with 2 commuters, child care required with both parents working out of the house, etc.   Both households report the same level of pre-tax income, but are in decidedly different financial positions.  Studies which adjust for taxes still fail to adjust for assets.

The other issue of importance is the recognition that costs of living vary widely in the United States.  The Administration has picked the $250,000 household income level as defining wealth.  Just what does that mean in terms of quality of life?  I played around with the “salary wizard” feature of salary.com, which allows you to find typical salary levels for jobs in different parts of the country.   I coupled that with some home searches on Realtor.com and some knowledge of New York City neighborhoods to produce a hypothetical household income/house scenario:

1) Consider a married couple, each employed as principals in the New York City school system.  If one assumes that seniority, education and competence are above average, it is not hard to imagine them each making $125,000 — this would be slightly above the bottom of the 1st quartile pay ($121K) for these jobs.

2) I assumed our pair of principals wanted a decent neighborhood with good public schools within the city — I chose Bayside, a neighborhood in Queens.  I would think of Bayside as a nice neighborhood, but middle class, not deluxe.  It tends to be somewhat more expensive than comparable neighborhoods, largely becuase the public schools are among the City’s best, which I assumed would be of importance to our principals.  Looking at their income, I looked at 4 bedroom, 2-bath homes in the $600-$650K range.  Here’s what they could buy for $639,000:  a 1925, 4-bedroom, 2-bath home with 1,536 square feet on 0.06 acres:

Bayside, NY - MLS ID#2154247

On top of the mortgage payment for this home (Realtor.com estimates the monthly payment at $3,344), our principals would be paying some of the highest local taxes in the country, high commuting costs, and generally high living expenses found in major metropolitan areas.   People in positions that provide household earnings over $250,000 typically have advanced degrees which may have been financed through loans which need to be repaid. 

Most people buy into the concept that, “everyone should pay their fair share.”  Unfortunately, income alone is a poor measure for determining what’s fair, and in many, many cases, it’s a decidedly unfair way to approach this issue.

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One Response to “Does This Sound Rich to You?”

  1. Rawson Hubbell Says:

    Interesting…the educator/principal (principled?) couple you describe above doesn’t sound “rich” to me.

    But they also might be a far cry from Obama’s $250K threshhold. While deduction phaseouts might apply to some ($250K?) Adjusted Gross Income threshold, marginal tax rates only apply to Taxable Income.

    Gross Income = $250,000
    less 15K retirement savings= $235,000 Adjusted Gross Income
    less 30K intersest, 6K property tax, 20K state and local tax, 5K charitable = $179,000 Taxable Income

    It’s not at all clear to which of these “incomes” the “$250,000” refers. Also, keep in mind that we’re talking about increases in the top Marginal rates. So at the highest end, for every $1000 over the threshhold, for a resident of a state with no income tax, the federal tax could increase $46.

    For many people on the “bubble”, the difference between effective or average tax and marginal tax is HUGE.

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