Tax Policy and the Upper Middle Class

Expanding a comment into diary.

The upper middle class is essentially defined by high earned income.  These people use education, skills, connections or whatever to earn a good living at a job they enjoy.  The American Dream is to be Upper Middle Class.

The upper class is defined by unearned income.  Essentially the upper class gets all it's income from owning rather than working.  Bush tax cuts on interest, dividends, capital gains, etc. are all targetted at lowering the taxes on unearned income.

We need to alter the debate on tax policy to better point out this distinction.

The GOP and their upper class backers have been able to alter the debate to deceive the American public.  The upper middle class thinks that tax breaks on dividends and stock appreciation helps them due to their 401k and small side portfolios.  And the middle class supports this also because they are "only a couple promotions away" from being upper middle class.

But the truth is that the highest tax bills fall on the upper middle class because their income is all W2 income (earned).  35% of every additional dollar from working harder goes to taxes.

The upper class doesn't do anything, they just own stuff.  And their unearned income is taxed at a much lower rate.  Each additional dollar of dividends from owning more is taxed at 15%.  Same with capital gains on stock sales.  Some types of ownership (such as energy/mining rights) are taxed at much lower rates.

The debate on taxes does us (the progressives) a disservice.  The media (and us) constantly report "benefits mostly to households earning more than 200k/yr" when discussing the Bush tax cuts.

This is simply wrong.  It's conflating two statistics: annual income and earned/unearned income.  It is true that high annual income is associated with people who have high unearned income, but it is not true that simply getting a raise or working harder will increase your unearned income.

We need to point out that it is fundamentally wrong for anyone to be taxed on their earned income from work at a higher rate than someone else is taxed on their unearned income from simply owning.  They can do nothing but sit on the couch, or shop, or party, or pose for the tabloids and still the income rolls in.

That isn't true for upper middle class professionals, even if they earn over $200k/yr.  Every day they have to work and perform or they will find themselves no longer living the American dream.  And that's how it should be.

Working (regardless of pay) contributes to our Gross Domestic Product.  Owning doesn't.  Don't believe the bull about low unearned tax rates being good for jobs, economy, or whatever.  If you work, it's good for the economy.  If you don't, it isn't.

So when you get jealous of that cousin with the fancy car, or the manager with the big house, or whatever.  Keep in mind: they have to earn that money.

And in a fair system, they would pay less taxes on dollar $250,001 than anyone pays on their first dollar of unearned income.  Because in America, we all dream that someday we or our children will work hard and live the American dream.

Nobody dreams that their daughter will grow up to be Paris Hilton.  It's just not American.  Don't let the GOP fool you into supporting their bogus tax policy.

•  Not much here, but it's a diary

  Being upper-middle class couple from background of middle-middle and lower-middle class, we've seen that often our relatives think we support Bush tax cuts.

  But really, it does nothing for us.  We pay high tax rates and simply don't get much from unearned income.  It's a false assumption and helps distort the debate.

  by jello5929 on Tue Dec 19, 2006 at 02:53:44 PM PDT

  •  me too

    We do well enough to be called upper middle class (well, lower upper middle class...), but virtually all our income stems from labor.  If either my spouse or I were to stop working, we'd be screwed and in for a serious rethink of our lives.  Our "investments" are dominated by far by our house and our retirement savings.  

    I don't mind paying the taxes we do at all, even at tens of thousands of dollars a year.  What I mind is seeing the tax money wasted. :(

    by Leggy Starlitz on Tue Dec 19, 2006 at 03:03:40 PM PDT

    •  I second that

      I'm more than happy to pay higher taxes if I knew it wasn't going to invading soverign countries.

      by sunshineonthebay on Tue Dec 19, 2006 at 03:08:02 PM PDT

  •  don't apologize. it's a very good diary.

    you left out, i think, the inheritance tax. inheritance being almost by definition, unearned. very solid points, good work.

    by rasbobbo on Tue Dec 19, 2006 at 03:04:42 PM PDT

•  I loved this comment

  In the other diary and I think the frame should be, "Bush Tax Breaks Favor Jet Set Crowd, Not Working Americans."

  If you can't take a permanent vacation without risking lifestyle, you aren't wealthy, you are just Upper Middle Class.

  by Sychotic1 on Tue Dec 19, 2006 at 02:56:16 PM PDT

•  I don't entirely agree

  The US Stock Market has been called the best wealth-creation engine in the world simply because it's cheap to invest.

  The careful balance that needs to be struck between income taxes and capital gains taxes comes mostly from an economic perspective. I'm not claiming we're currently at the correct balance, but the argument is much more complicated than "work good, dividends bad."

  by dennisl on Tue Dec 19, 2006 at 02:56:36 PM PDT

  •  You'd think it'd be doing better, then

    The stock market hasn't even kept up with inflation since Bush took office, at least not the Dow Jones and NASDAQ.  And the idea that small investors are getting in cheap is crazy.  A friend of mine recently started working at a large brokerage house, and he told me that day traders and small investors are bringing a knife to an artillery battle. They have NOTHING compared to the tools available to the big investors.

    by Leggy Starlitz on Tue Dec 19, 2006 at 03:05:49 PM PDT

    •  I was thinking overall, longterm.

      Over history, its ability to raise capital is unmatched. Once the capital is raised, the actual performance of the stocks depends on a much larger number of factors.

      by dennisl on Tue Dec 19, 2006 at 03:13:52 PM PDT

      •  so what's the impact of taxation?

        Would higher taxes on capital gains really hurt the stock market that much?  What's the primary expense here?

        This gets back to wealth versus work.  The classic Reaganite trickle-down theory is that you have to keep investment taxes low to encourage investment.  I say nonsense; capital has to go SOMEWHERE.  If you have capital, you invest it.  But capital doesn't produce wealth - LABOR produces wealth.

        Geez, all that Marx coming pounding into my head again...

        by Leggy Starlitz on Tue Dec 19, 2006 at 03:20:03 PM PDT

        •  not completely

          If you have money you don't have to invest it.  You could just put it in a bank account or buy gold.  If there is low reward for investing fewer people will take the risk.
          I think Reagan took things a bit far, though.  I'm still angry with him for throwing mentally ill Californians on the street.

          by sunshineonthebay on Tue Dec 19, 2006 at 03:42:49 PM PDT

•  I agree that unearned income should be

  taxed at least as high as earned income for those who have unearned income over a certain threshhold.  In other words, people shouldn't necessarily be punished for saving and investing, just those whose investments are very high.  

  But I dispute that "The upper class doesn't do anything, they just own stuff."  If you are talking about "upper class" merely in terms of income, you must provide some statistics to show that these high income people do not do anything. Plenty of very wealthy individuals (in fact, I would bet, most CEO's of highly profitable companies) do not spring from inheritied wealth. They may make significantly, even obscenely more, than they deserve vis a vis the average worker, but I need to see some evidence that these high earners start from wealthy origins.

  by feelingsickinMN on Tue Dec 19, 2006 at 02:59:15 PM PDT

  •  you are correct

    The portion of income that they get from working is earned.

    And the portion of income they get from owning is unearned.

    Most people have a mixture of earned/unearned income.

    If you rely on earned income to support your standard of living and could continue to essentially have the same lifestyle with no unearned income, you are upper-middle class.

    If on the other hand, you rely on unearned income to support your standard of living and continue to have the same lifestyle even if you decided to never work another day in your life, then you are upper class.

    And there a bunch of people halfway in between.

    by jello5929 on Tue Dec 19, 2006 at 03:02:46 PM PDT

•  this is actually a source of class resentment

  As a friend put it, the upper middle class work for a living. And they work hard to become highly skilled in their professions and advance their careers - as doctors, lawyers, agents, business owners, and such.  $200-300k/year isn't outrageous income for a two-earner family with both on solid professional tracks. But they're working just as hard or harder than those who get by on a fraction as much.

  The interesting resentment is here... the aristocracy (upper class), with so much money to throw around, jack up the prices on vacation homes, art, and other high-end luxuries that the upper middle class feels they've worked hard to afford. The difference is much more real to them than it is to, say, someone making $30k a year and barely getting by.  And proportionally, the difference between someone working hard for $300k and someone who gets $3M in capital gains every year is the same as the difference between those making $30k and those making $300k.

  The answer to this comes straight out of the left-wing libertarian playbook - tax wealth, not work.  Property taxes (especially on non-primary residences) and taxes on capital gains should be HIGHER than taxes on labor.  Additionally, estates should be taxed heavily once they get above the normal inheritance of the middle class.

  This would put MORE money in the pockets of the poor, middle class, and upper middle class, and make the wealthy pay their fair share.

  by Leggy Starlitz on Tue Dec 19, 2006 at 03:00:27 PM PDT

  •  Why?

    "Property taxes (especially on non-primary residences) and taxes on capital gains should be HIGHER than taxes on labor"

    While I agree that taxing capital gains lower than income is unfair, so is taxing it higher.  Why not tax them all the same?
    Not everyone who owns some stock or a rental house is rich.

    by sunshineonthebay on Tue Dec 19, 2006 at 03:05:55 PM PDT

    •  the problems with that

      First, we're not talking about people owning a hundred shares of Alcoa on the side, or a couple of rental houses.  We're talking about people who make (or CAN make) their entire incomes from interest on their existing wealth, people who don't HAVE to work in order to make a living (although many do).  

      Second, and more importantly, owning stock or rental property doesn't PRODUCE anything.  It doesn't add to the wealth of society, the way work does.  Owning the means of production is more profitable than BEING the means of production (it's not a far leap from rudimentary Marxist analysis to seeing labor as a form of slavery).

      Moreover, owners have little interest in the long-term impact of their investments.  As a homeowner, I want as little rental property in my neighborhood as possible.  Why?  Because it's not in the landlord's best interest to maintain his property!  Landlords let their properties go downhill, while homeowners invest in improvements.  The worst neighborhood in my town is architecturally the same as the great neighborhood where I live.  The difference is in the rate of rentals versus owners.  We want to encourage owning your own home, and discourage owning someone else's home.  It's for the good of society!

      by Leggy Starlitz on Tue Dec 19, 2006 at 03:12:08 PM PDT

      •  discouraging saving

        I agree with most of your points, but the downfall of your proposed policy is that it discourages savings.  We need to encourage, not discourage savings.  Also, keep in mind that more and more folks are saving for their retirement on their own, since pensions are a thing of the past.
        I don't agree that investing money in a business is not a contribution to society.  A lot of businesses wouldn't be around if it weren't for shareholders, which mean fewer jobs for the rest of us.
        If profits from stocks or real estate were taxed at a very high rate, why would people take the risk of investing?  Why not just keep the money in your mattress?

        by sunshineonthebay on Tue Dec 19, 2006 at 03:20:04 PM PDT

        •  because only profit would be taxed

          I think there's a logic flaw in your argument... that investors would pay taxes even if they lost money.  That's not the case.  

          Well, I suppose it's the case for real estate beyond the primary residence.  But I'm not sure that's a killer, assuming the landlord is making money on their property OTHER than capital gain.  And it's definitely not the case for stocks, bonds, and business investment - only profit should be taxed.

          by Leggy Starlitz on Tue Dec 19, 2006 at 03:24:03 PM PDT

          •  losses

            So are you proposing increasing the write-off for losses as well?  Because your logic only holds if you both increase the taxes on profits and increase the tax break on losses.
            BTW, I'm not against raising taxes on holdings, but don't see why a retired person who is counting on the sale of a rental house should be penalized for making a wise investment.

            by sunshineonthebay on Tue Dec 19, 2006 at 03:27:37 PM PDT

            •  zero-sum

              The taxes have to be paid by someone...so it's either the owner or the worker.

              You can make up all of the sympathetic characters that you want, but it doesn't change the fact that in reality, the alternative is to shove the burden onto someone else.

              by AdamR on Tue Dec 19, 2006 at 04:09:02 PM PDT

              •  huh?

                by sunshineonthebay on Tue Dec 19, 2006 at 04:23:20 PM PDT

                •  if you aren't going to tax the retired person...

                  ...then who are you going to tax?

                  It sounded like you were objecting to capital gains taxes because they might fall on someone who doesn't have a ton of money...which means that someone else would have to be taxed.

                  Or were you suggesting that retired people get an exemption from cap gains taxes.

                  by AdamR on Tue Dec 19, 2006 at 07:05:52 PM PDT

        •  complicated effects

          I think the above analysis is too simplistic, on two separate points:

          1. Investment doesn't just create jobs, it also eliminates them by way of automation and other labor-saving devices.

          2. I don't take for granted that overall savings rate is much affected by the return on investments. Working people tend to save what they can, regardless of interest rates. Wealthy people have more than they could possibly consume, so they save the excess by default. I'm sure that small differences in return on investment can impact WHERE people invest their money, but I don't think it's self-evident that it has a meaningful impact on the total amount that is saved.

          by AdamR on Tue Dec 19, 2006 at 04:05:43 PM PDT

          •  it's not that simple

            "Working people tend to save what they can, regardless of interest rates. Wealthy people have more than they could possibly consume, so they save the excess by default. "

            There are people who save money even though they're not wealthy, and there are people who have high incomes and blow all their money away.  While it may be true that poor people cannot save no matter what the incentives, and rich people will save because they have so much money they can't help it, most Americans fall in the middle of those two extremes.  Plus a person's savings rate (not amount) has to do more with his/her financial planning and discipline than income.

            by sunshineonthebay on Tue Dec 19, 2006 at 04:28:32 PM PDT

            •  exactly

              Savings rates are determined financial goals and personality, not interest rates.

              If a working person is aiming to have a steady standard of living across his whole life, then a high interest rate (high return on investment) will encourage him to save less money.

              by AdamR on Tue Dec 19, 2006 at 07:11:11 PM PDT

      •  tenants also

        It's not just the landlords who have no incentive to maintain the property--it's the tenants also.

        Basically, by splitting responsibility for the property between two parties, nobody is both willing and able to take care of it.

        by AdamR on Tue Dec 19, 2006 at 04:00:33 PM PDT

  •  Taxing wealth not income is interesting idea

    I think some mixture is probably the right idea.

    Just like the other commenter mentioned, there is a right balance between taxing earned income vs. dividends.  I'm sure there is a right balance here as well...

    ... and it seems like 0% tax on wealth and 35% tax on earned income probably isn't exactly the right balance.

    by jello5929 on Tue Dec 19, 2006 at 03:06:38 PM PDT

  •  Loss of income averaging meant

    that even those that came into a one time windfall got screwed and taxed at the MAXIMUM possible.

    Working for a living means you're a wage slave - the only differentiation being at what level.  Some are barely getting by while others toil with golden handcuffs working 80 hours a week for 6 figures.

    by xrepub on Tue Dec 19, 2006 at 04:01:32 PM PDT

  •  Fair Share?

    How do you define something like "fair share" - is it always just "more"?

    by 1918 on Tue Dec 19, 2006 at 04:44:05 PM PDT

•  Well

  One issue is that tax policy fails to address the disparities in the cost of living. Over the weekend there was that thread about that Nebraska family making $150K that had "difficulties making ends meet". I wrote that that family was most likely living beyond its means and that $150K is enough for a very comfortable life in Nebraska.

  However, in places like the DC area, New York, New Jersey, Illinois, California, and other big blue states, $150K is not as much as it first looks. While it is still enough to land most of those families in the middle class, when you factor in the high cost of living, college, and other expenses, it is not enough to be "rich" either". These families are often socked with the AMT.

  Something should be done with the tax laws to index and influence rates to the cost of living in their areas.

  by jiacinto on Tue Dec 19, 2006 at 03:21:48 PM PDT

  •  wouldn't work

    Being a resident of San Francisco, I should be in agreement with you, but I'm not.
    The reason parts of the country are more expensive than others is because they are somehow considered "more desirable", due to high employment, good climate, access to major universities, arts and culture, etc.  In exchange for these benefits you choose to have less disposible income.  If your standard of living was the same no matter where you lived due to a tax handicap, who would want to live in "undesirable" places?  Besides, where do you draw the line?  State, county, city, neighborhood?  

    by sunshineonthebay on Tue Dec 19, 2006 at 03:32:44 PM PDT

    •  in other words...

      Cost of living differences are largely due to land values. If you subsidize living in one area (by reducing taxes for those people), you'll just provide incentive for more people to live there, thereby driving up demand, and land-values, even more.

      The only people who would win would be the landlords.

      by AdamR on Tue Dec 19, 2006 at 04:11:34 PM PDT

    •  No, no, no

      I have seen you say this a couple times now.  Yes these places have a lot to offer.... if you live in Soho, or the Upper West Side.  

      Do you think the person living in Rosedale or in Bushwich will have the same point of view?

      There are plenty of pretty kewl places, if not a bit smaller that have a more reasonable cost of living.

      I don't think living in a high cost of living place should be a penalty, especially since that 'attractiveness' of the area attracts people who would earn a high income anywhere. Ergo, we pay more taxes, even if it weren't skewed against us.

      by roseba on Tue Dec 19, 2006 at 04:23:04 PM PDT

      •  not necessarily true

        "I don't think living in a high cost of living place should be a penalty, especially since that 'attractiveness' of the area attracts people who would earn a high income anywhere. "

        I couldn't earn much in West Virgina because there aren't industries that would hire me.

        by sunshineonthebay on Tue Dec 19, 2006 at 04:25:20 PM PDT

        •  Lawyers and Doctors

          Can work almost anywhere.

          by roseba on Wed Dec 20, 2006 at 04:14:58 AM PDT

  •  I live in fairfield County, CT

    One of the most expensive parts on the country on less than 60k a year. I have no sympathy for someone who can't make it on 150K in Nebraska.

    by mollyd on Tue Dec 19, 2006 at 03:46:27 PM PDT

  •  For those who own their home,

    They will have a larger home interest deduction, partly helping with the more expensive residence.  .

    by davewill on Tue Dec 19, 2006 at 04:47:13 PM PDT

    •  I'm not following you

      Your deduction is based on interest paid, not the value of your home.

      by sunshineonthebay on Tue Dec 19, 2006 at 04:50:21 PM PDT

      •  A more expensive home means

        a bigger loan which means more interest on that loan.

        by davewill on Tue Dec 19, 2006 at 05:14:53 PM PDT

  •  Well people in and around DC in the top

    brackets should pay a premium because they benefit by the US government.

    Two suburban counties near DC, Loudoun and Fairfax, are the wealthiest and the second-wealthiest counties in the US I believe.

    The folks in and around New York benefit by the relaxation of the anti-trust laws that allow my stock brokerages to be forced trade stocks through the NYSE.

    The folks in California have long benefited by the government supported aviation industry around LA and some extremely generous copyright laws.

    by SingleVoter on Tue Dec 19, 2006 at 05:46:23 PM PDT

    •  Misleading

      While $150K may be "wealthy" in other parts of the country, in the NYC and DC area, it's not. While it's still a decent salary, after taxes, the cost of living makes it a middle class salary for a family with two or three kids. Granted, these famlies aren't struggling; but they aren't "rich" either.

      by jiacinto on Tue Dec 19, 2006 at 05:55:05 PM PDT

•  If You Don't Steeply Progressively Tax the Top

  they will overpower our form of government.

  That doesn't depend on where the wealth comes from.

  by Gooserock on Tue Dec 19, 2006 at 03:22:20 PM PDT

  •  Too late

    by jello5929 on Tue Dec 19, 2006 at 03:25:22 PM PDT

  •  But it's not income that matters...

    It's wealth that matters.

    Consider two people, with equal income (earned or unearned), but one has immense wealth while the other has little.

    The guy with immense wealth has all day free to work on politics, whereas the guy who earns his income  spends all day working. The guy with immense wealth can use his properties to influence society (perhaps he owns a publication), whereas the guy who earns his living can only use his excess income to influence society.

    The guy with immense wealth has fewer expenses than the guy who earns his income. He has no payments on his house or car. He probably owns a vacation home, or has friends who invite him over.

    There are big benefits that come from wealth, in addition to measurable income.

    by AdamR on Tue Dec 19, 2006 at 04:16:32 PM PDT

•  We are the Classic Upper Middle Class...

  My wife and I that is.  Both Ph.Ds, both own our own consulting businesses.  Together we make over $300K/year but believe me, we worked our butts off to get educated, and are now working our butts off as small business owners to maintain that income.  

  Everything the diarist says is true about the upper middle class, and about tax policy.  As Nancy Pelosi (destined to be the first female president of the US)has pointed out, the Democratic party wants to reward work not wealth.  In that vein it then makes infinite sense to tax capital gains, royalties, and rental income at a higher rate than earned income.

  by The Angry Democrat on Tue Dec 19, 2006 at 03:43:53 PM PDT

•  Thanks jello5929! This was why I left the Dems

  back in the Reagan years--I was sick of me and my wife busting our ass to barely maintain a middle class lifestyle, then being lumped into the "rich" by the Dem establishment. To me, rich means being able to live a non-extravagant lifestyle and not be terrified about layoffs, sudden illness or old age. A modest definition, and certainly not at the Bush or Kennedy level. I'm 50 and I'm still not there.

  There is a distinction between money earned by spending half your life in school, spending a lot of your non-work time studying, having career demands above and beyond the 40 hour week, and astutely choosing rich parents and spending your life partying, shopping and clipping coupons. If the Dems can't get the distinction that you so clearly made above, they're going to quickly lose suburban professionals again--those of us around the $100k level may not be at the poverty level, but we don't have a family fortune to fall back on, and we're very concerned about our ability to keep our families housed and healthy.

  by dallasdave on Tue Dec 19, 2006 at 03:52:41 PM PDT

  •  True,

    and when you add in the now-astronomical costs for medical care and for college tuition, people in your position probably feel the ground skaing even more than before.

    by Leap Year on Tue Dec 19, 2006 at 06:36:47 PM PDT

•  Lay off Paris Hilton

  As much as I despise what she represents, she does earn a considerable income from her own activities (acting, modeling, merchandising, etc)...so she really doesn't illustrate your point.

  by AdamR on Tue Dec 19, 2006 at 03:55:31 PM PDT

  •  Not that she could earn ANYTHING

    from her own activities if she wasn't ALREADY filthy rich.......

    Without that trust fund she's a too skinny, not very good aspiring porn star and would be lucky to pull in a few thousand $$ a week instead of a few million $

    by xrepub on Tue Dec 19, 2006 at 04:04:59 PM PDT

    •  of course, but it's beside the point

      In terms of her tax burden, it would be treated as earned income, even if she's just cashing in on her family-name.

      by AdamR on Tue Dec 19, 2006 at 04:19:15 PM PDT

•  Let's not be so quick to jump on cap gains

  If we are going to look at a new formula for capital gains/dividends, then we must also consider that this could have an impact on the stock market (risk is priced in and at higher tax rates, there is more risk, so a lower return would result).  We must also look at a progressive cap gains structure.  Currently gains are taxed by period of time (short term at your income rate and long term at 15%).  Why not tax them by amount.  I should not be penalized for investing 20%+ of my paycheck and living beneath my means so that I can retire early.  Maybe a low (10% rate on the first $100,000 of gains/dividends in a year) rate to start and then up to income levels on a graduated basis.  Penalizing investment and savings is a bad idea.

  by SilverOz on Tue Dec 19, 2006 at 03:58:43 PM PDT

•  Wealth is taxed at a lower rate

  because money can be moved easily to places where it is taxed at trivial rates.

  Money earns money wherever it is, usually more OUTSIDE of the USA.

  Construction labor earns $3 a day in Central America and about $100 a day here in the USA.

  Labor derives a benefit from being in the USA and should pay a tax premium accordingly.

  Upper middle income people like doctors and lawyers should pay a vast tax premium because of licensing laws that prevent other smart people from competing at lower rates.

  One can be a financial wizard anyplace, including places with a low tax rate.  

  by SingleVoter on Tue Dec 19, 2006 at 05:27:48 PM PDT