Why Not Feeling Rich is Not Being Poor, and Other Things Financial

http://whatever.scalzi.com/2010/09/21/why-not-feeling-rich-is-not-being-poor-and-other-things-financial/

by scdlbx • 16 years ago

58 22 16 years ago

whatever.scalzi.com

CWuestefeld5• 16 years ago

Mr. Scalzi is a fine writer, but may not be a great reader. He completely overlooks the point of the article to which he referred.

To be sure, some of the criticisms he makes may be true. But to focus entirely on them, rather than the main point of the original article, is doing a disservice to those who really are more concerned with this issue than with financial envy.

So for the record, having followed the links to the original post, let me reiterate the intent. The "little guy" will be affected if the "rich" need to cut back. Luxury expenses (yes this is the point: it's a luxury to have a gardener or housekeeper) will be cut back, so anyone whose income relies on those expenditures will be hurt. In many cases, such as the immigrant gardener, forcing the rich to cut back causes a much more serious change to "downstream" incomes.

Of course, the number of rich people who really will react by cutting back, and the number of gardeners and the like who are affected by those cuts, is a matter of some debate. It may well be that in the balance, the harm is less severe.

But Mr. Scalzi doesn't even acknowledge that there is any debate. In this way, he's playing chicken with the rich, but the stakes will be paid by those who may be affected profoundly.

kscaldef2• 16 years ago

I would say, after reading the original post, that even this is unclear. Note that he says "Our combined income exceeds the $250,000 threshold for the super rich (but not by that much)" and also "At the end of all this, we have less than a few hundred dollars per month of discretionary income". I get the familiar feeling that Todd Henderson does not actually understand the concept of marginal tax rates. It seems like he's got enough buffer in his budget to handle a couple extra percent on the "not that much" he makes over $250k.

gnaritas• 16 years ago

I've found most people don't understand marginal tax rates. Many seem to think that jumping up into the next tax bracket by even one dollar will make them make less money than they made in the lower bracket on less pay.

I was stunned one day when I heard my boss, a small business owner, say something to this effect over lunch, as well as another co-worker. I told them they didn't know what they were talking about and that's not how taxes work and he cited his years running a business as a reference and claimed I was naive and clearly wrong.

I bet him he was wrong and he took me up on it; after lunch I took him to our accountant and had him explain it, then pointed him at Wikipedia. Amazing that one can be an entrepreneur for 15 years and not know this.

Part of the problem is how we talk about taxes, we say things like tax cut for people making less than 50k rather than the more correct tax cut for the first 50k of your income. The former seems to be talking about someone else while the latter clearly means you too, while avoiding the us vs them mentality that seems to turn off most people's brains. I've made it a point to make sure everyone I know understands marginal taxes now.

CWuestefeld5• 16 years ago

You may be right, but it's also not as simple as you make it sound. There are a number of discontinuities in the bottom line rates that can make a much larger difference than an increase in one's highest marginal bracket. Especially around the income that the Henderson refers to, when you're likely to be hitting the AMT, it's definitely not a smooth function.

For myself, a year and a half ago, this happened. There was a conjunction of several changes (particularly hitting AMT, and a significant decline in mortgage interest deduction, and a good chunk of additional one-time "unearned" income) that together made it appear that the marginal rate on the income (relative to the previous year) was on the order of 60+%.

FWIW, I know that it's a (hideously) complex calculation with many, many factors, and what I was looking at thus wasn't actually the marginal rate as such. Nevertheless, what I experienced was, financially, the equivalent of that.

Your point portrays this as simple by assuming that the income tax is represented by a simple set of tables, but it's much more byzantine than that. All this added complexity can sometimes make your best-case scenario turn much worse.

sethg• 16 years ago

I refer you to Brad DeLong (an economics professor who used to work in the Clinton Administration):

Back in 2000, the U.S. government's long-term budget was out of balance--although not by all that much. The government had, you see, made promises--very popular promises--for Medicare, Medicaid, and Social Security without proposing sufficient funding streams to pay for those promises.... So back in 2000,... we elected George W. Bush. Two wars.... A huge unfunded expansion of Medicare.... However, instead of raising taxes George W. Bush reduced them. This simply does not work. As Milton Friedman liked to say, to spend is to tax.... Taxes are going up over the next decade--barring cuts of 1/3 to Medicare, etc. They can either go up smartly or we can pretend they don't have to go up, in which case they go up stupidly. (http://delong.typepad.com/sdj/2010/09/in-which-mr-deling-res...)

Professor H., the author of the original complaint, does not want his taxes to go up at all. But if his taxes don’t go up, whose will? His gardener’s?

CWuestefeld5• 16 years ago

You're mostly right, and in my opinion the government needs to cut its spending very significantly.

However, you're confusing tax rates with tax revenue. It's quite possible that increasing the rate can lead to a net decrease in total tax revenue. And in some cases, lowering the rate can lead to an increase in revenue. This is known as the Laffer curve. See https://secure.wikimedia.org/wikipedia/en/wiki/Laffer_curve

While this concept is the subject of some controversy, it's demonstrably true at the extreme. Raising the rate to near 100% will clearly decrease revenue. But on the other hand, decreasing it to 0% will also decrease revenue. But with more moderate values, it's really anyone's guess as to whether it will hold or not.

It's the same in business, really. One's revenue can increase by decreasing prices: more people will buy your product, and that may be enough to offset the per-unit loss.

What's really controversial is the question over how much people will forgo additional income due to changes in marginal tax rate. There are certainly boundary conditions, such as when the amount you finally take home after taxes is less than your cost for child care. More fuzzy is when the amount you take home is less than your value for free time.

yummyfajitas2• 16 years ago

This is an interesting comment. But let me point to Tyler Cowen, who I found more insightful. He takes the same sentiment expressed by Scalzi, pushes it to it's logical conclusion and finds it lacking:

"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...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. ...At what percentile of wealth does your claim to complain go away or diminish? ... 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? ... Beware of moral arguments which do not address "At which margin?" I see a lot of attempts to lower the status of Todd Henderson, but not much real moral engagement."

I recommend reading the whole thing.

http://www.marginalrevolution.com/marginalrevolution/2010/09...

CWuestefeld5• 16 years ago

That's a good reference.

In that post, Prof. Cowen alludes to the strength of the argument being related to the complainer's marginal utility, relative to that of, say, a poor person. The complaints about the Henderson piece by the poor (or by others claiming to defend the poor) implicitly assume that the marginal utility of a rich person must necessarily be lower than that of a poor person, for the very reason that the former has more money.

However, Mr. Scalzi's other piece featured in HN today, about being poor, illustrates that one might be so deep into a hole that a little extra [1] might not be enough to make any difference. To the degree that's true, the marginal utility for the poor person would be very low. Perhaps low enough that more good would be done for him by whatever contribution to society that Mr. Henderson makes.

Or maybe not. But the answer is not a foregone conclusion; one can't simply assume that the answer is obvious.

[1] that little extra being what's taken from Mr. Henderson and his ilk and divided up amongst the poor.

teyc• 16 years ago

Todd's lamentation is basically "but I'm not rich, if you have a look at my peers". After all, Todd's on a fixed salary, and there is little thrill left in his work if he's tenured, there's little bluesky left in his investments.

Sounds like he's going through a bit of a personal crisis.

Leave him alone. When he gets over this episode, he'll be fine.

yummyfajitas2• 16 years ago

"I see a lot of attempts to lower the status of Todd Henderson, but not much real moral engagement."

masterponomo• 16 years ago

The guy making over $250K can easily wind up just as bankrupt as Scalzi's sad sack who stumbles around dropping his mac 'n' cheese on the floor (grip the bowl firmly, people). Saying the higher income folks just have a money management problem is just plain wrong, unless you want to also admit that the sad sack guy has a population management problem because he's gone and had kids he can't afford to feed/clothe/educate properly. Both have made choices they can't support, and I think both are entitled to bitch about the end result (briefly; and then go do something about it).

zweiterlinde2• 16 years ago

One key element that is missing from much of this discussion is an understanding of comparative advantage and its importance to society.

If someone has the skill and ambition to succeed in a demanding professional career,isn't it better that they do so rather than doing their own gardening for fear of being judged? In general, it seems obviously good for society for a married couple to both work and outsource some of their domestic responsibilities that others can perform more cheaply. But our current (and even more, our future) tax code discriminates against this heavily.

dasil003• 16 years ago

But our current tax code discriminates against this heavily

Why? You can always make more money. A higher marginal tax rate is at most a minor disincentive since you still end up with more overall. Everyone likes to complain about taxes, but I think it's pretty much bullshit if anyone says they turned down an opportunity for more money because of the marginal tax rate.

A better argument is that the rich spend money more wisely than the government, which is at least debatable.

CWuestefeld5• 16 years ago

A higher marginal tax rate is at most a minor disincentive since you still end up with more overall

That's not necessarily true. As I point out elsewhere, there's much more going on than just ones top marginal rate. I pointed out the discontinuity when one hits AMT.

But also, more topical to this aspect of the argument, is the other expenses involved in employment. It may be that I'm still making 60% of my labor after tax. But in so doing, I also have to forgo the work that I'd been doing myself, and pay someone else to do it.

Most relevant is childcare, since it's something that one can't readily avoid if both spouses are to be employed, and is extremely costly. It's quite possible that the loss to taxes plus the expense of childcare together exceed the potential income of the second spouse. Indeed, I'd guess that is a leading reason for single-income families.

chc• 16 years ago

I'm not sure it happens much, but the way you're framing it makes it sound more ridiculous than it is. Cutting into my profits diminishes the return I get on my investment. This reduces my incentive to chase any particular investment unless I'm simply ravenous for money.

Similarly, most people decline to work 20 hours a day, seven days a week. People who earn overtime could earn a lot more money if they did, but the ROI doesn't justify it in most cases.

jonhendry• 16 years ago

They could also, you know, do without the fancy garden that needs so much upkeep. Being in Chicago, I doubt they have a large lawn and garden, so how much upkeep could it require?

And they could do the housework themselves or maybe let things get a little dusty, like 99% of the population does.

fgf• 16 years ago

you're being either difficult or dense ... nice gardens are nice, people generally agree that clean homes are too, this is a fact and it won't change cause it'd be neat if professionals did that and kept working even tough they would rather have a clean house than a bit more money (that isn't enough to have the house cleaned)

Why Not Feeling Rich is Not Being Poor, and Other Things Financial

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