Who Are The 5%?

One of the mantras from the Obama campaign is that 95% of people will get a tax cut under his plan. The implication by the campaign, and the media, is that only very wealthy people would be taxed. Setting aside for the moment whether it is right to tax the successful punitively, let us examine who would fall into this 5%. Fortune had a great article on this, one of the first in depth pieces I've seen in anything close to the MSM.

The conception of the rich that Mr. Obama wants people to have is multi-millionaires and billionaires. However, these are not those who will be most directly impacted by the tax increases under Mr. Obama. There are several reasons for this. The first, simplest reason is that the very rich pay someone to hide their money from taxes. I would be lying if I said I knew exactly how to do it, but I understand the general outlines. Second, most of the very rich's income is not taxed in the way that most people's is. They generally aren't filing W-2s. Yes, Mr. Obama's increased capital gains tax will hit them, but it will still be lower than the rate on employee income. Third, the absolute wealthiest won't even notice. Take away $10 billion from Warren Buffet, and it wouldn't affect him in the least. Now, the stereotypical wealthy do pay taxes, make no mistake, however, it is not the impact on them which is most dangerous.

There are five million households who take in between $250,000 and $500,000 a year. This is where the real pain hits under the Obama plan(though also to an extent, the McCain plan, just to a lesser degree). Generally speaking, these are professional families with children. They often live in places where the cost of living is high. Most live sensibly, saving much of their after tax money for their child's schooling and for retirement.

Let's start by looking at the typical expenses of one of these families, especially how they differ from stereotypical middle class families. They have enormous childcare expenses, since both parents usually work, and rarely just 40 hours. They save large amount of money for their children's education, since the children will likely be ineligible for any need-based aid. They also save massive amounts for retirement, for several reasons. They are often middle aged, and spent much of their youth either in school or building their business or career, so they are often behind in saving. They also have jobs that are not easy to replace with similar income, or they may have income that is directly tied to the economy, or an industry. Thus, they need to save a higher rate than many. Many are also ineligible for the best retirement plans, such as Roth IRA's, and thus need to save more money to get the same returns. However, all of this comes after taxes, and these families experience taxes differently than the stereotypical middle class. Outside these families and those wealthier than them, most people pay an effective tax rate that is much lower than their marginal tax rate. This is because most Americans deduct a massive amount of their income from their taxable income, everything from other taxes paid to mortgage payments. However, all these deductions are phased out for these families. So they pay many times more in taxes than families that make half as much.

These are the people who made good decisions, got extra education, started a business or worked very hard in their career. They did what everybody knows you are supposed to do, but few people did. These are people who were studying instead of partying, were working instead of watching tv, who worked long and hard. Now they are being punished for succeeding.

They are also critical to the economy. Who do you think buys products (besides poorly made cars) made in America? Not poor people, they buy imported cheap crap at Walmart. Who employs people? The 660,000 companies owned by those who make over $250,000 and are taxed on their company profits as personal income. The high-wage earners, who are responsible for most of the productivity growth in corporate America. The people who spend all their time either working, or with their family, so they hire someone to do all the other things, from mow their grass to fix their car. Self-sufficiency is not good for the modern economy.

Here is what Mr. Obama doesn't understand. He claims he wants to create high paying jobs. But how? Unions? How did that work out for the domestic automakers? It does you no good to be guaranteed $65 an hour for every hour you work at unskilled labor when the company is bankrupt. Have everyone work for the government? The government needs the private sector to leech off of, it can't sustain itself. Even Europe has figured that out. Order people to pay more? Same problem as the Union. If you tax these families into oblivion, you do real damage to the economy. There is a point at which if you punish success enough it will deter it.