Monday, August 18, 2008

Income, wealth and 'the rich'

In addition to chasing Iggy Pop and her "cone of silence" conspiracy theory, the other item in Sunday's Saddleback forum that's obsessed the Left is when Rev. Rick Warren asked the two candidates to define "rich."

St. Hopey said $250,000 a year is rich; Maverick said $5 million a year. Both are wrong, although Obama's much wronger than McCain.

Income is not wealth. When ordinary Americans talk about being "rich," they usually mean, "having a lot of money," i.e., the possession of wealth, which is not exactly the same thing as having a large income.

This basic political confusion between the two categories -- your annual income as opposed to your wealth (net worth) -- is to some extent a function of the fact that the federal government taxes income, and so much political discussion of economics involves Democratic redistributionist proposals to tax the "rich" in order to provide benefits for the "poor."

People who have wealth can hide their income. It's not really difficult for wealthy people -- that is, people who already have a large net worth -- to engage in financial and accounting practices that allow them to live very well without reporting a huge personal income to the IRS. And nothing that Congress is likely to do anytime in the near future will ever allow them to close every "loophole" by which this is done, because to do so would create an onerous burden on too many middle-class people and have a dampening effect on the economy.

Most talk of taxing the rich is therefore dishonest. There are some sociopathic people who are full of a malicious spirit of envy, and who therefore thrill to hear some demagogue tell them that he's really going to stick it to the rich. It never really works out that way, but the sociopaths never seem to catch on to the game, and so the demagogues keep promising to impose punitive taxes on "the rich" but never doing it. (See Clinton administration, 1993-2001.)

People with large incomes often live in places with high costs of living. Ezra Klein notes ABC News anchor Charlie Gibson's assertion that households earning $200,000 a year are "struggling" and can't afford more taxes. Well, yes, indeed -- Gibson lives in New York City, one of the most expensive places on the planet, and a New York couple earning $200,000 a year (maybe a nurse married to a firefighter) aren't exactly sipping cognac on their yachts, lighting their cigars with $20 bills, and feeding caviar to their poodles.

Rich people are very rare. There are a little over 100 million households in America, and of those, the top 1% (i.e., about 1 million households) report an average annual household income of $348,000. Think of a successful building contractor having a good year, or may the vice-president of a university and his wife who's a professor of English literature.

Now, $348,000 a year is very good money, don't get me wrong. But assuming that this money is mostly salary or income from a small business, it does not necessarily mean these people are "rich."

OK, at $348,000 a year, you can afford the mortgage on a nice house, the payments on a couple of nice cars, and private-school tuition for a kid or two. But, assuming you're working for a living to earn that money -- as opposed to having inherited it, or made some other kind of multimillion-dollar windfall that now pays you dividends -- you're not really rich.

In fact, even if you're making $348,000 a year, there is no guarantee you'll be making that amount next year, or five years from now. And 10 years ago, you might have made only a fraction of that amount.

Say you were a 25-year-old medical student in 1998, and today you're a successful surgeon earning $348,000 a year. Are you "rich"? Well, you're certainly not poor. But chances are you're still paying off your student loans, plus you might have borrowed additional money to help you establish your own independent practice, and once these payments are subtracted from your income, you're not exactly a Getty or a Hilton.

Suppose you are this young surgeon, and you marry a smart young lawyer who brings home $200,000 a year. Your first year of marriage, you're reporting a gross income of over half a million bucks. Are you "rich"? Well, your lawyer wife probably brought her own debts into the marriage -- she's got her payments to make on student loans and so forth -- and what's going to happen if she decides she wants to have a baby? Either she's going to have to take off time from work, or else you're going to have to pay beaucoups bucks for child-care.

Say she decides she wants to stay home for a few years, at least until the kids start school (yes, "kids," plural, because once she gets one, she'll want another, trust me). Well, suddenly, you see, Dr. Gotbux, you're paying both your debts and her debts with the same $348,000 you were making before you got married. And don't even ask what your bottom line will look like if she ever decides she wants a divorce.

The path from having a high income to possessing wealth (a large net worth) is by no means an easy path. What's interesting is the number of people who, despite never earning an impressive salary, nevertheless manage by thrift and shrewd investments to acquire substantial wealth -- "The Millionaire Next Door."

These are just a few things to keep in mind the next time some left-wing demagogue starts talking about "the rich" in terms of snooty Thurston Howell III stereotypes. It's just not like that.


  1. Something else I don't quite follow:
    in this postmodern world, why am I concerned with materialism?
    Wealth, like evil and truth, are socially constructed, no?
    Maybe the envy of class warfare is merely a variation on the theme of racism, and should be shunned by all progressive thinkers.

  2. Umnnhhh...

    Now you've gone and let the cat out of the bag on Teresa Heinz' "foundations" game.