No one is going to sing Kumbaya for someone earning $200,000, $400,000, $600,000 a year, but that doesn’t mean you lay down and accept the pummeling. Before I get to an action plan, I’m going to sum up the “Crushing of the Upper-Middle Class” (UMC) to fire you up. Political policy over the decades has led to a redistribution of wealth in the middle class, taking from those who make $250,000 a year and giving to those who make $150,000, and taking from those who make $400,000 a year and giving to those who make $50,000. This pancaking of the middle classes has largely left the two extremes, the poor and the very wealthy, untouched. Furthermore, the flattening has occurred in a stealthy and complex way, 1 and through so many different tax, revenue, and rejiggering schemes that it’s hard to place the blame on a single source. Why is so much pain targeted towards and incurred by a specific economic segment?
Well, if we learned anything from the 2012 presidential election, it was that 47%, roughly the lower half, doesn’t pay into the tax system. Ok, I know that number is really probably closer to 20-30%, but that’s still a huge chunk of the populace. In addition, we learned that Mitt Romney’s federal tax rate is below 14% -no disputing that number, and I think it can be applied to anyone with a net worth over $100,000,000, which according to Business Week is roughly the .01%. Therefore, tax revenues have to come from the remaining 52.99% (100% – 47% – .01%). Yet here’s the rub as to why the pain is concentrated towards the top. Think of a standard distribution curve of all U.S. taxpayers. Then lop off the bottom half (aka Romney’s supposed 47%), then think of the number just to the left of that lop-off, which is the fattest part of a standard distribution curve, and let’s assume it’s an annual income of $80,000, and there are 20,000,000 taxpayers within +/-$10,000 of that number. Then go out to $120,000 and assume there are 10,000,000 taxpayers within +/-$10,000 of that interval. Now get out to the thin part of the curve, let’s say $200,000 in annual income, and assume there are 3,000,000 people within +/-$25,000 of that interval, and finally, close to the end of the curve (but not quite the very end), at the $500,000 interval, let’s assume there are 500,000 within +/-$200,000 of that interval. Therein lies the problem.
Because in addition to being taxpayers, they are also voters! Thus, those 3.5 million people close to the end of that curve, are sandwiched between all the votes on the one side, and all the money being funneled to political campaigns and special tax breaks on the other. Did you really think your $500 contribution to the Obamney campaign gave you a voice? Hah, not a chance! The only thing the politicians notice about this segment of 2, 3, 4 million voters is that they have some discretionary income to suck out for all their programs. 2 So what is to be done?
The first thing to do is take those 2-4 million voters and form a special-interest group. The next thing to do is promote an agenda. What should that agenda be? Ultimately it is real simple: advocate for a flat income tax. Why? Because there is no other way to halt the continued crushing. Any other fixes would come off as whiny self-promotion and never garner support from either the politicians or the people, no matter how equitable.
To start though, I am going to recommend a more modest and plausible goal: increasing the federal tax rate on dividends and long-term capital gains, currently 20%, to that on earned income; and eliminating the AMT. Why? Because it will have little effect on those whose income is below that of the UMC’s and for many in the UMC it’s washed away by the AMT anyway. Given the current “Piketty” environment and the fact that 97% of the voters won’t be against it, it’s a very doable goal, and doesn’t smack of directly “attacking the rich” because seemingly it’s an increase for everyone (ha!). As an added bonus, imagine how much simpler a tax return would be without having to do a separate time-consuming calculation for AMT, not to mention how much easier financial planning would be3.
Don’t be discouraged by our lack of size. By pushing our voting bloc hard, and advocating for a broad equitable fix, there’s a good possibility we can get the ball rolling given the current political stasis. Plus it is important to emphasize what the UMC does have going for it:
-an articulate voice and pen
-a social circle where this could escalate to topic #1
The organization of a group such as this could become a very effective voting bloc whose influence would be greater than the 1-2% of the population it represents. Remember: the very wealthy have an inconsequential number of votes, and the middle-class and poor are somewhat disenfranchised and at best only 50% vote in any given election.
This is how capitalism and politics work in 21st century America. Now that you have been given the manual, who wants to lead the charge? Let the capitalist revolution begin.
Working All Day for the IRS – “The top 400 paid an average of $49 million, or 18.1 percent of their adjusted gross income, in federal tax — lower than taxpayers in the $200,000 to $500,000 bracket.”
Read on, read on dear readers. Though our series on the Upper Middle Class is complete, if you’ve read this far my guess is that many of the future topics we delve into will have a very direct bearing on you. So check in again this Spring to TheShadowBanker.org
- Just think of the tax policymakers surrounding George W. who were fully cognizant that the highly touted reduction to the dividend and l-t capital gain down to 15% wouldn’t hold true for the UMC after they were put through the AMT. For revenue neutral reasons, they opted not to put through a patch, thus delivering a screwing to a particular group [↩]
- Oh, and by the way, if you earn say $1 million a year, you’re in this group too in 2015. As the uber-rich get wealthier (and stealthier) they will bend the rules to best benefit them …to your detriment. They are the ones who can spend massive amounts of discretionary income on politicians to write highly specialized and favorable legislation that benefits them and not you.
How so? Let’s take a not-so-specialized example: an inheritance tax compromise whereby the rate goes from 35% to 25%, whilst the threshold is lowered from $5 million to $1 million. Were you to leave an estate with $10 million, it would pay $1.75 million under the old rule (35% of $10 mil – $5 mil deduction) and $2.25 million under the new one = an additional half a million dollars. But a $100 million estate would pay $24.75 mil under the new rule vs. ~$33 million under the old one, for a savings of $8+ million! [↩]
- or not, because most don’t account for the AMT when planning [↩]