Do the Rich Really Deserve Such a Bad Rap?

Is there anything to be said for “the rich"?

By that I mean anyone earning more than $200,000 a year (if single) or $250,000 (if married filing jointly), the new threshold established by the Obama administration for its tax increase proposals.

With Bernie Madoff handcuffed and led off to prison last week (to the accompaniment of applause and tears of some of his victims), the rich seem to have reached a new low in popularity. Tabloid news sources are staking out resorts, luxury condos, airports for private jets, looking for any hints of indulgence or excess, especially if they involve taxpayer dollars. No wonder, given the stories emerging from the wreckage of the credit bubble.

Yet, as hard as it may be to believe, the overwhelming majority of people earning six-figure incomes aren’t criminals or spendthrifts. The Federal Reserve released statistics last week that showed Americans collectively lost $5.1 trillion of their net worth during the last three months of 2008 and $11.2 trillion for the full year. The numbers don’t break that down by income level, but I think it's fair to say that much of the drop came from the steep decline in stock prices, and stocks are owned disproportionately by high-income people. Indeed, stock ownership is so skewed to upper-income households that the percentage declines are probably much steeper for them, more likely in the 30% to 40% range.

That means anyone who was a millionaire at the beginning of 2008, and had a million dollars invested in stocks, has lost about $300,000 to $400,000, which is in line with what I’ve been hearing anecdotally. And the losses have only multiplied this year as the market continues its descent.

This group also pays a disproportionate share of income taxes, even before Obama's proposed tax increases. The top 1% of earners are expected to pay 25% of all personal income taxes this year, and the top 5% to pay 40%, according to Tax Policy Center's latest figures. It's no wonder that the people I know who earn $200,000 to $300,000 are incredulous to be branded as “rich.” They certainly don’t feel that way.

In New York City, for example, $200,000 in income yields roughly $100,000 after all taxes (including the unincorporated business tax, which applies to anyone who’s self-employed). If you're following the prudent rule of thumb that you should spend no more than one-third of your after-tax income on housing, that means $33,000, or less than $3,000 a month, can go toward housing — barely enough for rent on a one-bedroom apartment in Manhattan. As for buying, the collapse in stock prices has wiped out much of what many people invested toward a down payment. New York may be atypically expensive, but many people who earn $200,000 and up have little choice but to live in a high-tax, high-cost location.

There’s no doubt that in recent years income disparity has increased in this country. But no one seems to mention that periods like the present, and 2000-02, with steep stock market slides, have a tremendous leveling effect.

By contrast, let’s take a look at the top 400 earners, who in 2006 (the most recent year for which data are available) earned an average of $263.3 million. Now that’s what I call rich. These 400 people paid on average $45.2 million each, and collectively paid a remarkable 1.77% of all personal income taxes that year, the highest percentage since the IRS has been keeping records. They also paid an average rate of just 17%, the lowest ever, largely because of their massive capital gains, which are taxed at a low rate. Presumably those gains will seem a distant memory by the time the 2008 data are compiled. But imagine if they were paying at the top rate of 35%. That would roughly double their taxes paid in 2006, to $90 million each, or a total of roughly $36 billion. And that’s only 400 people.

I suppose anyone who makes more than we do may seem rich by comparison. But before we get too caught up in the current populist fury, it’s worth considering who, really, is “rich” -- and who pays most of the taxes in this country.