taxeswealth

How Do You Define Rich?

There has been a lot of discussion in the media lately (and among the Presidential Candidates) about what is considered rich? Obama has a much narrower view of “rich” than McCain and has said repeatedly that it is over $250,000 in income. Earlier this year, when McCain was asked what income threshold he thought would make someone “rich”, he suggested $5 million. Well, they are both wrong. Wealth and being “rich” has absolutely nothing to do with income. Basic theory would suggest that the more income someone has, the higher probability someone has to be rich. After studying this issue for some time and reading many books on the subject, I have learned that this is clearly not true.

Being rich, or wealthy, is not about income. It is about how much wealth an individual has on hand. Most Americans spend what they make. If they make $25,000, they spend all of it. If they make $250,000, they spend all of it. Their expenses naturally rise to meet their incomes. I am not saying this is the way it should work, but this is reality. This is one thing that scares me about some of the proposed tax increases on the “rich.” They are not tax increases on the rich at all. They are tax increases on high earners. These high earners are already locked into many high expenses – usually a high mortgage. What do these high earners do when their expenses are bumped another $50,000 or so to cover increased taxes? They are already spending all of their income and much of their expense may be locked in through mortgages, student loans and other concrete obligations. Could this increase foreclosures? Could this result in a further decrease in real estate prices as these individuals try to get out from under their mortgage obligations? Ultimately, I do believe these individuals should be paying more than someone making $100K, but I don’t think it is as simple as bumping their tax rates.

What should be considered “Wealthy”? In a sense, it is a state of mind. I once heard a speaker who was talking about the subject describe it as the point in which you can plan to go anywhere in the world for a week, call the travel agent and have her book the trip, and not care one bit about what the cost is. While, it is in large part a state of mind, surely their must be some dollar amount that most of us would agree is wealthy. $5 million in net worth? $10 million in net worth?

Ultimately, if we want the “rich” and the “wealthy” to pay for things in this country, we are going to have to develop a method to measure true wealth accurately and to tax it fairly. Just assuming someone is wealthy because they had a good year does not accurately reflect life in America.

Another problem with taxing “income” that may be indicative of “rich” is that different areas of the country have different cost of living. This is discussed in depth in How to Tell if You’re Rich, and article by Rick Newman from US News and World Report. An individual making $300,000 in El Paso, Texas may be getting by just fine, but someone making the same amount in New York, NY will have a lot more difficult time with the tax increases.