The Grand Illusion
Last week stories appeared across the media citing the facts that not only do 18% of Americans now believe that Barrack Obama is a Muslim, but that the number of such believers has been rising. Now… I’ll be the first to admit that I haven’t been pleased with some of what he’s done – or failed to do – but the fact that his middle name is of Islamic origin doesn’t make him a Muslim. Then there are the millions that believe Obama is not a U.S. citizen – except that he was born in Honolulu, Hawaii, on August 4, 1961, of an American mother. Since Hawaii became a state on August 21, 1959, he was born in a U.S. state, and, again, like it or not, that makes him a U.S. citizen.
Several other areas of “mis-knowledge” that have existed for so long that, while I still shake my head, I now know are a form of “folk stupidity” are the beliefs that “foreign aid” is a huge percentage of the federal budget or that all our deficit problems can be addressed by merely getting rid of the waste in the federal budget. Or, for that matter, that reducing taxes will solve problems – or, on the other hand, that taxing the rich will immediately balance the federal budget. Even a cursory look at the federal budget and outlays will show the falsity of these beliefs – beliefs that have existed for more than a generation and continue to persist.
Even supposedly intelligent members of Congress support stupid ideas – such as a fence along the U.S.-Mexico border. Two years ago, the non-partisan Congressional Research Service completed a cost study – and among other findings, the study showed that (1) a fence along the 700 miles most heavily crossed by illegal immigrants would cost $49 billion to build and maintain for 25 years, and (2) recently built security fences stopped immigrants in those areas, but did not change the total number of illegal border crossings because illegal immigrants simply crossed where there weren’t fences. Since the entire U.S.-Mexico border stretches some 1,952 miles, fencing the entire border would cost close to $150 billion – and wouldn’t stop the flow of illegals, not when the U.S. has over 12,000 miles of ocean coastline borders and almost 4,000 miles of borders with Canada.
History also offers an example. The ancient Chinese built a massive wall on their northern borders – several times. It cost tens of thousands of lives and who knows how much over scores of years – and it didn’t work, either, and that was in a time when rulers didn’t have to worry much about laws and civil rights…or immediately executing violators.
Politicians who opposed the health-care law on the grounds that the U.S. has the “best health care in the world” are pandering to another kind of stupidity – the idea that everyone else is “like us.” Not everyone is – and that’s illustrated by the 44 million Americans without health care… and people do die because of that lack – like the forty-year-old brother of a neighbor who was turned away at the acute care center because he lacked insurance after being laid off, and who died that night of asphyxiation from a strep infection that caused severe swelling in his throat and tonsils.
Then again, most of what I’ve called stupidity isn’t really that at all – it’s a rationalization of what those people holding those beliefs want to believe. Because Obama points out that Americans who are Muslims have the right to built an Islamic cultural center two blocks from the 9/11 World Trade Center ground zero, a right reinforced by a law sponsored by that arch-conservative Orin Hatch, many of those who feel strongly, either about Obama or Islamic believers, insist to themselves that Obama must be a Muslim because they can’t conceive of any other reason for his statement. Most Americans don’t want to believe that the vast majority of federal spending is actually spent on people here in the USA and with comparatively little outright waste [spending on dubious projects is not “waste,” just foolish]. And even the president is either pandering to that stupidity, or exercising it himself, when he claims that every American family that makes more than $250,000 is rich. They may be well-off, but they’re certainly not rich, not when it’s difficult, if not impossible, to raise a family in what most Americans, if pressed, would consider middle-class surroundings and schools in the most expensive U.S. cities for less than $100,000. Yes… $250,000 is “rich”… in Plano, Texas, or Richfield, Utah, or Nampa, Idaho… but most people today live in bigger cities with higher costs of living because that’s where the jobs are. Yet all too many Americans still think that a dollar is a dollar in value anywhere in the good old USA. It’s not… and it hasn’t been for generations.
Stupidity…or self-serving rationalization? Does it matter when the results lead to self-deception, hatred, pandering politicians, and poor public policies?
I agree with almost everything you say; and so, of course, I’ll spend a little time on the area where we might disagree.
As someone who has intermittently been in that situation myself (the inflation-adjusted equivalent of more than $250K near a high-cost city and with over $100K in living costs to raise a family) I can certainly sympathize with your feeling that such an income is far from rich; there were plenty of money worries. However, I didn’t feel that way, then and now; I felt that my income plus net worth indeed qualified me to be on the borderline of “rich”. That is, 10 years of such income allowed saving money for investment, and that investment (say, stock index fund) yielded on a long-term basis 3% after tax, which in turn translated to an additional 10% of income plus security against a downturn, and placed me in the top 5% of people in terms of net worth. As for most people living in higher-cost cities, I assume you mean most people making $250K – certainly by the last figures I saw the majority of people in general were suburban or rural. But even if we accept differences in cost of living between the higher-cost cities and the average household, I haven’t seen indications that the difference is more than 50-60%. If we say that the middle class runs from 50-80% of both net income minus expenses and net worth minus house value, then most — not all– folks making $250K a year are indeed rich.
Also, I don’t believe that bringing back the old taxes on people over $250K will eliminate the deficit. As far as I can tell, 1/3 of the deficit comes from additional defense spending, mostly related to Iraq and Afghanistan; 1/3 comes from the near-depression, and combating it; and one-third comes from the cuts in taxes over the last 10 years. Only about 7%, if I understand the CBO, would be recovered by reinstating the old taxes on people making over $250K. If we leave the rest of the taxes in place and accept shrinking the deficit by 3/4 in the long term, by returning defense expenditures to pre-2000 levels and growing the economy back to full employment, I am sure that I and everyone else I know would consider the deficit adequately dealt with. But leaving 1/3 of it behind, and not indicating a willingness to raise taxes on those with incomes above about $300K (Brookings) back to their old tax levels is not a sustainable strategy.
You don’t explain why returning taxes for affluent people to a pre-war level is not part of the solution to the country’s economy. Could you please explain this?
Could you also explain why you seem to be fixating on the idea that $250,000 is not a lot of money in big cities? There needs to be an affluence line just like there is a poverty line. Being a federal regulation, the number has to be an average which applies to the entire country. Can you honestly say that we are capable of defining what poverty means and simultaneously incapable of defining what affluence means? If we identify who is in most need to receiving aid, we must also identify who is best able to provide that aid, right?
I’m not opposed to higher taxes on the truly affluent; I just don’t think that the $200,000 – $250,000 level represents true affluence. I’m not fixated on $250,000; that’s the number used by the current Administration, and one of the tax bracket breaks.
The three parts of the deficit describe above agree with what I have seen. The projections of deficit grow horrible for a 4th reason, though: exponential health care costs. Getting that under control as soon as possible is a strong financial motive for health care insurance reform — this exponential sets the deadline that has to be beaten to have a survivable level of expense.
As for fiscal policy: I think the current tax burden in the USA is not as progressive as it should be. This is not because I want 1945 tax levels back and it is not because I think this fixes all fiscal deficits. The billionaires in the USA have rigged the system so the tax burden is nearly flat, and this needs to change.
I think the main break point in wealth above the middle class is having the “fuck you money” in hand, which I decline to set a value on right now. I would think “upper class” has more to do with total wealth than raw income: do you earn via investment or via toil. This is also a social class distinction.
What about $250,000?
I have previous seen the “rich” cutoff set near “top 1%” which is about $350,000 (as seen on wikipedia and agree with my memory of it being just over $300k).
The $250,000 is “top 1.5%”. The median household income is $44,000; this close to the median salary for a school teacher in Texas, about $50,000. So earning enough for more than 5 median households puts one at the $250k which is the 98.5 percentile level. This is softened by the differences in cost of living, but I do not have great CPI info in front of me. I note that I can think of little in tax policy that is generous to those in expensive urban areas, though a mortgage interest tax deduction would come close.
Another point of view would be rhetorical: rhetorically 1% is a useful value. “A quarter of a million dollars” is also rhetorically useful.
I think what Mr Modesitt is trying to say is that the facts show higher income earners reside in the same environments/suburbs/locations altogether rather than be spread out all across America.
This means that although they are earning way more than the average American, because they live near each other retail/business/health outlets charge them more. Making the price of living substantially higher as opposed to the average American.
A good example is if one was to live a comfortable middle class life in Costa Rica it would in overall cost be less than someone who lived in America. Both parties could have the same house, same furniture clothes etc and still Costa Rica would be cheaper.
The location and the earning potential of those around you have an added cost.
One could argue its their fault for living all together.
Another problem is how would one generate lower to higher real estate regions keeping in mind the recent economic crises was in part an intentionally generated housing bubble(a systematic problem I think Mr Modesitt is trying to highlight by asking what would happen if the federal government were to tax them more). Of course looking it at in that light, one could also argue that periodic bubbles would be the norm and are part of US progress just from observing income levels, periods of new tech introduced into the civilian sector, real estate purchasing and currency exchanges for the last sixty years.
I think it’s interesting that so many people (shown even in a good percentage of the comments here) feel that those who make less deserve a share of the money made by those who make more. I make a fairly poor living. Do I have a desire to change that? Yes, and on my own. I want to eventually say that my work experience and skills have grown enough that I can provide more for myself and ultimately for a family. I do not want to say that I’m better off because I siphoned money unjustly from people who earn more.
There’s talk of needing aid and an obligation to provide aid, talk of a flat tax rate being rigged, as if it’s a human right to say that we all deserve more just because we make less. This, I feel, is very wrong. The purpose of taxing isn’t to redistribute wealth. It is to communally pay for things that we all (communally) use. It raises what the country (or area) itself can offer to its citizens. We all drink the same municipal water, and drive on the same roads, and send our kids to the same public schools. If you personally can afford luxury beyond that, such as buying your own water filtration system, flying in your own jet, and sending your kids to a private school, then so be it. That does not mean I am entitled to the same perks and luxuries if I cannot afford them.
If a tax rate is set, for example, at 25%, then a household that makes $40,000 a year will contribute $10,000 for that same year to communal public services and goods. If your household makes $1,000,000 a year, then you will pay $250,000 that same year. That’s already contributing considerably more in actual value, regardless of the same percentage.
That being said, if people choose to provide aid (or whatever you want to call a redistribution of wealth) because they are in a position to do so, that is admirable. But it isn’t something we should expect, demand, or enforce.
Joshua –
Sigh. A reasonable assumption, but not, as far as I can see, more than a small fraction of the picture. It would take too long to go into full detail, but here’s the gist of it:
(1) No, I don’t believe that “those who make less deserve a share of the money made by those who make more.” I do believe, based on my understanding of economics and history, that societies that provide redistribution of wealth in order to ensure high worker quality (good health, good education) — which effectively means positive net worth and minimum income at about the poverty line for all — are more stable and better off economically in the long run. This does not mean those who have less should have more; it means that those who have least get a minimum amount, and it must necessarily come from those who have more than they do.
(2) No, the purpose of taxation isn’t just to “communally pay for things that we all (communally) use.” Defense is not something we communally use — right now, that is something that takes up a large share of our taxes. Social Security and Medicare are only used by the elderly — right now, that takes up another large chunk of our taxes. Moreover, we do indeed have an interest in using taxation for other purposes. The classical theory of economics says that taxation distorts markets — even if it’s “flat” (a term that ignores the effects on the self-employed and other businesses). We have to fine-tune taxes to minimize or “level out” those distortions. And the very wealthy get a much larger proportion of their net worth from investments, and of their income from returns on investments, which today are subject to an effective tax of 15% or less at the federal level plus 5% in many states — much less than any revenue-neutral flat tax. Finally, one of the aims of our Constitution is to prevent concentrations of political power that can threaten our system. Money is power. Our income distribution is now about at the level of the Gilded Age, when the political system was bought and sold by the wealthiest. We could afford that when we did not need to worry about the rest of the world, or they about us. I am afraid that this type of skewed income distribution is much more serious a threat to our system (not to mention the world) now. The only answer I can see that has proven effective so far, from the progressives in the early 1900s and FDR in the 1930s, is increased progressivity of taxes.
(3) You should be aware of the economic concept called the “tragedy of the commons.” As I understand it, it states that when things are available for communal use, businesses or individuals that can do so will over-use the “free” resource, degrading its quality, often until it is no longer useful (think: the village common grazing land). The point here is that in areas like energy markets and fisheries, a “flat” tax that does not take into account the far greater communal costs of over-use of communal resources by richer companies and individuals is actually regressive, and increases the market distortions due to use of the “commons” that already exist.
Thoughtful ideas.
I agree with almost everything you say; and so, of course, I’ll spend a little time on the area where we might disagree.
As someone who has intermittently been in that situation myself (the inflation-adjusted equivalent of more than $250K near a high-cost city and with over $100K in living costs to raise a family) I can certainly sympathize with your feeling that such an income is far from rich; there were plenty of money worries. However, I didn’t feel that way, then and now; I felt that my income plus net worth indeed qualified me to be on the borderline of “rich”. That is, 10 years of such income allowed saving money for investment, and that investment (say, stock index fund) yielded on a long-term basis 3% after tax, which in turn translated to an additional 10% of income plus security against a downturn, and placed me in the top 5% of people in terms of net worth. As for most people living in higher-cost cities, I assume you mean most people making $250K – certainly by the last figures I saw the majority of people in general were suburban or rural. But even if we accept differences in cost of living between the higher-cost cities and the average household, I haven’t seen indications that the difference is more than 50-60%. If we say that the middle class runs from 50-80% of both net income minus expenses and net worth minus house value, then most — not all– folks making $250K a year are indeed rich.
Also, I don’t believe that bringing back the old taxes on people over $250K will eliminate the deficit. As far as I can tell, 1/3 of the deficit comes from additional defense spending, mostly related to Iraq and Afghanistan; 1/3 comes from the near-depression, and combating it; and one-third comes from the cuts in taxes over the last 10 years. Only about 7%, if I understand the CBO, would be recovered by reinstating the old taxes on people making over $250K. If we leave the rest of the taxes in place and accept shrinking the deficit by 3/4 in the long term, by returning defense expenditures to pre-2000 levels and growing the economy back to full employment, I am sure that I and everyone else I know would consider the deficit adequately dealt with. But leaving 1/3 of it behind, and not indicating a willingness to raise taxes on those with incomes above about $300K (Brookings) back to their old tax levels is not a sustainable strategy.
Joshua – you keep speaking of redistribution of wealth, but a flat tax on wealth would amount to a very similar distribution of the Federal tax burden to our current system.
In an expansion we want to encourage saving and discourage consumption, in a recession we want to encourage consumption and discourage saving. People tend to imitate the behavior of others around them and too much of that leads to a vicious cycle; either rising inflation or falling production. An income tax is used because it is a good compromise, I guess. It discourages work to some degree… but not generally enough to reduce work much – most people try to work more or less full-time regardless of tax or income. But it makes sense for individuals with money to pay for social services in proportion to the amount of money they have, not in proportion to the amount of money they earn in a particular year. So a progressive income tax is not redistribution of wealth – it causes each person to pay tax approximately in proportion to their wealth while minimizing distortion of incentives.
On the general point, while it is true that people making about $250,000 do not usually consider themselves wealthy and are concerned about expenses, they are also concerned about savings and lead a significantly more extravagant lifestyle than the median individual even in the richest places. It probably makes sense to have a millionaire tax bracket, but a quarter millionaire is more than two standard deviations and almost 4 times above the median income in even the richest metro area, San Francisco. I don’t think anyone would say that a quarter millionaire was poor and I think most would admit that they’re not in the middle 60% of Americans, even in the richest, most expensive cities. I would say being so far outside the middle puts a person in the ‘upper class’ which I would also consider ‘rich’, even if they’re not the richest people in their social circles and do not feel rich.