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What is “Rich”?

When the Bush tax cuts expire at the end of this year, the result will effectively be a tax hike on many Americans. Congress is now left with the decision of whether to extend the tax cuts and thereby determine who amongst us are the rich members of society and, therefore, not worthy of being absolved from the tax hike. Of course, since this is a slightly political issue, it is being left until after the midterm elections.

But it does raise an important question. How much income must be earned each year to be considered rich? Even more importantly, especially for young professionals saddled with student loan debt, should debt load be considered as a mitigating factor in determining a taxpayer’s tax bracket? Or should Congress reform the tax code to make it “simpler” and more straightforward in an effort to capture more tax and eliminate clever methods of tax avoidance?The New York Times discusses whether a couple making $250,000 per year or an individual earning $200,000 is considered rich, or if the bar should be set higher. At first blush, it certainly seems that having two people earning more than $250,000 is clearly rich, but look at the situation more closely: most people that are able to earn this level of income are usually well-educated. Education does not come for free and most students need to take on enormous debt loads to finance their educations. In essence, these students are paying for school today with money they will earn tomorrow.

There is a deduction for student loan debt interest, but even that is in danger of being abolished, and is subject to an adjusted gross income phaseout, usually leaving a taxpaying couple earning around $250,000 without a deduction and those who take a standard deduction without any interest deduction at all. It is very likely that a married professional couple could have, in total, around $200,000 in student loan debt to pay down while earning $250,000 per year. Add in rent payments or a mortgage and a modest retirement contribution and you have a couple taking home a small paycheck to pay living expenses with; living comfortably but far from the lap of luxury and financial security that a $250,000 income would ostensibly bring, say, for a couple with little to no debt.

It is understandable in today’s political climate to heavily tax the “rich”, but when a couple earning $250,000 has pay an enormous amount of tax, pay down student loan debt and pay for life’s expenses, it does not seem that while some of  the intended targets of the proposed tax hike are being struck, the collateral damage caused by it is unacceptable. People with discretionary income similar to that of  middle class America should not be taxed at the super-rich level.

Congress needs to take these interests in mind when deciding who is rich. Instead of coming down hard on young professionals, Congress needs to close loopholes that limit the truly “rich” class’ ability to avoid tax.

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Categories: General Tags: , , , ,
  1. cmh
    October 8, 2010 at 11:20 pm | #1

    I don’t know many young professionals who would need to worry about the expiration of the Bush tax cuts. How many young people, newly graduated, are married and earning $250,000 a year or single and earning $200,000 a year? I doubt its that many. In the legal profession, a new associate at a BigLaw firm might make $160,000 a year at best. Meanwhile, the average first year associate makes $70,000. If married, assuming the spouse also has a very well paying job, the BigLaw couple may have a combined income of $250,000, but there are probably not all that many people who fit this description.

    Even so, if you are young and making that much money, I doubt the slight increase in taxes is going to break the bank. You’re young and already making 5x the median family income with a lifetime of earning potential ahead of you. Given the position that the vast majority of graduates are in, its difficult to summon much sympathy for the very few who will be captured within the highest brackets, and I disagree that Congress should base tax policy on this small group or really give them much consideration.

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