10/21/10 10:48 AMHoisted from Comments: How Much Do I Earn? - Grasping Reality with Both Hands

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Grasping Reality with Both HandsThe Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, Reality-Based, and Even-HandedDepartment of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 7080467; delong@econ.berkeley.edu.

Economics 210aWeblog ArchivesDeLong Hot on GoogleDeLong Hot on Google BlogsearchOctober 02, 2010

Hoisted from Comments: How Much Do I Earn?

Larry Siegel writes in comments:

We Are the Super Rich: OK,here's my tax bill. I earned$280,419 last year and hadFederal withholding of$61,402, New York statewithholding of $23,527, andNew York city withholding of$12,700. Social Security taxwas $6,621 (plus the employer'sshare), and Medicare tax was$4,252. That's more than$100,000 on an income justbarely above $250,000.

Now here's the punchline. I didn't pay nearly enough. Because part of my incomewas from a bonus, which is withheld at 25% instead of 35%, I have to cough up alot more by October 15. At least $10,000 more. I'm working on the math rightnow. And this analysis doesn't include sales tax, property tax, or any other tax.

I usually enjoy Brad DeLong's work although we are both professional economistson opposite sides of the political fence. So I won't assume he's mendacious, justignorant of the basics of tax rates.

What Larry misses, I think, is that at least in the rarified research-universityprofessoriate what numbers flow through to our tax returns grossly understate howmuch we earn.

Dashboard Blog Stats Edit Post

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Put it this way: what with the furloughs, etc., I think that the flow-through from myBerkeley salary to my 1040 this year may be in the five figures--$96K.

But that's not a good measure of what I earn.

Given that I am now in my 50s, the (generous) employer health contribution is nowworth at least $12K to us. Add in $30K in 403b(7) and 527 tax-shielded retirementcontributions. Add in what looks to me, at my age, like a $30K employer contributionto the defined-benefit program. And add in a mortgage subsidy that is damnablydifficult to value but that I think is worth an extra $25K a year.

And Berkeley does not offer anything like the educational benefits of the Chicagos orthe Stanfords.

With the exception of the possibility of a (usually much less generous) employer healthcontribution, almost none of these tax-shielded compensation vehicles havecounterparts available on any significant scale to those households at or near theAmerican median income of $50K a year.

So do I personally earn from Berkeley this year 1.92 times median household income?Or do I earn 3.86 times median household income? I would argue for the second...

Brad DeLong on October 02, 2010 at 08:11 AM in Economics, Economics: FiscalPolicy, Economics: Inequality, Economics: Labor, Obama Administration | Permalink

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mike said...I think it's telling that he finds $280,000 to be "just barely over $250,000." Thedifference that he apparently thinks is hardly worth counting--over $30k--is somepeople's entire before-tax income. But let's say he pays an additional $30,000 in salestaxes and property taxes. So at the end of the day his personal after-tax income is$140,000. What is his point again? That he's poor? I think the violin is too small forme to hear it...

Reply October 02, 2010 at 08:39 AMdonna said...I would be more than happy to pay more in taxes if it meant I could pay less for mykids' college tuitions. But I am lucky enough to be among those wealthy enough to paythe tuitions. We know a lot of kids trying and struggling to even take a few classes atcommunity college.

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We are shorting our kids' educations so assholes like Larry can bitch about how muchthey pay in taxes. Thanks for nothing, Larry.

Reply October 02, 2010 at 08:44 AMRW said...You not only earn at least 3.86 times median household income you probably augmentthat greatly in accumulated wealth: investments and other assets that secure a futurethe "little people" have virtually no access to.

The "I pay too much tax" bunch basically indulges in the same kind of quasi-thinkingand half-argument as the "deficits and/or debt are too large" crowd: Totaling up theliabilities while ignoring the present/future value of benefits and assets and, yes, time(and the ability to allocate it).

This is not a small difference to those who can see it but I have come to believe there isan entire class of people out there, many with impeccable educational credentials, whohave a hole in their brain where they cannot go and mere words describing it find noresting place.

In his last book, The First Man (published posthumously), Albert Camus writes of hisanger and sadness at his mother’s inability to provide any details concerning his long-dead father: "Poor people’s memory is less nourished than that of the rich. It has fewerlandmarks in space because they seldom leave the place where they live, and fewerreference points in time throughout lives that are gray and featureless. Of course thereis the memory of the heart that they say is the surest kind, but the heart wears out withsorrow and labor, it forgets sooner under the weight of fatigue. Remembrance of thingspast is just for the rich. For the poor it only marks the faint traces along the path todeath."

Reply October 02, 2010 at 08:51 AMmifune said in reply to mike...I think his point was pretty clear, that it is possible to pay roughly $100k in taxes onroughly $250k in income, and that you don't (at least in New York City) have to make$450k to pay that much. Brad wrote "If his household income is near $250K/year, histaxes are not now $100K/year [...]" I don't know what taxes are like in Chicago, but itseems helpful for someone to point out that at least in some parts of the country this isan empirical fact, whether or not he considers himself rich or poor.

Reply October 02, 2010 at 09:11 AMDevil's Advocate said...To be fair to Professor X's numbers, the state tax rate in IL is a flat 3%, which is lessthan the NYC tax alone. Secondly, the reason Larry owes about $10K on his $10K / (.35- .25) = $100K bonus is that because NYS + NYC taxes are so high he is caught by theAMT, which has a marginal rate of .35 until the deduction is phased out. This is nottrue for Professor X. Thirdly, Professor X can deduct his (substantial, c. $50K)mortgage interest, which I presume Larry, living in NYC on $180K before bonus,cannot.

Comparing income taxes in 2 different states is really like comparing apples to oranges.

(Digression: Larry is just now doing his taxes for last year? No wonder he finds themsurprising...)

Reply October 02, 2010 at 09:24 AMdarkmatter said..."That's more than $100,000 on an income just barely above $250,000." Actually if you

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total it, that comes to 101,881.

So, that is "more than 100,000" (by $1,881). And income is $280,419 which is "justbarely above 250k" (by $30,419).

So we have "more than = 1,881" and "just barely = 30,419." The choice of descriptors ismind-boggling.

So I won't assume he's mendacious, just ignorant of the basics in the differencesbetween how somebody views themselves when their income is in the top 3% bracketvs somebody somebody from the lower 97% bracket.

Larry did not develop these ideas today, rather he stopped being reasonable manyyears ago.

Reply October 02, 2010 at 09:40 AMkcar1 said...Honestly, I couldn't care less what your total tax bill is... what matters is the lifestyleyou are able to maintain versus the lifestyles of your fellow citizens -- and by fellowcitizens, I include the average, median, and someone from the bottom 10% not justyour percentile and up. If you can list as part of your lifestyle private school,housekeeper, gardener, annual vacations that involve flying somewhere, you have noright to complain about your tax burden... it is not seriously constraining your choices,it is not genuinely reducing your quality of life. Unlike your fellow citizen who sendstheir children to middling to poor public schools and doesn't take vacations or evensick days because he/she can't afford to miss the wages (let alone come up with thecash to take the vacation).

And $30K is not "just above" $250K. This income alone offers him the opportunity tobuy luxuries, like the ones above, that are not even on the map for the medianindividual. This is a year's worth of tuition at a decent private (not Ivy) university, anice new (not luxury) car, a couple of nice (not 1st class, presidential suite)transcontinental trips! These are things that the median household does not evendream of.

One additional note, sales and property taxes are regressive. While Larry may end uppaying several thousand in those, it constitutes a much lower proportion of his incomethan the median household. He probably derives greater benefits from them too -- Ivisit neighborhoods all over my city for work and where the professors, lawyers, andjudges live the streets are reasonably well-maintained and sidewalk are in decentrepair. Where the women wait at bus stops in their scrubs, the streets are riddled withpotholes and the sidewalks are buckled. Same city, same taxes, different services.

Reply October 02, 2010 at 09:59 AMRobert Waldmann said...Anyone who says that $ 30,000 above is "barely above" is rich.

Note the phrase "barely above" is in a statement about total taxes withheld, and not ina statement about the ratio of total taxes witheld to income. Also note that theemployers share of social security tax is counted as a tax, but not as income.

The ratio of taxes to income is about 125/286 = 0.433 % (just calculated in my head Imight have made a mistake). I also wonder about the work ethic of someone who is"working on the math."

Clearly New York City is not typical. The state income tax is high and the local incometax is unusual.

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Your points are more important.

Reply October 02, 2010 at 10:05 AMRobert Waldmann said...Oh and wasn't he commenting on Henderson ? What is the relevance of New YorkState and City income taxes to a discussion of a post by a professor from the Universityof Chicago.

Reply October 02, 2010 at 10:07 AMRobert Waldmann said...Not just the work ethic. Also the thrift, rationality and/or familiarity with the tax code.He describes his earnings as something from which tax was witheld plus a bonus. Thatsounds like what the IRS calls earnings -- wages salaries and tips. What about capitalincome ?

Given his tax rate, he should be investing in municipal bonds not treasuries. It wouldalso be wise unless he blows amazing amounts each year to invest in stock. I've neverhad anything withheld from my US Capital income (well it's zero in recent years but itwasn't always zero). Has this guy managed to spend all of his very large after taxincome or is he talking about a number less than his income in response to yourdiscussion of income ?

Reply October 02, 2010 at 10:20 AMRobert Waldmann said...Sorry to keep commenting but didn't this Henderson guy say that Obama was going toincrease his taxes by over $ 10,000. Doesn't that leave three possibilities1. his family income is over 250,000 + 10,000/0.03 = 883,333.33 and one third cent,2. He has a six figure income and can't subtract 250,000 and multiply by 0.03, 3. He hasn't bothered to learn about the debate on which he chose to comment,

4. I haven't bothered to learn about the debate on which Henderson chose to comment,or5. That $10,000 in my head is a feaver dream ?

Reply October 02, 2010 at 11:22 AMRobert Waldmann said...or maybe a fever dream. The beaver has fever, the bever doesn't have feaver.

Reply October 02, 2010 at 11:24 AMPlarry said...The comedy is complete. I had figured Hannibal = Delong, and Paullus = Henderson,but who was Varro? Now we know.

Reply October 02, 2010 at 11:46 AMdilbert dogbert said...My late wife, a CPA, told me of a client who was complaining about his taxes. She saidthat she paid a lot less taxes so lets do a swap and you take my pay and I take yourincome - Deal? No way said the client.

Reply October 02, 2010 at 12:49 PMsave_the_rustbelt said...Prof. Siegel could move to the midwest where the taxes are much lower.

He could sell fishing licenses at Wal-Mart for $10.50 an hour and he wouldn't have toworry so much about taxes. Or benefits. Or retirement. Or eating regularly.

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Reply October 02, 2010 at 01:37 PMRichard Careaga said...Let's see if I can spin a tale of woe that will garner sympathy from some and derisionfrom others, based on whether to emphasize 2010, 2009 or the cumulative effect of1965-2009 in terms of accumulation.

Poor me: In 2011, 95% of my family income will go to health care costs and we willhave to live off of capital until Medicare.Undeserving rich: In 2009, my family income was enough to generate well over $100Kin income taxes off just three months of work. We paid cash for a house and a new car.Class traitors: In 2008, we gave the maximum to the Obama campaign.Generational transfers: One side of our family has been generous over the years.Thrifty: Paid off $350K mortgage in 10 years.Lucky: Made more money on home sales than lost.Beneficiary: Undergraduate education heavily subsidized by grants.Hardworking: Supported stay-at-home wife with part-time work while also attendingfirst two graduate programs.Partners: One of us put the other through law schoolPrivileged: Began second career at Big Law in SF.Thick-skinned: Was 42-year old first year associate.Unlucky: Laid off twice, once recently.

So, are we the undeserving rich, a paragon of the American dream, spongers off oftransfer payments, victims of the Great Recession, the justly punished/rewarded forchoice of career or does some other label fit?

Or, should judgment be suspended, heeding Herodotus, to see what we suffer or enjoyover our remaining years? Will our capital last? Will transfer payments continue? Willwe have to further downsize our comfortable lifestyle? Will stars fall upon us bylottery? Will my specialty revive from the dead? Or is Taleb right, it's all been just theluck of the draw?

It can be hard to have class interests when class membership becomes fluid. So, class,discuss:

Is Careaga rich?Is Careaga deserving of his economic condition?

Reply October 02, 2010 at 02:02 PMAaron Baker said...". . . on an income just barely above $250,000."

Hmm, as a legal aid lawyer, I pull in about $49,000.00. I once would have said thiswas just barely below $50,000.00--but now I realize that I wasn't expressing myselfcorrectly. "Just barely below" $50,000.00 must mean $20,000.00. And my wife, whoworked as a pre-school teacher for 15 years before she broke the $30,000.00 mark--Ithink I can safely say she makes "nearly" $60,000.00.

I'm grateful to Larry Siegel for this lesson in usage--and the Olympian perspectiveenjoyed by those who make "just barely above $250,000."

Reply October 02, 2010 at 02:18 PMWilliam B. Jensen said...Last time I checked $280K is a hell of a lot of money and if one can't "get by" they areas guilty as the government they are complaining about. By the way, isn't the wholeargument about a minor increase in the marginal tax rate for ajusted gross income over

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$250K. If I'm right, for someone making $280K we are arguing about someting near agrand. Give me a break, the guy probably spends that in coffee in a year. Shut up, payyour taxes, and be happy with what you have at a time when many are really suffering.

Reply October 02, 2010 at 02:54 PMnkirsch said...I don't think that anyone who gets a university paycheck should complain about taxes.Even if you are in a private school, there is still a lot of dependence on governmentprograms, grants and loans that are converted into faculty salary. In a public school, Ican't see the argument at all for too high taxes.

Reply October 02, 2010 at 03:48 PMrfisher said...oh boo hoo. you don't make much money, so larry has no right to complain that themoney he's earned through personal efforts (read: monetary value) is spent on thingshe likely doesn't value or even use? inefficiency and friction in government spendingaside, why should he owe a higher percentage of his pay to us than we owe to him?

the argument isn't that he can't "get by"; it's about the ethics of demanding somethingthat belongs to something else for a cause you may not agree on. if larry, making$250K a year, doesn't give to charity, then he's a dick. if he doesn't find value insacrificing for others, then he may well be a horrible person. but it's not your call todecide how much to take.

Reply October 02, 2010 at 04:31 PMDavidS said in reply to ncgirl...I find your comment a bit shocking. You think that people with incomes lower than$280K don't pay their share of taxes?

People who make more money should pay more of their incomes in taxes, period. It'sone of the most fundamental principles of modern society.

Reply October 02, 2010 at 09:22 PMGreg said...

ncgirl said:"...maybe if more people with lower incomes had to pay their share of taxes, they'd bemore concerned about the attempt to fund our government by sucking the wealthydry...who do you think is next if we don't demand fiscal responsibility from ourgovernment??"

a: The wealthy are not being sucked dry. They are wealthier than ever.b: The wealthy won't be sucked dry, because they control the government. c: The wealthy profit from the inefficiencies and irresponsibility of our government,more than everyone else. The wealthy will not change this. d: The people with lower incomes are already paying. Their incomes have not increasedsignificantly in 30 years.e: The people with lower incomes are already paying in terms of diminished services.This, combined with d: means they have probably actually lost ground in terms ofeconomic well being.f: The wealthy should pay more. One of the functions of government is to protect theirwealth against the rest of society, er, preserve the rule of law, from which they benefitfrom the most. g: The wealthy should be glad to pay more. That they do not represents a surprisingand sad lack of civic mindedness on their part. It also indicates an inability to see to,

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and act according to their own long term best interests. It is simply not in theirinterests to have all the money, yet this is the trend we are seeing. This will result, notonly in less 'wealth' for them, but greatly diminished income for all. h: It is hypocritical and fraudulent for the wealthy to demand services, (they controlthe government,) yet refuse to pay the taxes necessary to support such services. Insteadof paying taxes, they force the government to borrow, FROM THE WEALTHYTHEMSELVES, so the wealthy take profit, and establish an income stream on thebacks of the rest of the people.i: An impoverished people simply cannot pay significant taxes, certainly not enough tosupport the government strong enough to maintain such inequality, or even supportthe income stream the wealthy are so actively augmenting.

Reply October 02, 2010 at 09:47 PMurban legend said...It continues to piss me off, and should piss everyone off, that the whiners are gettingaway with confusing TAXABLE INCOME, which is the only category of income uponwhich marginal rates can be calculated, and how much some "earns" or "makes." Whenwe say someone "makes" X hundred thousand dollars, with no further qualification, wemean, always, the person's GROSS INCOME (and not Adjusted Gross Income, either).(Yes, shouts intended, since this has been going on and on for several weeks now, withonly me seemingly fighting the good fight for truth and clarity.)

Larry's amount of $280,000 is almost certainly, in some combination of salary andbonus (and other income), in TAXABLE INCOME. That's after his 401K contributionadjustment, his personal exemptions, and his deductions for state and local incometaxes, property taxes, mortgage interest and charitable contributions. Larry may wellbe "making" well north of $400,000.

This is a hell of a lot richer than $250,000 or even $280,000. An income of $400 or$450,000 is, no ifs or buts about it, rich. If someone on the coasts can get away withclaiming $250K is not "rich" in that environment with out-of-sight housing costs, theycan't even hope to do that on $450,000. We on the progressive side let the discoursebe cheapened by letting the wealthy whiners gloss over this important distinction. It'stime to shut them up by pointing out the obviousness of their absurdity.

Please, Brad, or Robert, or anyone, pick up on this finally.

Reply October 02, 2010 at 09:50 PM300baud said..."if he doesn't find value in sacrificing for others, then he may well be a horrible person.but it's not your call to decide how much to take."

It's not *my* decision. But it is *our* decision. Together, we jointly decide all sorts ofthings about society, and one is how much we want to keep from old people fromstarving in the streets this year. Once we have decided, Larry has to pony up, badperson or no.

He may not appreciate the benefits, but some people don't appreciate defense or agood legal system either, and they still have to pay. That's how democracy works.

Reply October 03, 2010 at 12:07 AMkcar1 said...@urban legend, I think this is what DeLong was alluding to in his original post, thathis salary this year is under $100K but once you factored in the benefits like 401kcontributions, insurance, and in-kind from employers, deductions, and tax exemptions

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not to mention other non-income gains, he is still north of the $250K mark -- eventhough he won't get taxed on all of that.

Yes, to make your point, he could be much more direct. I think that those politicians infavor of the just extending for taxable income under $250K have been woefully ineptat communicating that we are talking about a 3% MARGINAL rate increase, not on allincome, gross or adjusted.

And that doesn't even being to address @RW's point, a very good one, that theaccumulation of those benefits and wealth as you go up the income/wealth ladderincreasingly counteracts the progressiveness built into the income tax (of course, thatprogressiveness is already basically cancelled out by the regressive nature of thepayroll, sales, and property taxes).

Reply October 03, 2010 at 07:15 AMSteve Roth said in reply to dilbert dogbert...dilbert dogbert: "My late wife, a CPA, told me of a client who was complaining abouthis taxes. She said that she paid a lot less taxes so lets do a swap and you take my payand I take your income - Deal? No way said the client."

Yeah. Every time somebody complains to me how high their taxes were last year, I say"congratulations!"

Reply October 03, 2010 at 07:56 AMJeffreyY said...This looked like equivocation to me at first glance, but Mr. DeLong pointed out thathe'd included all of these in his first post. Fromhttp://delong.typepad.com/sdj/2010/09/in-which-mr-deling-responds-to-someone-who-might-be-professor-todd-henderson.html:

$455,000 a year of income, of which:

$60,000 in student loan payments$25,000 building equity in their house$80,000 in state and federal income taxes$15,000 in property taxes$10,000 for automobiles$55,000 in housing costs for a $1M house (three times the average price in the HydePark neighborhood$60,000 in private school costs for three children$35,000 in other living expenses

Subtotal of 1044 income: 340k

$40,000 is employer contributions to 401(k) and similar retirement savings vehicles$15,000 is employer contributions to health insurance$60,000 is untaxed employee contributions to tax-favored retirement savings vehicles

Untaxed income: 115k

New York's taxes appear higher than Chicago's, which makes up part of the difference,and I'm not sure whether or how much of the $25k+$55k of mortgage paymentsshould really be in the "untaxed" category, which would make up the rest. So it lookspretty consistent to me now.

Reply October 03, 2010 at 11:16 AMSteveBreeze said...The funny thing is, if the tax rates go up it is only the marginal tax if married on the

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income OVER $250k. So doing the math, taxes on this person should amount to 3% of30k or $900. Cry me a river.

Reply October 03, 2010 at 03:16 PMRW said in reply to Richard Cownie...WRT point #4, there are precious few defined benefit plans in education these dayseither; e.g., a 403b is the basically the same deal as a 401k. Apples vs. apples prettymuch.

WRT the mortgage subsidy, my own rather straightforward interpretation was that the(roughly) $25,000 figure simply meant the mortgage interest tax credit that anyhomeowner with a mortgage gets on their primary residence but, in retrospect, itseems possible Brad could have been referring to something else: support of hishousing cost as part of a pay package or even university-owned housing perhaps? I'minclined to doubt it's the latter -- professors tend not to get the really big perks thatCEO's do (like a house) but really couldn't say for sure.

Reply October 03, 2010 at 05:29 PMMatthew Ernest said..."the argument isn't that he can't "get by";"

Then they should stop making that arguement. None of the initiators are arguing thatit would be wrong to raise taxes on everyone; they are arguing that it would be wrongto raise taxes at the upper end of the income scale.

Reply October 03, 2010 at 08:26 PMBrad DeLong said in reply to Matthew Ernest...Actually, Todd Henderson is very happy raising taxes on people richer than he is--positively gleefully class-warfareish about the possibility, in fact...

Yours,

Brad DeLong

Reply October 04, 2010 at 12:37 AMMichael E Sullivan said in reply to urban legend...(about the fact that Larry is almost certainly talking about *taxable* income, and nottotal income).

I agree this needs to be said. If you make 280,000 *total* and you end up paying 61kin federal taxes, you are doing something very very wrong. Most likely, Larry is talkingabout *taxable* income, and if he can't put a pile of money in his 401(k) or 403(b) orwhatever plan, when he's dealing with NYC marginal tax rates and makes 280,000,that's his problem. I have people working for me making 40k a year who find a way toput 10% in their 401(k).

Plus, as brad says here, he surely has a pile of employer benefits that bring his totalincome value much higher, and which he need pay no taxes on.

Brad just pointed out in this post, that he could claim that he makes less than 100kthis year in terms of taxable income, but of course, he, like many in similar jobs, andvery much unlike the average person earning 40-60k/year, gets about as much dollarvalue from his non-taxable benefits, as from his taxable income.

I employ a number of people in a small business, all of whom are paid somethingbelow that median income of 50,000. And I can verify that their non-taxable benefitsare in the neighborhood of 20-40% of salary (the range mostly depending on howexpensive their health plan is). For our industry and shop size, we offer better benefits

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than average. We offer *3%* of salary in employer 401(k) contributions, and in goodyears (not the last 3), another 2-3% in profit sharing. Nobody is getting 30k, or eventhat percentage of their taxable income. 6% or around $2500 is the biggest totalretirement contribution anybody has seen. And forget about having a defined benefitplan in our industry. There's nobody out there doing that anymore.

The most frugal of our employees are able to put away another 10% of their ownmoney in the 401(k) (no small feat of forced retirement savings when you only earn~40k/yr), bringing their taxable income down further. But still that means, they areputting away less than 20% of their taxable income, while Brad has *employer*contributions of 30%, *and* a defined benefit pension, that he estimates requiredanother 30% of funding this year. So even on a percentage basis, that's 10 times whatwe have offered in a good year, and 20 times what we offer in a down year. On anabsolute basis, the difference is even bigger, of course, since Brad's understated taxableincome is already a bit more than double that of my representative employee.

I don't know whether Larry Siegel does as well as Brad on his tax-deferred retirementcontributions, but I've never known a non-adjunct professor at a major university orselective college who didn't do a damn sight better than what I can afford to do for myemployees (which is competitive in my employment market) even in percentage terms.

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economics DeLong

10/21/10 10:48 AMHoisted from Comments: How Much Do I Earn? - Grasping Reality with Both Hands

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10/21/10 10:48 AMHoisted from Comments: How Much Do I Earn? - Grasping Reality with Both Hands

Page 14 of 14http://delong.typepad.com/sdj/2010/10/hoisted-from-comments-how-much-do-i-earn.html