Who Are the Rich? Why Our Tax System is Broken

Posted: September 25, 2011 in New Economy
Tags: , , , , , , , , ,

In 2002 at the University of Arizona, I had the privilege of taking Econ 200 with Dr. Gerald Swanson. He was absolutely one of my favorite professors who had the gift of being able to relate what he was teaching into relevant current events. I remember him always saying something along the lines of “I wouldn’t be surprised if the WSJ runs an article about this in the coming weeks” and sure enough, within the next couple of days, he would display on an overhead projector an article the WSJ had run just after his lectures relating to what he had taught us in class the week prior. The economic truth that stuck with me most, however, was his insistence that we answer any question he asked us with, “It depends.” So in honor of Dr. Swanson, the answer the question, “Who are the rich?” is simply, “It depends.”

Herman Cain waves to the crowd during the September 12 Republican Primary Debate

On Thursday, September 21st during the Fox News/Google GOP debate, on of the questions posed to the audience was exactly that; “Who are the rich?” This poll was in response to President Obama’s $447Billion jobs bill in which he proposes a new tax on people making over $1Million a year to partially fund his bill. While many people agree that making over $1Million per year considers a family financially rich (44% of respondents), 12% of respondents feel that if a family makes over $100,000 per year, they should be considered rich too.

With a question as subjective as “Who are the rich?”, the answers will most likely reflect the cost of living where those who answer reside. An individual in San Diego who makes $100,000 would only need roughly $62,000 to live the same lifestyle in Louisville. Under the current progressive tax code, having tax brackets that are based on a dollar amount is the wrong approach.

When calculating the income brackets at which people are federally taxed, the following should be taken into account:

Cost of Living Index

State Income Tax Rates

By adding weight to the cost of living index and state income tax rate, we make sure that people who live in more expensive areas are not overtaxed since the marginal value of one dollar is less than those who live in less expensive areas. As it stands, the individuals who live in San Diego and makes $100,000 will pay a larger share of their income in taxes, when that income is needed to maintain a standard of living that is similar to the $62,000 earner in Louisville. The San Diego resident will pay more than twice as much in state income taxes than the Louisville resident ($7,000 versus $3,400 respectively), and because each marginal dollar goes further in Louisville the SoCal resident gets hosed! After state and federal taxes have been taken out, the San Diego resident has roughly $77,500 left and the Louisville resident has roughly $50,700. When plugged into the cost of living index, which takes into account housing, transportation, utilities, food, etc, to have a similar standard of living in San Diego, that Louisville resident who has $50,700 after taxes would need almost $83,000 should they move to San Diego!

This shows that the current progressive tax system puts a higher strain on individuals depending on where they live  and it does not take into account the cost of living and state income tax rates when deciding the income brackets. So who are the rich? That answer really depends on where you live. But as we’ve found out, all things being equal, the income of a family making $62,000 in Louisville will go further than that same family making $100,000 in San Diego.

Of course, a simpler and fairer system is within reach if our nation had the courage to enact the Fair Tax.

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