On Being Rich

by: Felix Salmon September 02, 2008    
Felix Salmon

Felix Salmon

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My blog entry about people on $250,000 a year being rich elicited a fair amount of response, both in the blogosphere and via email. One theme running through the responses was that it doesn't matter how much money you make; what matters is how much money you spend. And if you're spending almost as much as you're making, well, then you can hardly be rich.

The main expense that most people have in mind when they make such arguments is location-related. "If you live in New York," says Tom Lindmark, "you might not be rich until you hit, say $450,000". One of my correspondents said that before you started counting up income, you should deduct $4,200 a month in rent, plus "another $1k for phone, water, electricity and heating oil". And Caveat Bettor goes even further with regards to being "middle class in Manhattan":

Of course, a 2 bedroom apartment will cost about $7,000 per month.

No! For one thing, most Manhattan 2-bedroom apartments do not cost $7,000 a month. But even assuming they did, then being able to afford $7,000 a month for a 2-bedroom apartment would make you rich.

BusinessWeek had one of its Debate Room debates on this subject in June. Carl Winfield gamely tried to say that "like everyone else, the estimated 2% of the population that makes more than $250,000 has been hit by a meteoric rise in grain prices that has pushed the cost of a loaf of bread from $1.28 in January to $1.37 in April." Er, no, Carl, if you're making $250,000 a year you're very unlikely to even notice an eight-cent rise in the cost of a loaf of bread, let alone be hit by it.

But the most revealing part of the debate came next:

Consumers at all economic levels have been hit by the higher cost of living, but saddling 2% of the population with higher taxes to lessen the tax burden on the remaining 98% caters to a populist myth that national crises have an impact only on the very poor and leave everyone else unscathed.

You see? It's not that people earning more than $250,000 a year aren't rich, it's that anybody earning less than $250,000 a year is "very poor".

In response, Jacob Stokes talked about

the richest American households, or those who make more than $250,000 a year. These are America's elite. The Mercedes-Benz-driving, Coach-bag-carrying set.

It's a useful reality check. Are there middle-class people earning less than $200,000 a year who drive a Mercedes and who carry Coach bags? Yes, and there are lots of them. But such luxuries are still signifiers of being rich and elite; that's one of the reasons that they are bought in the first place.

The point is that "rich", in terms of disposable income, kicks in well before you hit $250k: it kicks in when you start being able to buy a Mercedes or a Coach bag without such an action making any discernible impact in your standard of living elsewhere. These people might not like spending over $100 to fill up their GL450, but they're not suffering the same pain at the pump as normal people for whom spending more money on gas means having less money left over for groceries.

A lot of the problem, I think, is one of visibility. If you live among people for whom spending $7,000 a month on rent is normal, and if you don't live among people for whom the Olive Garden constitutes fine Italian cuisine, then it's easy for your idea of middle-class to gravitate towards the former and away from the latter. Even I've made cheap cracks about how "you know it's a recession when PF Chang's is considered 'aspirational'".

There's a good reason why the overwhelming majority of Americans consider themselves to be middle-class -- including a large number of the super-rich on seven-figure incomes with multiple houses and multi-million-dollar life insurance policies. Everybody looks around them and sees some people who have less and some people have more; they're in the middle. Said my email correspondent, in high dudgeon:

Ranking me among the "rich" -- among bankers plunking down $4m for condos, among hedge fund managers spending a $100m in art for their Bridgehampton pad, etc. -- seems completely divorced from reality to me. But then I'm just one of the cigar-smoking, top hat wearing upper crust, so I probably don't get it.

What he's doing is looking at the behavior of people who have more money -- a lot more money -- than he does, and then using that behavior to define "rich". Are those people rich? Yes. Maybe it would be useful to reclassify them as the "very rich" -- people who don't know how many houses they own, or who don't even think about checking commercial airline schedules when they need to fly back to New York for a vital board meeting.

Such individuals are useful from a wealth-porn perspective, but they're not useful for setting a "rich" baseline. There's a very long tail of wealth in this country, and all of it counts as rich, even when parts of it are orders of magnitude richer than other parts.

To get a more useful feeling for what counts as rich, don't wonder at the excesses of billionaires, but rather look at what counts as poor. For a family of four in the US, the poverty level is a household income of $21,027. And yes, there are thousands of people even in Manhattan living below the poverty level. Once you start bearing that in mind, it becomes much harder to say with a straight face that people earning $250,000 -- people who can spend $21,027 on a family holiday -- aren't rich.

Do such people feel rich? No, because they think that holiday is expensive. Because their life isn't easy. Because they still worry about money. Just like all of us. They've reached the top 2% of the population, and they realize that it's not all it's cracked up to be. Well, that's reality for you. Life's very rarely a bed of roses, no matter how much money you have in the bank. But the reason that your life isn't easy? Isn't that you're not rich. It's that you're human.

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This article has 31 comments:

  •  
    Sep 02 02:59 PM
    IN SHORT: everything is relative.

    lots of good points made
    Reply | Link to Comment
  •  
    Sep 02 03:08 PM
    I make considerably over the 250,000 limit that Obama seems to want to tax to the hilt.
    I do not debate that through my hard work, 70-80 hour weeks, months away from my family and children I have managed to ensure a comfortable lifestyle for my family (which for the record is the American dream, not something to be lambasted)
    However also consider that I have 2 children in college who will receive no financial aid whatsoever, they will soon also be going ahead to graduate school, I have extremely high housing costs, my financial portfolios are under strain due to the wider markets and there are costs that have become institutionalized and that I would never press my family to scrimp on (and why should I??)
    For all this I deserve to be taxed even more? I already without no qualms (unlike the super-wealthy Donald Trumps of the world whom you associate us all with) about paying my already exorbitant tax burden while receiving few, if any tangible economic benefits from the government. I do this because I understand that I can afford to pay more than others and so it should be in a caring society.

    It is however not fair to abuse that for populist gain.
    Reply | Link to Comment
  •  
    Sep 02 03:33 PM
    An excellent perspective...
    Reply | Link to Comment
  •  
    Sep 02 03:39 PM
    Thank you, Mr. Salmon. Sometimes people need to be beat upside the head with perspective, and i hope this does it.

    OracleofOmaha, i have no sympathy for you. You have money -- plenty of it -- you're just spending it wrong. "extremely high housing costs" -- maybe you should ask yourself what is necessary, not what is frivolous. Your "few, if any, tangible economic benefits from the federal government" are probably discounting the single largest benefit you got: The good fortune of being born in the U.S.A. Your "tangible economic benefits" are so invisible you can't see them -- kind of like a fish not knowing what "water" is. I assure you, a child born in any nation in Africa would be happy to pay your taxes for a similar shot. Suck it up.

    "The essence of civilization consists not of the multiplication of wants, but in their deliberate and voluntary renunciation." -- Gandhi.

    Get civilized!
    Reply | Link to Comment
  •  
    Sep 02 04:33 PM
    OracleofOmaha:
    Although you say that you are "receiving few, if any tangible economic benefits from the government." perhaps you should consider the following:

    -Did you, or your employees and customers, receive an education on the taxpayers' dime? If so, isn't this a significant contributor to your success? Could you be as successful if you were illiterate? Could you be as successful if your employees or customers were illiterate? Hati has low tax rates, but few financially successful people. If your parents paid for private education, where were they educated?

    -Is your ability to keep your wealth protected by the taxpayer-funded law enforcement and military? What keeps your banker from disappearing with your retirement funds? What keeps a mob from ransacking your home? It costs money to protect money, and the rich benefit more from this than people without any wealth.

    -Is the economy that allowed you to acheive your success at all affected by things like airports, roads and interstates, utilities, or a functioning legal and judicial system? Try earning money in Somalia or Afghanistan, where infrastructure is nil and business disputes are resolved with bullets.

    -With all the money that the previous generation of taxpayers spent enabling your success, as described above, might you owe them a subsistence income (social security, medicaid) in old age? Considering the opportunity cost of that money over time, aren't you getting an incredible bargain?
    Reply | Link to Comment
  •  
    Sep 02 04:56 PM
    What I find odd and interesting is how many people (especially anonymous ones on the Internet) like to act like they are part of that 2%. I suppose that 2% would have more time to read and post on the Internet, but still...

    Maybe they just like to act like they're part of that 2%?

    And I must admit that I find it both hilarious and somewhat offensive when someone within that 2% uses the Patrick Ewing excuse. (i.e. Well, I need to make that much money because I need to spend that much money.)
    Reply | Link to Comment
  •  
    Sep 02 05:01 PM
    What gives people the sense of entitlement to believe they deserve to live in the most expensive neighborhoods in America and still be called middle class? If you are paying more than $2000 a month in rent, you live in a fancy neighborhood, bottom line.

    It doesn't matter if there are no cheaper options within an hour's drive - you always have the option of moving to someplace like Indiana, Texas, or Michigan. If doing that sounds unbearable, then accept the fact that you feel entitled. If you can't make as much money in those locales, then accept the fact that you are living in a fancy neighborhood like Manhattan so that you can earn more. If prices in your area are too high compared to your income, MOVE. I'm sure you could afford a great lifestyle in Oklahoma City even at half the salary. You might even save for retirement.

    Just don't whine to me that $250,000 a year aint what it used to be. It buys a lot actually, including ridiculously expensive NYC condos OR 6 houses in my area that are nicer than the condos.
    Reply | Link to Comment
  •  
    Sep 02 05:34 PM
    Everyone is at their place in the socio-economic ladder for whatever reasons, but I think that being rich is more of a mindset, rather than how much green you have in the bank. Whether one person is wealthy and the other is dirt poor, the wealthy one is not better than the other man. Humans are creatures of habit and we all have difficulty adjusting to the economic environment and our own personal financial habits, rich or poor.

    OracleofOmaha - 1) high housing costs? You have control over where you choose to live and what to spend on. 2) learn to invest and don't blame the "wider" markets for your losses.
    Reply | Link to Comment
  •  
    Sep 02 05:34 PM
    This debate just proves the politicians aren't as dumb as most Americans like to think.

    Government spending, measured as a percent of GDP, has grown twice as fast as the economy as a whole -- for decades. It grew faster under Republican presidents, it grew faster under Democrat presidents. Faster under republican controlled congress, faster under democrat controlled congress.

    And as the government takes up an ever larger piece of the pie, the politicians have foolish Americans arguing with each other over the definition of "rich"!!!!

    Divide and conquer is really an old trick. Class warfare conveniently distracts the tiny minded voters away from the real facts: the government is taking a bigger and bigger chunk out of EVERYONE's wallets, every year.

    We spend three times as much per student as any other country on Earth -- including the other members of the G-7. Is there anyone crazy enough to argue our schools are 3x better than Japan's or Europe's?

    How about the $2 billion airplanes Uncle Sam likes to buy? Or how about Congress spending over $30 BILLION to build the Capital visitor's center, so as to prevent the people from going into their own capital building? Has anyone in the private sector ever spent $30 billion on one building?

    Public sector employees supposedly get paid less than the private sector -- but this only holds if you confine your "analysis" to posted salary. Add in an amazing assortment of tax free benefits, much shorter working hours, and the fact that many government employees more than double their posted compensation via over-time scams (conveniently, only the guys near retirement are chosen to work overtime so as to bump up their retirement pay).

    Its really embarrassing that the public stands around having these moronic debates about who is rich or poor -- while politicians and government employees laugh at us behind our backs.
    Reply | Link to Comment
  •  
    Sep 02 06:15 PM
    GREAT article.
    Reply | Link to Comment
  •  
    Sep 02 06:58 PM
    Very enjoyable reading!
    Reply | Link to Comment
  •  
    Sep 02 07:13 PM
    Two points: (1) The names of the individuals or families making above or below the $250,000 level will change considerably over time. This is the problem with equating gross income "rich" with wealth "rich". The person with a $2.5 million diversified portfolio producing a 10% annual investment return is much more secure than a NY lawyer or broker 5 years out of school who is skillful enough to have obtained a position with a major law or securities firm. They have been living a relatively good life in NYC up until now.

    They will quickly find themselves out of the "rich" income bracket and on the unemployment line with zero assets.

    Contrast them to the conservative owner of his own closely held business anywhere in America. He has built it up over the past 15-30 years, usually with he and his spouse working 80 hr weeks with no time off. Living in a modest home and driving an 8 year old automobile as he plows everything back into the business. If he has been fortunate enough to survive the government regulation and the generally unenlightened and uneducated "workforce" he must choose from, he will have created a business with some value. Maybe its worth the $2.5 million to his competitor or to a younger entrepreneur.

    One thing is for damn sure. He is not going to take out a $250,000 salary so that the blood-sucking government can tax it at 50%+. There are many, many ways to get value from a company other than taxable salary and this man has spent a lifetime learning how.

    The higher Obama raises the marginal tax rate, the lower the revenues will be.
    Reply | Link to Comment
  •  
    Sep 02 07:39 PM
    irondoor91

    Don't repeat the class warfare supply side mythology of declining total tax revenue with increased marginal rates. Econometric studies have consistently refuted the contention. The facts don't support what you want to believe .
    Reply | Link to Comment
  •  
    Sep 02 08:04 PM
    We tax alcohol, tobacco, speeding, gasoline and other things that we want to have less of.

    Why exactly do Americans want to tax "the rich"? However you define it? Isn't the American dream that a poor immigrant can come here, work really hard and become financially successful?

    What changed in America that being rich has become socially unacceptable?

    Shouldn't America focus on making **more** people rich, instead of taxing the rich out of existence?
    Reply | Link to Comment
  •  
    Sep 02 11:08 PM
    Gramps, 10% of the population control 90% of the wealth. Where, exactly, do you expect the government to get it's revenue? Raising taxes on the poor?

    How about you start helping by electing fiscally responsible people into government and getting them to slash government spending which benefits EVERYONE?

    ~X~
    Reply | Link to Comment
  •  
    Sep 03 01:30 AM
    OK, I made some posts on another article that would fit nicely here. But I won't bother to repeat them.


    Let's put it this way. What this country needs is two things:


    First, it needs to extend the mandatory tax withholding of 6.8 percent (or is it 8.6 percent?) for Social Security and Medicare to every American, of all income levels. Forget the "income tax", since it is only a tiny fraction of what most Americans ultimately pay. Let EVERYONE get 15 percent whacked off the top of every dollar they earn --- no questions asked or exemptions granted --- and I suspect the concept of "taxes" would take on a totally different argument within our society.


    And secondly, everyone living or working in Washington DC as a politician and calling themselves a "public servant" should be required to be randomly adopted by a "real" average American family. Drawn randomly, by lot. And to live with them for at least 3 months, before they went to Washington and tried to pass laws in the name of the "public" good.


    Those two minor changes would fix most of our problems, I'm guessing ....


    :)
    Reply | Link to Comment
  •  
    Sep 03 01:54 AM
    >>> Shouldn't America focus on making **more** people rich, instead of taxing the rich out of existence? <<<


    Yes, I agree with this. The problem is, our laws are structured in such a way as to make it a practical impossibility for the average American to "become" rich.


    I don't know if you achieved your success through hard work or good fortune, but I know many people (myself included) who have worked hard their whole lives and never achieved success. And in fact, that "American dream" is REALLY hard to achieve when your government effectively seizes 50 percent of every dime you earn along the way (in order to avoid "taxing the rich out of existence").


    I don't want the rich to pay any more than anyone else. But I want them to pay the same as everyone else, on a percentage basis. Their "fair share", and nothing more. If the top two percent earn 90 percent of the income, then they need to pay 90 percent of the bills. Not 50 percent, while arguing they're paying "more than their share" and depriving every other hard-working American the opportunity of realizing the American dream.


    It's simple, really. If the effective tax rate on the average hard-working American (considering employment taxes and business taxes and sales taxes and income taxes and excise taxes and real estate taxes and inheritance taxes and all the OTHER taxes) is 43 percent, then the richest of Americans should also send 43 percent of their income to the US Treasury.


    How is that unfair, or "taxing the rich out of existence" (any more than it is taxing the middle class out of existence) ????
    Reply | Link to Comment
  •  
    Sep 03 04:23 AM
    being rich? dont forget health, being in harmoney with your coworkers and neighbors, and living a life that you love. i call THAT rich.
    Reply | Link to Comment
  •  
    Sep 03 05:57 AM
    Being rich is a state of mind, not how many stacks of $100 bills people have. Unfortunately, that's how the world works.
    Reply | Link to Comment
  •  
    Sep 03 08:50 AM
    So here is my two cents. It really isn't about being rich or poor. It is about how are we going to pay for government. The last eight years the government has doubled the national debt from just under 5 trillion to 10 trillion. A good piece of this was lowering the taxes on upper incomes while not changing the spending in congress. So the money was spent the money folks. And the it is now time to pay the piper.

    So when you are looking at who you are going to elect this fall, look to who wants to tackle the real problem of tacking a limited resource of Tax revenues and spending it on programs that work by investing in Americas future.

    The last eight years have been all about ideaology. It is time to move to the practical. No one, party, has all the answers. What is the path for our country in the 22 century? It is time the voters, both the haves and the have nots be represented in Washington.

    So what does being American mean to you?
    Reply | Link to Comment
  •  
    Sep 03 09:16 AM
    "Poor" is when you spend every waking moment working to try and make ends meet, with nothing left over as discretionary income.

    "Middle Class" is when you have some choices about what do do with your discretionary income, but still must work for a living.

    "Rich" is when you have the option to live entirely off your assets, without being required to work to earn money. The "rich" may still opt to work, but it's because they enjoy what they do, no because they need the income.

    Rich/Poor/Middle Class have nothing to do with income levels. It's all about discretionary income relative to your spending.
    Reply | Link to Comment
  •  
    Sep 03 09:23 AM
    Being "rich" has to do with NET WORTH, not just income. When are people going to realize that a good income with heavy debt is NOT being rich regardless of the income!
    Reply | Link to Comment
  •  
    Sep 03 09:51 AM
    This whole debate misses the point.

    $250,000 is just an arbitrary number used for tax purposes. It was never meant to be the cutoff point for being rich/middle class. The government can't tell if you are officially rich or in upper middle class based on some other standard, so it keeps it simple with income.
    Reply | Link to Comment
  •  
    Sep 03 10:26 AM
    I have to agree with this article. "Rich" is relative. When I was 19 (1971), I had $100 a week in discretionary income, and I felt 'rich,' because most of my friends had less than half that.

    When I was 36, I bought my first home and felt 'rich,' because it was a new home in a suburban neighborhood.

    When I was 38, I changed jobs and got a 20% raise, and felt 'rich.'

    When I refinanced my house in 2006 and cashed out my soon-to-be ex-wife, there was so much equity that I felt 'rich.'

    Now I live in a 1-bedroom apartment with my 2 teenage daughters (one of whom is planning on an Ivy League education). I no longer feel 'rich.' But I do feel fortunate to have work that I know how to do, and I still think that the US represents the land of opportunity for anyone who chooses to work at it.

    I've never earned anywhere near $250,000 a year. But I have hope that one day I'll get to that income level. Unfortunately, many families who are in the $250,000/year bracket have lots of debt (houses, cars, recreational toys) and are enslaved by their financial choices. While they may be considered 'rich' by the Obamaists, they're not truly free. And taking even more out of their pocket to redistribute to people who are less willing to put forth effort to advance their own financial situation smacks of collectivism, not capitalism.

    One thing that Obama said during his acceptance speech truly troubled me. He said "You are your brother's keeper." It reminded me of Atlas Shrugged, and the attitude of the government leaders in that book. That self-motivation is less important than making sure everyone is comfortable. That achievement needs to be taxed. That new ideas become the collective property of the populace, and any rewards that result should be distributed among everyone, rather than enjoyed by the creator of the idea.

    That's why I'm voting against Obama. Not because I'm 'rich,' but because I value self-determination and earned achievement.
    Reply | Link to Comment
  •  
    Sep 03 01:03 PM
    What you have forgotten is that 1/2 of 1 percent of the American population owns almost 40% of the wealth and makes about 40% of the income every year.

    That is one out of every 200 hundred people walking around in America (or being chauffeured around.) In Washington D.C., Manhattan, San Francisco, Beverley Hills, and other places where rich people hang out, it's probably closer to one out of every 50 people or even one out of 25 people.

    These people are rich. They live a truly rich life-style and most of us know what that is, more or less.

    John McCain tells the truth, sometimes as a joke, sometimes crudely and sometimes flippantly. When he said that rich is EARNING more than 9 million dollars a year, he knew what he was talking about. After all, his wife his the chairman of the board of Hensley Enterprises, one of the largest Anheuser-Busch beer distributors in the United States and he hangs out with the rich.

    Your article is talking about the rest of us, the 199 out of 200 Americans. It makes sense to call an income of $250,000 per year as rich compared to the lower 199 out of 200 Americans but not with respect to the really rich in America. After all, they own 40% of the wealth and receive 40% of the income every year. Even the richest of the rest of us only get "the crumbs off the table" of the rich.

    It is understandable that the rich want to remain invisible because they are afraid of class warfare which, history teaches us, has often brought revolutions and the confiscation of their property and money.

    The rich were not against communism because it was EVIL or because of any other reason than because they were afraid communists would take their property and money and distribute it to other people. We in the middle class may be convinced, for ethical and rational reasons that communism is very bad but the rich don't care about that. All they care about maintaining their estates, private jets and their massive incomes. If communism could help them do that, it would suddenly become very respectable to be a communist.

    This is relevant to us, the lower 199, because it concerns taxes. When Obama says that he wants to tax the rich, he is talking about (or SHOULD BE) talking about them, not us.

    We of the lower 199 should argue that higher taxes should start at a very high level, at least 1 million dollars a year, and that estate taxes (death taxes) also should start at at least 5 million dollars and perhaps 10 million net worth because the very rich are certainly worth more than 10 million dollars.

    Sad but true, the "very, very poor" rich are only worth about 10 or 20 million dollars and they can hardly hold their heads up at the party.

    When are we Americans going to face these facts, especially when talking about taxes?

    And yes, taxes and income and wealth distribution are relevant to investing. Obviously.
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  •  
    Sep 03 01:53 PM
    growing up my parents told me again & again-rich or poor,its good to have money.
    Reply | Link to Comment
  •  
    Sep 03 02:07 PM
    billddrummer: well said! My story is very similar to yours in many ways. I too am voting against Obama for the same reasons.
    Reply | Link to Comment
  •  
    Sep 03 04:39 PM
    LOL.it wont make much difference who you vote for.your vote is meaningless-sadly.
    Reply | Link to Comment
  •  
    Sep 04 12:17 PM
    I guess I didnt explain my point well enough... While citizens sit around arguing *WHO* should pay for all this government we have, no one stops to ask if *anyone* should be paying for it. That is a huge problem.

    We have tried taxing "the rich" at rather onerous tax rates in the 1970s. The rich got upset, the poor stayed poor, and the government got bigger.

    In the 1980s, we cut taxes for almost everyone. The rich were happy, the middle class's income did not keep up with costs, the poor stayed poor, and the government got bigger.

    In the 1990s, we re-jiggered taxes a little bit. The rich were a little less well off, the middle class income did not keep up with costs, the poor stayed poor, and the government got bigger.

    And from 2001-present, we cut taxes across the board, but a large percentage of the cuts went to the ultra-rich. The middle class's income fell way behind rising costs, the poor stayed poor, and the government got bigger.


    Regardless of what happens to tax rates -- the only things that change are the ultra-rich get a little more / less, and the government ALWAYS gets bigger. If having a bloated government makes a country rich, then Venezeula and Cuba would be ruling the world.

    While Americans sit around like puppets and argue that taxes should be higher for anyone who is "relatively more rich" -- the government just keeps getting more and more bloated.

    I repeat the statistic I gave before: government spending as a percent of GDP is **DOUBLE** what it was when JFK was president. Compared to 100 years ago, government has grown exponentially faster than the economy.

    Regardless of who pays what percentage of the total taxes -- the total number is obscene. America cannot afford to maintain such an enormous public sector.

    Every other sector of the economy has gone through "right sizing" -- but not government. Democrat / republican, booming economy / recession -- it just keeps growing faster than the economy as a whole.

    Americans need to figure out that we cannot tax ourselves into prosperity. It never worked in the past, it hasn't worked in any other country -- and this time will NOT be different.

    When I was in school (and dinosaurs roamed the earth), we learned about Lewis and Clark exploring the western frontier. Private industry put down rail tracks and built the Erie Canal. Admittedly, wage workers didn't always get "a fair share", but for a while unions addressed that problem.

    Now a days, Americans can't do anything for themselves. It doesn't matter what the issue is, the knee jerk response boils down to "Lets have the gov