AP Writer Misses Main Reason Why the Rich Are Getting Stingy

If you believe that there's a 50-50 chance that your take-home pay will be cut by almost one-fifth beginning in as little as five months from now, would that belief affect your current spending habits?

Of course it would. But that idea apparently never occurred to the Associated Press's Mark Jewell.

In the course of a 950-word article Monday about how the rich are getting more stingy, he focused on how "the economic slump" and "downturn" are affecting their spending, while ignoring the massive tax hits high-income earners will likely be forced to absorb (illustrated in detail below the fold) if Barack Obama wins the presidency and Democrats retain control of Congress.

Here is some of what the AP's Jewell wrote (bolds are mine):

The rich are sharing your financial pain — and contributing to it.

It may have taken longer and it may not be as acute, but there are early hints that the economic slump is crimping the lifestyles of the wealthy.

They are investing more conservatively, spending less on luxury goods and are being more thrifty with their credit cards. Many are asking their personal shoppers and private-jet travel providers to seek the best deals rather than over-the-top extravagances.

That news may produce a shrug from many people who have lost their jobs or homes in this economy. The problem is that when the wealthy get stingy, it trickles down to the rest of us.

..... To be sure, the poor and middle-class are being hurt more, but upper crust thriftiness could reverberate across the rest of the economy.

The 10 percent of households with the highest incomes account for nearly a quarter of all spending, according to data compiled by research firm Moody's Economy.com from a 2006 federal survey.

"That does suggest those folks are important for the spending outlook, and the overall economic outlook," said Scott Hoyt, Moody's director of consumer economics.

Other government data show households in the top one-fifth of the U.S. population ranked by income earn about half of all total personal income before taxes — an imbalance that gives the wealthy immense economic clout, said Sara Johnson, an economist at the research firm Global Insight.

On Tuesday, Rush Limbaugh made the point (link will expire next Tuesday evening) that Jewell at least conceded that what the rich do with their money affects us all, and that we should care. That's fine, as far as it goes. A much larger and more salient point is that the rich see the possible post-November political landscape, and are recognizing that they have to start adjusting their situations now, not five months from now, just in case Obama wins. The Illinois senator's proposed tax increases, which I will refer to as ObamaLaw, along with the choke-hold the congressional majority has placed on offshore and other drilling for oil, are affecting the economy to a much greater extent than President Bush can, and in a very negative way. That's why I'm referring to this pre-election period as the POR (Pelosi-Obama-Reid) Economy.

The last bolded item in excerpt above is very misleading. The top one-fifth may earn half of the pretax income, but thanks to "progressive" federal and state income taxes, I'll guarantee you that they earn a lot less than half of the after-tax income, and thus have less, though still substantial, "economic clout" than indicated. (Side note: It seems that Jewell's definition of "balance" is the infamous "from each according to their ability, to each according to their need.")

If ObamaLaw ever passes, the percentage that higher-income earners will be able to keep after taxes, especially those whose earnings are from salaries and self-employment, is going to come way, way down.

What I've laid out below is the following:

  • (on the left) What happens to each additional $1,000 of wage and salary income above $500,000 under current tax law, and what would happen that same $1,000 if ObamaLaw becomes reality. ObamaLaw would raise the highest federal income tax bracket to the Clinton-Era level of 39.6%, and would impose the 12.4% Social Security payroll tax (6.2% withheld from the employee, 6.2% paid by the employer) on all wage and salary income above $250,000. This comparison assumes that all itemized deductions and the personal exemptions have phased out (usually the case), and ignores the Alternative Minimum Tax. I'm also assuming a state income tax rate of 5%, which is a pretty typical high-earner rate in those states with an income tax.
  • (on the right) What a person earning $500,000 pays under current, and what that person would pay under ObamaLaw.

ObamaTaxMarginAnd500k0808

As you can see on the left, a high-income person in a typical income-tax state gets to keep $571 out of each additional $1,000 in gross pay under current law. Under ObamaLaw, the take-home amount out of each $1,000 is only $463, almost 19% less. Also relevant, but not shown, is the fact that the employer has to pay an additional $62 (6.2%) in Social Security tax.

On the right, you can see that a person earning $500,000 under current law in a typical income-tax state gets to keep about $273,000 after taxes. Under ObamaLaw, that same person will pay an additional $23,000 in income taxes and $15,500 to Social Security, lowering his or her take-home pay by over 14%.

Now let's see how current law and ObamaLaw compare at even higher incomes:

ObamaTaxHiIncomeExamples0808

The higher a person's income, the worse the percentage hit is to take-home pay, and the worse the overall tax bite is, including the employer's portion of Social Security.

Of course, in many business-ownership situations, the employer and employee are one and the same. But where that isn't the case, it remains to be seen how many employers will be willing to absorb the entire additional Social Security burden without demanding a pay cut. Some certainly won't.

Another factor not considered is that, like everyone else, high earners have fixed tax costs, principally real estate and personal property taxes, they can do very little about in the short run. If these taxes could be included in the analysis, they would cause the percentage reductions in after-tax pay calculated here to be even greater -- and would cause the reduced ability to spend freely to be even more obvious.

What is illustrated here far outweighs whatever impact current -- and, by the way, non-recessionary -- economic conditions might be having on the spending habits of the well-to-do.

No, Mr. Jewell, what's really weighing down current spending by high earners is the fear of a serious and permanent reduction in take-home pay that would more likely than not be retroactive to 1/1/2009 -- just as Bill Clinton's tax hikes passed in mid-1993 were retroactive to January 1 of that year.

Usually, politicians who want to raise taxes are "smart" enough to avoid promising to do so during a campaign, not only because voters generally don't like the idea, but also because the credible threat of a substantial tax increase can, in and of itself, slow down the economy. None of the three Democratic primary contenders were "smart" enough to do that, but ObamaLaw, with its sky's-the-limit Social Security tax, ended up being the most extreme of the three, and is currently inflicting a significant negative economic impact.

Speaking of current economic conditions, ObamaLaw's tax increases, along with the congressional majority's refusal to deal with the energy needs of the world's largest economy, aren't just talking the economy down -- there's a very good chance that they're taking it down. Perhaps the triumvirate that is more responsible than anyone else for our POR Economy -- Nancy Pelosi, Barack Obama, and Harry Reid -- think that's their ticket to victory in November.

In the meantime, it would appear that their operating philosophy is "The country be damned."

Cross-posted with slight revisions at BizzyBlog.com.

Tom Blumer
Tom Blumer
Tom Blumer is a contributing editor for NewsBusters.