Why You Don't Feel Rich

A Princeton study last fall showed extra income didn't affect most people's happiness above about $75,000 a year. Another study by Gallup found the happiest people in America earn $120,000 a year.                                         

These folks may be happy. Just don't call them rich.

Survey after survey shows many Americans wouldn't consider themselves "rich" until they had a net worth of $5 million-$10 million. British publisher Felix Dennis says you aren't rich until you have at least $150 million. Russian oligarch Sergei Polonsky says anyone without a billion dollars "can go to hell."

The question over what's considered "rich" became important a few years ago after some politicians suggested anyone making more than $250,000 could afford a tax hike. Plenty found this absurd, and perhaps rightly -- what $250,000 buys varies wildly depending on geography. A quarter-million bucks in North Dakota buys a ranch. In New York City it (literally) buys a parking space.   

But there's more to it than that. Consider this chart, showing household income distribution by percentiles:

Source: Tax Policy Center.

Those earning $250,000 a year might not feel rich, but in reality they're in the 97th percentile nationwide -- they earn more than 97% of tax filers. Objectively looking at the data without considering what earning $250,000 feels like, it's hard to call that level of income anything other than … dare I say … rich. Most who scored higher than 97% of the nation on a test would consider themselves smart. Those who run faster than 97% of everyone else would consider themselves in good shape. Income is an oddity in that many of those statistically near the top still feel inadequate. Daniel Gross of Slate put it more bluntly: "For those of you making more than $250,000, I regret to inform you: Yes, you are indeed rich -- any way you slice it."

Why so many disagree with that statement could also be explained by this chart. What's important is how flat income distribution is until you get to the upper-90 percentiles, where the slope explodes skywards.  

Affluence is an enormously subjective measure. The field of behavioral finance shows that the feeling of wealth isn't based on how much money one earns, but how much money one earns in comparison to peers. Michael Shermer, author of Mind of the Market, points out that most people would rather earn $50,000 when the average is $25,000 than earn $100,000 when the average is $250,000. Similarly, the increase in how wealthy additional income makes us feel has less to do with the amount of income than it does how many of our peers that additional income pushes us ahead of.

The flatness throughout most of the income distribution gives a huge boost to this phenomenon. If someone earning $35,000 a year doubles their income to $70,000, they move from the 43rd percentile to the 67th percentile -- a massive move that pushes them ahead of many peers. They've gained social ground. They feel much better off.

But then the slope explodes. If someone making $250,000 doubles their income to $500,000, they move from the 97th percentile to the 98th percentile -- almost no gain at all. They may not surpass a single peer even after doubling their income. They don't feel better off because, socially, they're not.

The upward climb becomes more onerous from there. Increasing your income from $800,000 to $2.1 million pushes you from the 99.5th percentile to the 99.9th percentile. Financially, you're making millions more. Socially, you've gained almost no ground whatsoever. And remember, it's the latter that guides how rich you feel.

Jason Zweig, in his excellent book Your Money and Your Brain, shows how powerful this can be. In a survey of 800 people with a net worth of at least $500,000, 19% said that having enough money was a constant worry. For those with a net worth of at least $10 million, 33% felt this way. "Somehow," Zweig writes, "as wealth grows, worry grows even faster."

That, more or less, is why those making $250,000 don't feel rich. It's not that they don't earn a lot. It's that passing new social hurdles becomes so difficult that relative wealth -- all that really matters -- declines. To paraphrase Pablo Picasso, they're poor people living with lots of money.  

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.   

Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On May 27, 2011, at 1:04 PM, raidoh wrote:

    I'm not a psychologist, but it seems to me that as income grows, so do fiscal expenditures. Houses get more expensive and multiply, as do cars, TV's, vacations, etc. While an individual may have once considered certain things a luxury (think cell phone, nanny, summer home), with it in their lives they can no longer imagine what life would be like without. They become obligations. So, if you earn $300k/yr and create a budget, you might file all of that stuff in the "need" category and suddenly you're not rich. But, if you look around, people get by on 1/10th of that. Maybe you don't "need" as much as you thought.

    Just as feeling rich doesn't make you rich, not feeling rich doesn't make it true. So, if you make over $250k/yr, realize you're in the top 3% of earners in the richest nation on earth, do a little dance to acknowledge just how extremely lucky you are, and pay higher taxes with a smile on your face.

  • Report this Comment On May 27, 2011, at 4:07 PM, NotJesseL wrote:

    All those rich people should just take a look at how the national debt is increasing and sing to themselves a little song, " It takes a worried man to sing a worried song. I'm worried now, but I won't be worried long..."

  • Report this Comment On May 27, 2011, at 6:15 PM, mhonarvar wrote:

    the idea that as income grow - so do expenses is garbage. They could buy an affordable house and a normal car....if they buy a mansion and a sports car...that's their problem.

  • Report this Comment On May 27, 2011, at 7:33 PM, solarfool314 wrote:

    Lets remember also that once needs are met money alone doesn't in itself make one happy.

    The irony is that as people get richer their options explode in number which presents an insoluble problem-so many options, but only one lifetime. No matter what options are chosen the nagging suspicion remains "I wonder if I should made another choice".

  • Report this Comment On May 27, 2011, at 7:50 PM, ynotc wrote:

    Taxing those making 250K + will not solve the present problem. In fact draining the top 5% of all income earners of all of there wealth would barely cover our present budget for one year. Spending is the problem. The inability to say no is the problem not extracting money from high earners.

  • Report this Comment On May 27, 2011, at 8:47 PM, TheDumbMoney wrote:

    1) With all due respect, I think this one is mostly psychological mumbo-jumbo. Nobody thinks to him or herself: gosh, my income went from 250K to 500K but oh no I only moved from the 97th percentile to the 98th percentile in income, oh no! Baldersdash. They think, holy crap my income just doubled! If one doesn't think one is socially better off after doubling income from $250K to $500K, then I don't know what to say. That's particularly true if one lives in a city.

    2) Speaking of that, one can't simply mention the cost-of-living thing and then discount it in the psychological mumbo-jumbo stuff. When people have to pay $250K for a parking space, the don't just feel less wealthy, they are less wealthy. It has nothing to do with psychology. It's math. The difference between a $250K and a $500K income in New York City is basically the difference between being upper middle class and actually beginning to be wealthy. At $250K family income in New York City one looks for a decent, affordable daycare and tries to find a good one while in all likelihood both parents work like dogs for that income. At $500K in New York City you have a nanny. I'd say there's just a tad bit of a class/social distinction there, no? Now, going from $250K to $500K in North Dakota maybe makes nobody-no-nevermind. You iz rich either way. But the thing is that the vast, vast majority of people with these high incomes are in the high-cost areas. In reality, income is only meaningful at all when veiwed in comparison to cost of living where the income is earned.

    3) The focus on income rather than net worth also privileges the old over the young, because the old are more likely to have significant savings, built up over decades, regardless of their income. For example, a high-income job one has had for one or two years out of college or grad-school while being called wealthy and having one's taxes raised while trying to pay down massive student loans and never actually acheiving a positive net worth, can go away instantly in a bad economy. But $200K in the bank typically cannot.

    3) Or perhaps the filthy rich or the high income are just whiners. I point you to the immortal words of Christopher George Latore Wallace, from the Big Apple, who perhaps expressed this sentiment best when he famously opined, "Mo Money Mo Problems."

  • Report this Comment On May 27, 2011, at 10:20 PM, hondamikesd wrote:

    I can't remember if it was Malcolm Gladwell in Outlier's, or if it was Nicholas's Nassim Taleb's Fooled by randomness, but one of them dedicated an entire chapter to this phenomenon (I think it's similar to, if not identical to, "keeping up with the Joneses).

  • Report this Comment On May 28, 2011, at 7:10 AM, TicoHombre wrote:

    Morgan, as usual this was a thought-provoking, well-written article. You are definitely one of my favorite authors here.

    Thanks!

  • Report this Comment On May 28, 2011, at 10:45 AM, Happymspage wrote:

    I usually feel we are living twice as nice as those in NYC.Both of us have cars that are only 1 year old.We both have a private income .We both have

    better health than many in our age bracket.

    We can afford nice gifts for our grandkids once a year ,and somethimes twice a year.

    We live in a nice neigborhood where crime is almost not here.The community is gated and its also a outpost for our Sheriff deputies 24-7

    The water is very good here ,and so is the air quality. We have great medical care for any emergency or specility operation.

    Food is as cheap and any place in the nation.

    We have wonderful winters and springs but summer is a bit on the hot side.

    We hire a made once a week to clean up,and we have an outdoor trimming man weekly.

    My office /studio attached to the house is a full 20ftx 16 feet.With a sitting area and a working area.

    The window in my office is looking out to the east and views the neigbor and the back of the lot.The south window looks out to the street.

    For a ground floor view few executives have this great a view..

    Our living quarters attached to the office/studio is over 1850 square feet of living area + we have a two car garage and a laundry and storage ,and workshop that is 20 x 19 feet.

    On top of all this our gated community has ,A olympic pool,a great hall that has rooms from the main part for special activites,20 shuffle board courts, 8 tennis courts lit for nignts, Pickle ball courts ,a nine hole putting course.A driving area where you drive a ball over a creek to the first tee off of the Putting green.We are 1/2 mile which is an easy walk to our shoping area . With WinDixie,Publicks,hardware, 5 banks ,a car wash,

    offices of a few professionals and many other small stores,two gas stations,beauty ,and barber shops

    Our monthy income actually is but 3500 net and our income from dividends is about $1600

    We eat out 4 times a week and do other nice things.

    Richard

  • Report this Comment On May 28, 2011, at 11:17 AM, FutureMonkey wrote:

    Diminishing utility of the dollar, nuff said.

  • Report this Comment On May 28, 2011, at 11:40 AM, FutureMonkey wrote:

    Okay not quite nuff said. I've never been able to write a short comment.

    The truth is that if you are reading this; i.e. can read, have access to a computer and the internet, and enough marginal income to consider investing a priority, then you are richer than the vast majority of the current population of the earth and richer and more secure in your future than 99.99% of those that have ever lived. We are all wealthy beyond the imagination of most of our ancestors and most people living on the planet.

    Compared to people that don't have access to drinking water without 2-3 hours of labor, speculating about perception of wealth of $24,000/yr and $240,000/yr is as ridiculous as arguing about the difference between having $100M and $1B dollars in the bank.

    Peg my income at any point between $24,000 and $240,000 and the basic truth is I will feel fortunate, not rich. I don't even know what rich means? Money is a utility that is only worth as much as what you buy with it. Anything after the security of food, water, and shelter is a luxury we just have different views of necessity vs luxury based on our experiences and desires. Americans simply have higher expectations for what amount of money they need to provide for their security and enjoyment. Just like Americans have a different expectation than Subsaharan Africans, Americans earning $120,000 - $240,000 incomes have a different view than people earning $12,000 - $24,000/year.

    I'll always feel fortunate. I doubt I'll ever feel rich.

    FM

  • Report this Comment On May 28, 2011, at 12:07 PM, mtracy9 wrote:

    People making $250,000/yr. may not feel rich, but they are five times richer than most, considering that the median income in the US is about $50,000/yr. These people should not whine so much about having to pay another 3% on income over $250,000. This would be the amount they would pay if Bush's deficit producing tax cuts are ever allowed to expire.

  • Report this Comment On May 28, 2011, at 6:32 PM, Case58 wrote:

    The Talmud said it best: A rich man is one who is satisfied with what he has.

  • Report this Comment On May 29, 2011, at 1:04 AM, CaptainWidget wrote:

    If you're using marginal utility as a justification for progressive taxation, it's back to Econ 101 with ya.

    The great thing about percentages is they get bigger as the number you're applying them to gets bigger. Funny thing those percentages. Higher numbers equals higher grosses, even with the SAME PERCENTAGE! NEAT THAT

  • Report this Comment On May 29, 2011, at 1:24 AM, promommyfool wrote:

    Wealthy isn't how much you make, its how much you have left over after the bills are paid.

    Your bills, however, are a lifestyle choice. There are plenty of people out there mixing up needs and wants. You may want a 200,000 home, but you may only need a 75,000 home.

    Living within one's means and living within one's needs is not the same thing.

  • Report this Comment On May 29, 2011, at 2:21 AM, whereaminow wrote:

    "Michael Shermer, author of Mind of the Market, points out that most people would rather earn $50,000 when the average is $25,000 than earn $100,000 when the average is $250,000."

    Well, duh. Wealth isn't the number in your bank account. It's what that number can buy. In the former example, $1 can buy 10 times as much stuff as the latter example (e.g., size of house, cost of hired help). Therefore, the person earning $50k is several times wealthier than the person earning $100k.

    Morgan, you did bring up a point that is rarely discussed in taxation policy: that people in different regions of the country have dramatically different costs of living, and hence, their tax burden is unfair. (Of course, all income taxes are immoral, so the question of applying an immoral tax fairly is pretty stupid, but that's all we can ask for these days.)

    David in Qatar

  • Report this Comment On May 29, 2011, at 12:05 PM, BMFPitt wrote:

    I have been yelling at idiots who say, "$250k isn't rich" for a long time. They don't seem to realize that they are pretty much saying, "Yes, of course rich people should pay much higher taxes, I just disagree on the cutoff point."

    David in Qatar -

    How is a tax rate applied equally (as opposed to giving preferential treatment to those in certain areas) unfair? If the rates were different, wouldn't the cost of living just go up even higher due to more money chasing the same amount of goods in those areas?

  • Report this Comment On May 29, 2011, at 4:18 PM, ershler wrote:

    David,

    How is the change of citizenship coming?

  • Report this Comment On May 29, 2011, at 7:37 PM, FutureMonkey wrote:

    @CaptW Clearly I was not using marginal utility to justify progressive taxation since taxation wasn't the subject of the discussion. I was using the "marginal utility" or "diminishing utility" of the dollar as an explanation for why somebody going from $250,000 to $255,000 annual salary doesn't feel $5000 richer compared with somebody getting a raise from $25,000 to $30,000 would.

    Sure $5000 is $5000, but our perception of the utility of that $5000 varies quite a lot based on our situation, life experiences, and expectations.

    FM

  • Report this Comment On May 29, 2011, at 9:40 PM, Joulesh wrote:

    Feelings in relation to wealth aren't really tied to how much you make, but how much you spend relative to how much you make. Live within your means, and you'll be happy and stress free. The more money I have left over each month to put in the bank or invest, the more comfortable and happy I am.

  • Report this Comment On May 29, 2011, at 11:15 PM, whereaminow wrote:

    BMFPitt,

    I've never heard of a tax rate being applied equally. Tax rates usually confer preferential treatment upon one group at the expense of another. Of course, besides having some dream of tax equality, we would still have to deal with irrefutable act that tax rates, like all government actions, are completely arbitrary.

    There is no government solution to this problem. I don't advocate any government-proposed solution. I just found it interesting that someone brought up an angle that is not normally discussed.

    David in Qatar

  • Report this Comment On May 29, 2011, at 11:27 PM, CaptainWidget wrote:

    <<@CaptW Clearly I was not using marginal utility to justify progressive taxation since taxation wasn't the subject of the discussion.>>

    My post was to Housel, sorry for the confusion.

    The article is clearly a veiled argument for progressive taxation, and a horribly flawed one as well.

    Ya Housel, people are in fact NOT good at determining the strength of their desires. They ARE good at determining the relative order of their desires in relation to outside influences. So you've got that figures out.......welcome to 1880.

    I don't see how this justifies taxing some people at 10% and some at 40%. It doesn't matter if you can afford it, regardless of whether you "feel" rich or not. It's ineffective and inequitable. Take your pick for the reason it sucks, but progressive taxation sucks.

  • Report this Comment On May 29, 2011, at 11:41 PM, FutureMonkey wrote:

    Clearly $240K/yr family income doesn't buy as much for a family in Southern California as Arkansas.

    An earlier commenter said "Your bills, however, are a lifestyle choice. There are plenty of people out there mixing up needs and wants. You may want a 200,000 home, but you may only need a 75,000 home." Which made me laugh, since $200,000 home doesn't exist in my area, let alone a $75,000 home.

    Not wanting to live in a shoebox with bars on the window in the worst part of town may be seen as a "lifestyle choice" to some, but to me safety, security, and shelter for my family is a necessity not a luxury.

    FM

  • Report this Comment On May 30, 2011, at 7:44 AM, BMFPitt wrote:

    David in Qatar -

    Way to dodge the question! You specifically brought up, "People in different regions of the country have dramatically different costs of living, and hence, their tax burden is unfair." I pressed you on this statement, and you changed the subject.

    You seemed to state a desire for geography-based social engineering, then when asked about it you complained about non-geography-based social engineering. Care to explain?

  • Report this Comment On May 30, 2011, at 8:44 AM, whereaminow wrote:

    BMFPitt,

    Wow, where did that come from? I guess I didn't realize you were trying to pin me down in a debate.

    I answered your question by stating that I don't agree with the concept of adjusting tax rates based on cost of living. I only found the discussion interesting. Is that a crime? Am I on trial here? I don't belive that any forced income confiscation is moral. I couldn't care less about perceived fairness from the perspective of a minority group that holds a competitive advantage in violence.

    So I'm not sure what I am supposed to say? What position do you think I'm taking here?

    I'm confused.

    David in Qatar

  • Report this Comment On May 30, 2011, at 9:06 AM, BMFPitt wrote:

    David in Qatar -

    Ask 100 people to read your statement about how the tax burden is "unfair" to those with higher costs of living and at least 99 of them would have thought you supported adjusting tax rates based on cost of living.

    Why post comments if you're uninterested in a debate? It seemed to me that your response didn't address my question even remotely, which I felt the need to point out. Now that you have clarified your position against subsidizing high COL areas, I am satisfied with the answer.

    I'll leave the rest of your eye-roll inducing Objectivist talking points alone, as that discussion would be fruitless for all.

  • Report this Comment On May 30, 2011, at 9:16 AM, whereaminow wrote:

    BMFPitt,

    Dude, back off. Take a few deep breaths. Put down the energy bar or whatever has you hyped up.

    I'm not an Objectivist. I don't have talking points. But I do know Objectiviism and can say absolutely definitively that they would disagree with my views on taxation. So stop assigning values on me that you don't even understand.

    Here's the key sentence in my first comment in question:

    "Morgan, you did bring up a point that is rarely discussed in taxation policy: that people in different regions of the country have dramatically different costs of living, and hence, their tax burden is unfair."

    Notice I said that people would feel THEIR tax burden is unfair. I NEVER said I felt it was unfair. I said very clearly that I think the question is stupid in the big picture of things, but it's at least less stupid than the normal conversation.

    I answered you because I thought "hey, here's another person with a less-stupid-than-normal" view point.

    But appearantly I was wrong. You're just a tool looking for a fight.

    Well you found one. Step one. Learn Objectivism. Then lean Anarcho Capitalism. Then learn the difference.

    Then learn not to label people with terms you don't understand.

    Then get back to me.

    David in Qatar

  • Report this Comment On May 30, 2011, at 11:04 AM, McCueRC wrote:

    What's wonderfully interesting here is to compare this income distribution with what we think we know of historical income distributions. This is the income distribution we think of as that of Imperial Rome, or the ante-bellum South, or the West Indian sugar plantation. The top 1% income (circa $2 million) is 8 times that of the 97% percentile, and (it's hard to make out but let's call it 50,000 as the 50% mark, that sounds right) 40 times that of the mid-point. Wow. It is good to be king, opps, I mean rich.

  • Report this Comment On May 30, 2011, at 11:07 AM, LVTfan wrote:

    I'm in agreement that taxing wages is a miserable idea. A better way to collect the public revenue we need would be by collecting some significant portion of the rental value of the land we each occupy. (Landlords already collect it from their tenants, and get to keep most of it.)

    Those who live in high-rent areas -- the coasts, major metropolitan areas, etc. -- would pay more; those in areas less desirable, less served by infrastructure (provided by taxpayers, and leading to higher land values) would pay less.

    This was a popular idea 100 years ago -- known then as the Single Tax -- and I find the incentives it creates very desirable. We'd have better cities, less sprawl, housing affordable to all of us, less land speculation, and, arguably, higher wages. (To me, any one of those results would be reason enough to pursue it -- and any two conclusive evidence of a desirable reform!)

  • Report this Comment On May 30, 2011, at 12:54 PM, OGamble wrote:

    Maintaining a lifestyle that matches your wealth does bring with it increased spending. Most people who take in upwards of 200-300K a year aren't going to live frugally in a Manhattan studio while clipping coupons. So I think it's only at the point they can afford what they consider "extravagances" they think they're rich.

  • Report this Comment On May 30, 2011, at 3:46 PM, CaptainWidget wrote:

    <<What's wonderfully interesting here is to compare this income distribution with what we think we know of historical income distributions.>>

    How is that interesting? Wages and the quality of life in America have increased quadratically for all classes. The richer are richer, and the poor are richer. Income distribution means absolutely nothing other than the fact that a few rich are selling the rest of us more products than ever that we can't live without.

  • Report this Comment On May 30, 2011, at 5:50 PM, daveandrae wrote:

    Evel Knievel earned 60 million dollars over his career. Unfortunately he spent 63 million dollars over the same time period. He declared bankruptcy in 1981.

    On the side of the coin is a man named Ted Johnson. He worked for UPS his entire life. He never made more than $30,000 a year....but when he died. He left behind a legacy of more than 90 MILLION dollars. He even managed to give away a third of it because it brought him so much joy.

    The great moral of this story is that it does not matter how much money you "make." If you're not willing to save a dime out of dollar, then you will never put back 100,000 out of a million.

  • Report this Comment On May 30, 2011, at 5:52 PM, daveandrae wrote:

    Put more simply, money does not make people wealthy. People make themselves wealthy.

  • Report this Comment On May 31, 2011, at 12:39 AM, enneas wrote:

    Mr House, thank you for a thought-provoking article. I think it is absolutely true, geography lessons from some put to one side, that wealth is largely based on perception. Everyone has a different definition that is meaningful to them. Myself, I find the constant bickering over taxes both universal and tiresome. The proper level of taxation is obviously a political issue, and rightly so, but I don't know where to begin with people who believe that *any* tax is immoral. Our common project, government of, for, and by the people, does not function on air, nor are the services it provides -- which we all enjoy and derive benefit -- free.

  • Report this Comment On May 31, 2011, at 1:31 AM, CaptainWidget wrote:

    Taxes are only immoral when they're spent on something you don't agree with.

    Everyone agrees that the government's rightful job is to protect our natural rights. Life, liberty, and property. Not everyone agrees that it's government's job to travel into space or subsidize under-aged immigrant prostitution. And yet they do it all anyways, without universal consent. Without even majority consent in many cases. That's probably why there's so many dissenting voices on the level of taxation in the US.

  • Report this Comment On May 31, 2011, at 4:34 AM, whereaminow wrote:

    "Taxes are only immoral when they're spent on something you don't agree with. "

    That's actually a very humorous statement, probably unintentionally though. If taxes were spent on things individuals agreed with, there would be no need for taxes, since individuals would be spending in the exact same pattern as government. Hence, taxation is not a voluntary transaction. It can't be. So you have to decide if using force to purchase things that individuals do not want is moral, regardless of the outcome of the spending. We already know the outcome will not be what individuals want. That is a logical certainty.

    So is it ok to use force/violence to make individuals purchase things that they do not want? That's the moral dilemna of taxation.

    David in Qatar

  • Report this Comment On May 31, 2011, at 10:01 AM, mtf00l wrote:

    "Our common project, government of, for, and by the people,"

    Abraham Lincoln said this. It is not part of the Constitution.

    http://en.wikipedia.org/wiki/Gettysburg_Address

  • Report this Comment On May 31, 2011, at 2:52 PM, drborst wrote:

    Morgan, Nicely done.

    I'd add an additional factor. I felt rich this past weekend when visiting family, but didn't want to make anything of it out of fear that they'd start asking for money. But I don't feel rich when I'm at work because most of my co-workers make about the same amount as I do...

    I suspect that the problem of the rich not feeling rich is the same problem of self-segregation.

    @David in Qatar

    The point that got you into an arguement (about how to tax when there are cost of living differences) is an interesting one. But I don't think it is really that unfair. I think taxes don't matter that much, they really only change the number of dollars chasing the same amount of goods and services.

    Also, Thanks for your last post, it clarifies your position better than anything else I've seen you write.

    If I may disagree, I don't see the moral dilemma as clearly as you do. I think taxes are about paying for things that I may not want individually, but that benifit me as a group.This may not be the clearest example, but I hate the cop who pulls me over for speeding, and I individually hate the speed limit, but I like the collective result.

    DRB

  • Report this Comment On May 31, 2011, at 3:00 PM, DJDynamicNC wrote:

    "So is it ok to use force/violence to make individuals purchase things that they do not want? That's the moral dilemna of taxation." - David in Qatar

    David, you are free to select a different country that taxes at a different rate, or only spends on things you support.

    I recognize the benefit I gain from living in America, even though the government often spends vast sums of money on things I think are immoral, like blowing up foreigners for their oil. Taxes are the price you pay for civilization.

    Further, your argument that "if taxes were spent on what individuals want, then there would be no need for taxes because people would be spending in the exact same pattern as the government" has all the hallmarks of libertarian naivete. Frequently libertarians will posit some situation and say "if this happens, then this would happen" - without offering any real evidence. I challenge you to prove to me that private citizens, absent a tax-funded government, would still be buying F-14s.

    At no point will all of the people agree with all of the purchases, but if we the people agree with the process by which those decisions are made, then we have a functioning nation. If we adopt instead a pure capitalist ethos, as the libertarians would have, then we have no country at all - just a tangle of self-interested actors fighting amongst each other using constantly accumulating wealth with no check on their power for those who are not already wealthy. It's a dystopian nightmare for anybody who actually thinks human life has value.

  • Report this Comment On May 31, 2011, at 3:01 PM, TMFHousel wrote:

    David,

    Can you shoot me an email at mhousel@gmail.com? Have a question for you.

  • Report this Comment On May 31, 2011, at 3:09 PM, DJDynamicNC wrote:

    As for the article itself - interesting point, and I'm not sure I entirely buy it but it's reasoned well enough, so I don't have any real objection. I think I'll consider it plausible but not yet proven.

    I do think it's important to push back against this idea that people living in New York City and making 250k are not "really" rich just because things are more expensive in New York. Yes, things are more expensive there - and nobody is forcing anybody to live there. If you make 250k and you live in New York City, you're still rich, you're just choosing to spend your money to purchase a New York City lifestyle, which costs more. That doesn't make you less rich, it just reflects your priorities.

  • Report this Comment On May 31, 2011, at 3:29 PM, TheDumbMoney wrote:

    DJDynamicNC wrote: "If you make 250k and you live in New York City, you're still rich, you're just choosing to spend your money to purchase a New York City lifestyle, which costs more. That doesn't make you less rich, it just reflects your priorities."

    There is truth to that, but it is also not even close to entirely true. What I would like to see is the statistics as to how many 250k jobs are even available outside of about 7-10 major metropolises. I suspect it is not many, relatively. So it is not entirely a choice. The income is dependent upon the location, it does not exist entirely indepedent of hte location, because that is where such jobs are.

    Now can someone with a 250k job as a lawyer or investment banker in New York choose to live way out in Jersey, or in a bad part of Brooklyn a long way from the city? Sure, if you think one has much of a "choice" to live that far away and commute two hours or more per day, when still working 2,700 -- 3,000 hours per year to earn those salaries, which is not at all uncommon.

    So yes, there is a choice aspect, but not even remotely as much as I think you think there is, for the two distinct reasons above.

    What I would like to see (this is the kind of thing Morgan is great at digging up, if he is listening) is a statistic about how many jobs at the 250k level are available outside of the major metropolitan areas with high costs of living. I suspect, as I said, that it is relatively few, and I would be well and truly shocked if it is more than 25% of all such jobs. Though I am happy to stand corrected if I am wrong; should be something available from IRS data somewhere.

  • Report this Comment On May 31, 2011, at 4:32 PM, CaptainWidget wrote:

    <<That's actually a very humorous statement, probably unintentionally though. If taxes were spent on things individuals agreed with, there would be no need for taxes, since individuals would be spending in the exact same pattern as government. Hence, taxation is not a voluntary transaction. It can't be. So you have to decide if using force to purchase things that individuals do not want is moral, regardless of the outcome of the spending. We already know the outcome will not be what individuals want. That is a logical certainty.>>

    Bastiat, Smith, Von Mises, Hayek and many others would disagree. Bastiat asserted that the government's only rightful job was to protect a person's natural rights (life, liberty and property ala Locke). Von Mises and Hayek argued that legal rights are things that, by definition, we can ALL agree upon.

    We can all agree upon the government's role in providing national defense, protecting citizens from robbers and murderers, and arbitrating and resolving contracts. There's no private role for that. We as people give the government some power to protect our own rights, but the catch is that EVERYONE must agree with it, or else it's in effect taking away the natural rights of someone.

    I'm not some anarchist. The government has a job. It's the job that we unanimously elect it to do. And whatever we can unanimously decide is the governments role is a moral cause, and whatever level of taxation that fulfills that role is a moral amount of taxes.

  • Report this Comment On May 31, 2011, at 4:48 PM, mtf00l wrote:
  • Report this Comment On May 31, 2011, at 5:03 PM, zgriner wrote:

    I guess my family is in that 120k category and I certainly don't feel rich. The biggest problem with these stupid surveys is that they don't present the other side of the story - expenses.

    We have dependent expenses that cost more than my mortgage. And my mortgage is less than the typical liar loan. We buy used cars for cash. We're not even able to put 10% into our 401k. We haven't had a vacation in a while. And we pay off our credit card bills every month.

    As for the Ted Johnson story, here's the truth: http://www.nytimes.com/1991/10/15/us/retiree-donates-fortune...

    The man retired from UPS with $700k in UPS stock in 1952. He died in 1991, and it was worth $70m. He had 40 years to watch UPS and his investment grow. According to MF, you could have done something similar with Amazon or Walmart, if you got in and held. I know of someone who parlayed $10k into $1m on Yahoo during the dotcom boom.

  • Report this Comment On May 31, 2011, at 5:09 PM, zgriner wrote:

    Income taxes are legalized robbery by the government. If I take what you have because I want it, I would be arrested.

    The only valid tax is a sales or consumption tax. Why should 2 people spending the same amount of money be taxed differently? How they choose to spend their money is their business. Having money doesn't get you anything. You can't live in it, eat it, wear it, or drive it - no matter how much you have. Money is potential. You have to spend it to get a benefit.

  • Report this Comment On May 31, 2011, at 5:58 PM, ayaghsizian wrote:

    Very weird,

    I make about as much per year as my peers but have a higher net worth than almost all of them.

    Ask any one of them and they will all tell you I am more worried about money than anyone they know. My wife says I'd actually be better off without my investments.

    Ten years ago (with only 15,000 in the bank) I was much happier. Hmmmm...

    A. Yaghsizian

  • Report this Comment On May 31, 2011, at 6:03 PM, ayaghsizian wrote:

    dumberthanafool,

    ur right...95% of high paying jobs must be in the NYC type of cities...so what you spend could be considered a partial choice

    A. Yaghsizian

  • Report this Comment On May 31, 2011, at 6:32 PM, DJDynamicNC wrote:

    @Dumberthan - I am happy to concede the point, although I don't know that it necessarily undercuts the thrust of my argument. I would argue that a NYC lifestyle is itself a relatively wealthy lifestyle, and so while someone making 250k in NYC is indeed not going to have rich-person levels of disposable income due to the expense disparity, that person IS going to be living rather high on the hog compared to the rest of the nation, which suffers a noticeable lack of Broadway, SoHo, and all the rest.

    It all comes down to how we measure quality of life - if you are attempting to purchase a home in NYC with an equivalent square footage to one in Alabama, then yes, you'll certainly not feel rich at 250k. But you are getting NYC instead of Alabama no matter what size home you purchase, the quality of which (in that regard) is altogether harder to measure but undeniably better - so much better that people are clearly willing to pay a premium to obtain it.

  • Report this Comment On May 31, 2011, at 7:49 PM, TheDumbMoney wrote:

    DJDynamic, first, that doesn't reply to the point that the primary place to find these high-paying jobs is in such high-cost-of-living places. This is precisely why they are higher-cost: more money (income) chasing limited goods (usually exacerbated by excessive regulation, particularly as regards housing). Because of that, I think it is very disingenuous when anyone, from the top down, focuses only on income without also focusing on where that income can possibily be earned, and the inevitable cost-of-living in such places.

    Second, at least you must admit that the definition you are now using for wealth is a very odd one. Indeed, by your definition, is a waiter in NYC making 30k and living in a shoebox with two roomates 'wealthy' because he gets to be near Brodway, SoHo, and all the rest? :-) Please. I have couple-friends who scrimped for years for a 1 bedroom nyc coop for which they paid 800k; I cannot wait to tell them they are wealthy because they live in the same city as Broadway! You are equating cultural amenties with wealth, and moreover you are cherry-picking; NYC also suffers from a noticeable lack of clean air, stars, 70-degree days in January, and Targets and WalMarts.

    That said, like everything else, there is a certain amount of truth even to the amenities argument. I concede that. What I objected to was your original absolutist statement and characterization of it as pure choice. As I hope I have begun to show in two or three posts on this thread, it is much more complicated than that.

  • Report this Comment On May 31, 2011, at 8:14 PM, TheDumbMoney wrote:

    "Most who scored higher than 97% of the nation on a test would consider themselves smart. Those who run faster than 97% of everyone else would consider themselves in good shape."

    Yes, these are objective measures, as to which it makes total sense to look at them in isolation. If you are a fast runner, you are a fast runner. If you are smart, you are smart. The quantum of your smartness or your speed is never even partially-negated by an external, independent third factor (such as cost-of-living in the income context). They simply are what they are, unlike income.

  • Report this Comment On May 31, 2011, at 10:21 PM, enneas wrote:

    @Dumberthanafool:

    You are focusing on income, rather than the subject of wealth. The pursuit of high-wage jobs will undoubtedly be more successful in high cost-of-living cities, in part because a higher concentration is present there. It is also true that this also drives the cost-of-living. Yet, living in such a place is indeed a choice. I think the point others have made is that one could choose to live elsewhere, earn less, and still live in comparative comfort because of the difference in cost-of-living between NYC and Charlotte NC. I could live as or more comfortably in my hometown on less than half my income. Yet, I choose to live in Washington DC. This is no doubt why many retirees I know move to places where it's cheaper to live. The point is, people generally have a number of choices: they simply don't always like the choices that they have.

  • Report this Comment On May 31, 2011, at 11:59 PM, TheDumbMoney wrote:

    enneas, your comment is unintentionally ironic. Implicit in your helpful explanation is the idea that wealth is not a number (let alone an income number), which is the very point I am trying to make. I am focusing on income precisely because others are improperly conflating income with wealth. That conflation is particularly nonsensical given the quite-true scenario that you paint. It is indeed very possible to imagine someone making 100k in NC and being far wealthier and having a higher standard of living than someone who makes 250k in NYC. That is exactly why it is silly to focus purely on the baseline income figure, enneas.

    Choice is a different matter, and a different issue. You may think people made a bad decision to live in NYC in the first place, but that does not change the objective reality above, of their actual cost-adjusted income and wealth. I have acknowledged the choice aspect multiple times. What I am trying to get people to acknowledge is the non-choice aspect that exists as well. Unlike others (at least as I perceive it) I am not intending to paint in black-and-white

  • Report this Comment On June 01, 2011, at 12:13 AM, TheDumbMoney wrote:

    Here's a chart I just found on Bing showing that the areas of highest income tend to be areas with the highest cost of living:

    http://www.thedigeratilife.com/blog/high-paying-jobs/

    Here is one breaking it out by class of worker:

    http://www.creativeclass.com/creative_class/2010/08/05/the-g...

    Look in particular at the chart for the high-paid creative class, which shows, as expected, the jobs are generally in San Jose, New York City Area, and San Francisco, with lesser pockets in Los Angeles, Boston, Washington, Dallas, Denver, Chicago, and Seattle. This is where the vast, vast majority of the high-income earners in this nation are located, in these ten or so metropolitan areas, where it is no surprise that cost of living is also quite high. Unsurprisingly, San Jose, with the highest income/wages of all, has an absurd standard of living that sees modest three bedroom houses sell for 1.5million. If you are a software engineer and you want to work for Google, for example, you're going to work in Silicon Valley, Los Angeles, New York City, or Seattle/Redmond (where all tech cos have an office so they can poach Microsoft talent). Period. Up to a certain point, higher income is partially cancelled out by the cost of living of the places where earning such income is generally possible.

  • Report this Comment On June 01, 2011, at 12:41 AM, TheDumbMoney wrote:

    The point is, to beat this dead horse completely to a pulp:

    When you are looking at only the topline income figure, you are looking at a nominal versus a real wages/income number.

    Would people here try to brag to me with a straight face about what your stock market return was, without adjusting it for costs and taxes, and expect me to take that seriously? Would a corporation succeed by focusing only on revenue, instead of earnings? I think not in either case.

    If you think there is no distinction between nominal and real numbers, have I got the 10-year Treasury for you!! Pay no attention to the negative real yield after inflation, folks!! Oh wait, you won't, because you don't understand the distinction between real and nominal numbers. Hey if that's the case i've also got a 5-year TIPS I'd like to sell you, too, and you can basically pay me for the privilege of lending me money!

    When people talk about nominal versus real income numbers, they are engaging in an exercise that is, in my view, equally meaningless, false, and, to the extent it informs policy decisions in this country (which it very much does), destructive.

    Please, everyone, don't talk to me about nominal income any more than you would talk to me about nominal stock returns or nominal bond yields. Income does not mean anything in a vacuum, absent a mathematical adjustment for the cost-of-living where that income is earned.

    I understand why we can't do this for tax or policy reasons. There are practical considerations, based on what is feasible to administer and enforce in a tax. There are policy reasons whereby maybe we don't want to confer a benefit on people who do get the benefit of greater amenities to go along with their higher cost-of-living.

    In non-policy, non-tax reality, however, I am telling you this is actually how real income is properly defined, as applied to people's real lives. Make all the policy and tax and psychological arguments you want. Just understand that in real life, nominal income is an often-unuseful measure. Its useful is more generally associated (on both sides of the aisle) with ideological policy prescriptions than with a fact-based attempt to model the world.

  • Report this Comment On June 01, 2011, at 11:00 AM, DJDynamicNC wrote:

    @dumberthan - I see your point and I accept your argument. Well reasoned.

  • Report this Comment On June 03, 2011, at 3:02 PM, tealcat wrote:

    You're wrong for me. I don't feel rich because I have no pension and no retirement healthcare insurance. Congress wants to strip me of Medicare and will be sure to make Social Security means tested. So I have to save every penny I can for retirement. I live a middle class life. Yes, I moved up from the $150,000 house to the $300,000 house (big mistake). My husband and I live apart all week because we can't get jobs in the same city. I'm on a high deductible health insurance. So the first $1500 in costs is on my nickel, then I will have to pay the co-pays. If I worked for the unions or the government, then maybe I could feel rich because I would know all my needs would be taken care of by the government and I wouldn't have to pay a penny in taxes for all those benefits. As my Dad says: It all depends on whose ox is getting gored. To put it another way - all those people who want to raise taxes on the "rich" should first be saying "Please raise my taxes". Then I would know they are not hypocrits. I would like to see Health insurance benefits included in the salary basis and remove all deductions except for the deduction for having children. Institute a flat tax. And do way with 50% of the public paying $0 in taxes. Then we would be in the boat together. Also, we need a value added tax, aka national sales tax. After all those taxes are added up, let's raise the tax on the truly rich - those making over $5 million a year. $250,000 is not rich. I don't think my husband and I make $250,00, but I would like to. Finally, the only real solution to the debt crisis is to cut spending. Raising taxes should be used to pay down the debt - true debt reduction. I'm guessing this post won't be popular with all those people who want to raise taxes on people other than themselves.

  • Report this Comment On June 04, 2011, at 11:15 AM, tbird619 wrote:

    Suppose the government did not tax us. How would they pay for all the things we want them to do? There is only one way - they would print the money they need. This would lead to inflation - a form of tax. No one would escape. Those who earn a regular income would not see it deducted from their income but would feel it in the loss of purchasing power. Those making their income illiciltly would feel the same effect. People who lived off their savings would not only see their purchasing power drop but would also see the real value of their saving dimish. Would this be any worse than the situation we have right now? I am not really sure of the answer. I would love to hear what others think of this.

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