President Obama has rolled out a tax initiative supposedly aimed at the wealthy, whose key feature is the "Buffet tax." But the details of his total package reveal that average, hardworking families are also affected. Mr. Obama's proposed limits to deductions and exclusions for families making $250,000 or more effectively raise taxes on families in areas with a high cost of living. And these households can hardly be considered wealthy.
How could a family earning $250,000 be an “average” family? That seems like a great deal of money. And it is. It is six times the national earnings average, and for 46 million Americans living in poverty, it is an unimaginable sum. But, research has shown that the illusion of wealth for average families living in high-cost areas is just that – an illusion. For many families in expensive regions of the country, $250,000 is actually is the average salary for an average family. And families earning $250,000 in these areas spend every cent just to meet their daily needs.
A May study by the accounting firm BDO USA for the Fiscal Times found that in 7 of the 8 high-cost areas included in the study, a family of four, earning $250,000 a year, with an average mortgage and average additional debt did not have enough money to meet their daily needs and still save for retirement.
My own research showed that a family of four living frugally with no debt, earning $250,000 a year in Indianapolis, Indiana would have 10 times the discretionary income of the same family living frugally in Manhattan. The Manhattan family, living as frugally as possible with no discretionary spending at all – no meals eaten away from home, no entertainment such as cable or Netflix (or Qwikster), no childcare or children’s activities, no trips to Grandma’s or other travel – would have less than $700 a month left over to cover some of those things.
Salaries in pricey areas reflect the reality that it simply costs more to live in these parts of the country. Despite Obama’s generalized rhetoric, these hardworking families are no wealthier than similarly situated families with the same wage-to-expense ratio in low-cost areas of the country.
In fact, in some areas, these families are typical middle class families. According to the Bureau of Labor Statistics, the average weekly gross wage for an individual in Manhattan in 2010 was $2,404 a week, or a little over $250,000 for a dual income family. Manhattan employment advertisements show that a firefighter married to a nurse could easily earn a combined salary of $250,000 before overtime – not exactly the kind of family one imagines when Obama conjures up images of the superrich.
This result is not surprising when one looks at the history of the magic $250,000 number. The threshold of $250,000 was chosen as the start of the highest tax bracket almost 20 years ago by the Clinton administration. The equivalent salary adjusted for inflation today would be over $386,000. As with the Alternative Minimum Tax, any growth in wages in response to inflation will force more and more middle class families across that $250,000 line.
While the “superrich” may make heavy use of loopholes and deductions, these normal families are certainly paying their fair share. Limiting the deductions they can claim only increases their effective tax burden. In fact, because our graduated tax code is not adjusted to reflect actual wage to expense ratios, families of all income levels in high-costs areas already effectively carry a heavier tax burden than those with equivalent standards of living in other areas of the country.
A study conducted by the Center for an Urban Future showed that a Manhattan family of four must earn $60,000 a year to have the equivalent standard of living to a family surviving just above the poverty line in Atlanta. Higher incomes in pricey areas bump families of all income levels up to the next federal tax bracket, and state and local taxes in these communities exact a heavy toll. Though these families may be just getting by at a standard of living far below those at a $250,000 income bracket in lower-cost areas, they pay taxes at the same level.
While families can and do make the choice to leave their current jobs and social environments to move to low-cost areas, urban flight does not solve the overall problem – nor it is possible for every family. It is simply more costly to live in certain areas in the United States, and salaries in those areas reflect that fact. There are more than 1.5 million people living in Manhattan alone; they can’t all move to Atlanta.
[Editor's note: The original version of this piece overstated the population of Manhattan.]
In this tough economic environment, families spending every penny to make ends meet deserve to be treated with respect, whether those families are struggling in Indianapolis, Atlanta, or New York. Families with an income of $250,000 in high-cost areas are already shouldering more of a tax burden than their fellow citizens. Obama is asking them to carry even more.
Instead of disproportionately penalizing high-earners in expensive regions, the president should be proposing tax initiatives to help these families. Rather than limiting the deductions these families can claim, Obama should propose adjusting tax rates according to an average family’s geographic cost of living. This would help – not harm – the hardworking families the president says he wants to protect.