Why Rich People Feel Poor
Spare a thought for the millionaires this week. The bill from last year's tax increases has come due.
The rich aren't poor, of course, whatever their tax burden. An adjusted gross income of $389,000 puts you in the top 1 percent of earners in 2011, according to the latest IRS data. No telethons have been organized. No TV ads have been narrated by Sarah McLachlan. Even the House Republicans have been silent lately on taxes on top earners, as Bloomberg's Richard Rubin notes.
But put aside the tone-deaf rich and their caricatures in pop culture. Hold the class warfare. High-earning Americans who haven't found the right dodge, or who live in high-tax states, get socked. They contribute more or less like their compatriots in other developed nations, with few of the perks.
What this chart doesn't show is, first, how much Americans end up paying in state and local taxes. For that, check out this slideshow.
Second, and more important, it doesn't demonstrate how little wealthy Americans get for their tax dollars. Sure, the rich benefit from the court system, national defense and everything else that maintains the society that underpinned their success. But when it comes to their personal finances, wealthy Americans must save a huge portion of their earnings before they are fully protected from future risks and costs. Blame the nation's financial safety net. It doesn't meet the needs of the poor, and it largely leaves out the wealthy.
Consider a married couple living in New York with newborn twins and earning $450,000 a year. Here's roughly what they need to save:
Our hypothetical couple has a $2 million savings goal to hit just to meet expenses that would be mostly or entirely covered in other developed countries. For example, while university is cheap or free in many parts of the world, full tuition and expenses at a private college in the U.S. can run $60,000 a year or more. For a newborn matriculating in 18 years, the four-year bill could be almost $500,000, assuming a 4 percent annual rise in costs and no financial aid. Double that for two children if neither can get a merit or athletic scholarship. In addition, many high-earning doctors, lawyers and other professionals may still be paying off their own student loans.
U.S. unemployment benefits are little help to high earners. They're capped at $405 a week in New York, for example, the annual equivalent of $21,060. If one or both top earners lose a job, the chart shows, they'll need an emergency fund that covers at least three months' salary.
The wealthy do get Medicare insurance at age 65. Unlike universal health care programs abroad, however, Medicare coverage has big gaps. Fidelity Benefits Consulting says retirement health care costs outside Medicare can total $220,000, not including long-term care. And while countries like Germany and Japan have universal long-term care programs, the U.S. covers nursing home care only for Medicaid's low-income population. Genworth Financial's Cost of Care Survey, released this month, found the average cost of three years in a private nursing home room now total $260,000 per person.
A high-earning couple in New York City must save for all these expenses even after paying a 39.6 percent federal tax rate on income above $450,000 and a top marginal local tax rate of 12.7 percent. They should also be saving 15 percent of their income for general retirement expenses, Fidelity says -- a larger share than lower-income households that will rely more on Social Security.
So take a moment to recognize the sacrifice of high-paid professionals. They can pay an effective tax rate approaching 50 percent -- far more than an idle heir pays on his investment income -- and still must worry about a job loss or health emergency leaving them strapped.
But also remember that the rest of the country must save for most of these very expenses. And while a few well-deployed tax techniques can make all the difference for wealthier folks -- deduct home interest, take up residence in Florida -- the rest of us must prepare for the future with far less room for error.