Tax Rate Cuts vs. Share of Tax Burden

Prior to Bush's income tax cuts, the top 20% paid 78% of the income taxes and the bottom 40% paid 2.8%.

After the cuts, it was 81% and 2.2%.

That is probably news to a lot of folks, and it goes along with what I calculated about whether or not tax cuts pay for themselves (see here for more info).

What Is "Rich"?

I just read a brief blog about Fidelity Investments' fourth annual Millionaires Survey.  In short, most millionaires don't "feel" like they are "rich".  That probably makes most non-millionaires a little resentful, and it inspires me to offer a walk-through of my way of analyzing this whole "rich" or "not rich" point of view.

Cut to the chase:  Think of "rich" as a function of wealth.  Think of wealth as "access to goods and services, necessary and merely desirable".  The higher your income, the richer you are.

If you're earning your income, your assets are not really the issue--you don't buy gas and food and pay the mortgage with stock certificates.  If you're not earning income and, instead, living off of your assets, then your assets are the area of focus when we're talking about who is rich.

Now, what's the cut-off between "rich" and "not rich"?  No one can say for sure, but let's say anyone in the top 20% of income.  Fair enough?

In one survey, I read that $92k per year puts a household in the top 20% income grouping.  If that's so, then I'd say family earning $92k or more is "rich".  Maybe not in Northern Virginia or Manhattan, but most certainly in Toledo or Amarillo.  Regional cost of living adjustments are a topic for another time...

Now, if a family is not working (retired, already rich, whatever), how much do they need in the bank to be "rich"?  Most financial planners use a withdrawal rate of 4% of nest egg for income (if and when short-term interest rates rise up from 0-1%, where they are now, that 4% will increase a few points).  That would mean it takes about $2,300,000 "in the bank" in order to be rich.  At least right now in this low-rate environment.

That's not including equity in one's home or income-earning assets.  But if someone has a rental property that delivers net income of $10k per year, then we'd only need $2,050,000 "in the bank" to produce the other $82k of income.

So, by this logic, it's a dynamic assessment.  What does "rich" mean?  Where is the line between rich and not rich?  What assumptions can we make about income-producing investments vis a vis prevailing interest rates?

Bottom line, you're probably "rich" if you have the ability, financially, to do all the necessary things in life with more ease and certainty than most other folks.  If you're earning a living, a high income can make you rich.  If you already have a relatively high net worth, you might be rich, as long as your real and investible assets produce enough income.