How MacArthur Geniuses Handle Their Windfalls
nytimes.com
nytimes.com
[1] William Hoffman, "The Stockholder", 1969, ASIN: B001HS4R58.
MacArthur winners have two advantages: First, they are probably good at something, and therefore are likely not poor. Secondly, even if they are poor, they are probably very focused on their thing which made them get the prize, and any money goes to their thing, not to themselves, which makes most people a little more rational when deciding things.
And secondly you can incur lots of debt, or spend money you had saved up, knowing it'll be replenished.
Either of the two or a combination could let you blow through the money in half a year, not impossible, although it's unlikely.
The last study I saw said this was not true. And it's pretty illogical really. A bit of a Gladwellian story, or worst an urban legend since it's pretty mean.
People who are poor/less educated do have trouble with money, yes.
But if you give them a big chunk (lotto or smaller) it greatly improves their lives.
Well off/educated people generally invest the money better but it's silly to think poor people would blow it or worse, become less well off.
Having a saturation point: some people just keep on spending, way beyond what they can actually get comfort and enjoyment from. When poor people have this personality, they spend their windfall and go broke. When rich people have this personality, they also spend almost all the free-floating cash they have. The difference is just their money keeps growing back. However, when their money source dries up, many rich people do indeed quickly go broke as well.
It can take a lot of money to upgrade a life (permanently): for poor people suddenly receiving lots of money, it can seem like all their problems are solved. But upgrading your lifestyle, your family, your social situation can easily swallow up millions of dollars without necessarily "wasting" anything. If you're permanently and hereditarily poor, there is a more profound form of debt than just what you owe to the bank. This debt still needs to be paid, and it can easily be more than the windfall provided.
I have my own thoughts on this, but would love to hear you or others expound upon it.
There may be many previously poor recipients who haven't blown it all.
The wider world is not a meritocracy. The United States isn't even remotely a meritocracy. There is a prevailing ideology that depends upon this presumption of meritocracy, but that's all you can say.
But I would definitely place it among my top 20 books of the last century. Perhaps even in the top 10
To the parent: MacArthur Genius Grants have been given to computer scientists... IDK about "coder"; ostensibly, that code should be pretty remarkable if you're getting that kind of windfall. And if the code is so remarkable, there's probably some science or engineering behind it that is the actual reason for the award. In other words, by the time code is doing something that is societally significant, there are probably ideas extant in that code that are worth codifying and explaining in something other than a programming language. And probably those ideas/results have impacts that go far beyond a particular implementation.
Companies are formed to generate a profit, and investment is a direct expectation of that, or more directly, an expectation for a company to grow their market cap irrespective of any actual profit. MacArthur is the abject opposite of that, cash money without expectation.
Give a person $200,000 and that may be just enough that they know they cannot make a mistake. Give them north of $500,000 and now they feel they can spend freely without a worry. Give them north of $1.5M and now they may literally think this money is a bottomless well.
But if you are giving an award to someone with 6-figure salary and 5-figure annual living expenses, no $50,000 isn't going to make as much of a difference in their lives. If you want to seriously free that person from thinking about money for a significant period of time, it better be 7 figures. And anyway, $1.5M is not all that far from a bottomless well (i.e. 5% per year).
I've read stories about people in the US who win a not huge but not small lottery prize of say $1 million don't do so well.
By the time they pay all the taxes and get bumped up a tax bracket or two spend a few hundred thousand they probably owe even more.
In Canada lottery wins are not taxed but the interest is. But even so many "poor" people and that's a broad term end up blowing it all.
I've seen fishermen who made $30,000 a year go work in oil fields and seem to treat $100,000 like it's play money.
It's easy to dismiss as a wonkish point, but I actually think it's important. Some people think it's unfair for millionaires to be "taxed at a higher rate" when they've "earned their money." I wonder if they would still feel that way if they understood the millionaire is paying the same rate as everybody else for the first $75k, for example.
Of course, the truth is the millionaire is probably paying a lower tax rate due to clever accounting and large portion of earnings being subject to capital gains tax instead of income tax. But that's a different topic.
Anyway, not trying to make this political. :) I just wish more people understood how tax brackets actually work.
In the UK at least once you go into the 45% super high earner bracket (150k I think) - you'll start to lose your tax free allowance which means you do actually pay more tax on the sub threshold income. Obviously it's still designed to ensure no one ever goes over 100% marginal tax rate (where you'd actually lose money by earning more).
The personal allowance decreases by £1 for every £2 you earn over £100k. Combined with the existing income tax this is equivilent to having a marginal rate of 60% on earnings between 100 and 120k.
For US Federal taxes, thats generally how its supposed to work - see [1], and for some exceptions [2].
> small gross increase [...] resulting in a net decrease in pay for that pay period
If a payroll system is doing that, its not for the reason you cite. US tax rates are such that an increase in gross pay always results in an increase in net pay, and that doesn't change when you divide gross and net by 24 (or however many pay periods you have each year).
[1]: https://www.irs.gov/publications/p15/ar02.html#en_US_2015_pu...
[2]: https://www.irs.gov/publications/p15a/ar02.html#en_US_2015_p...
GSA has some studies which specifically look at effective tax rate on incremental dollars. There are places in the curve which are nearly 100% marginal.
To see dramatically higher than 100% marginal rates, you have to look at the big picture and not just income taxes. There is a bevy of state and federal-supported social programs, the big ones SSDI, Medicaid, SNAP, and ACA, which pay out tremendous sums if you don't work at all, and ratchet down aggressively as you start working.
Combined with the higher bracket income-based taxes, you get a curve which looks like a shifted x^3 curve. Namely, as soon as you start working you are heavily negative. Then for a long time working more nets you little to nothing, and then eventually you can pull-out the other side (for a family of 4, that starts around $100k gross household income)
The great majority of households in the US have household income less than $100k. Are you saying that they are all worse off, or only insignificantly better off, than they would be with an income of zero?
If so, I'd love to see some data.
But even that does not include a substantial number of assistance programs, like TANF (up to $10k per year in cash), Section 8, and forget about a proper analysis of progressive income-based-pricing for things like college tuition.
Most of all, these analysis always assume the cost of working is $0 when in fact it costs a lot to get to work and be at work all day, as well as the marginal value of not being employed and spending that time doing work you would otherwise pay someone else to do (childcare, housework, home schooling, etc.) is very significant.
It also depends heavily on how healthy the family is, and therefore the market value of $0 deductible Medicaid / ACA. GSA pegs the average value of Medicaid around $8,000 but consider the max family out-of-pocket for Bronze ACA without any subsidies is $13,200, and that's not even counting the premiums, so that $8,000 value is assuming a a relatively health family of 4.
If the family has chronic health needs, then getting eligible for Medicaid can save upwards of $25,000 per year between premiums and out-of-pocket expenses. Also note, SSDI is ~$48,000/yr for a fully vested disabled individual with 2 children.
So I definitely agree if you just look at the tax return the average healthy family of 4 will see net income rising certainly before you hit $100k gross. How much their cost-of-living is increasing in lock-step with that rise, versus how much is eaten by increasing work-related and income-related expenses is a more contentious topic which I have yet to find, even from GSA, a truly comprehensive analysis which includes the effects of the ACA.
The other factors you mention will of course make a difference, but I'm not seeing anything that comes close to justifying the statement that you don't get into positive returns until $100k/family/year.
First, there are all the programs the chart simply ignores. Some are asset-tested like TANF and SSI, so you can't just stop working and start claiming them. Yet they pay out about $70 billion so they are not insignificant. Others are income-based and can be very significant, like Section 8 which could pay $10,000/yr in rental assistance.
Another question, is it fair to value Medicaid as the average cost / enrolled person, when the government is getting a special low rate? If valued on a replacement cost basis (what it costs for worse insurance paid for by the employee+employer) then it would be valued closer to $20,000 in premiums plus the deductible.
So yes, you can easily lose $40,000 in benefits, and pay $20,000 in taxes earning that first $100k gross, besides the fact that it will cost you 4160 hours of work to get there.
Programmes for which "you can't just stop working and start claiming them" are surely irrelevant to this particular discussion, which is entirely about the effect of earning more or less (at, presumably, a fixed level of assets).
Also: 4160 hours of work is over 11 hours/day, 365 days/year. I'm sure there are people working such hours, unfortunately, but if you're implying that that's in any way typical then I must gently suggest that you might be wrong.
(For the avoidance of doubt: I think "poverty traps" are a very bad thing, and I would love to see taxation and benefits everywhere reformed so that effective income rises smoothly as a function of gross earnings, and I agree that the US tax and benefit system is a mess and makes it unprofitable for some lowish earners to earn more. All I'm disagreeing with is the suggestion that the point at which this stops happening is anywhere near as high as $100k/year gross.)
Unfortunately just because the family is netting after lost benefits and taxes $40k for the work, doesn't mean they are "$40k/year better off" for working. For two people to work full time and gross $100k somewhere outside the home, there are substantial direct costs. After you "net" the lost benefits and taxes, you still have to "net" the direct costs. Child care, transportation, and clothing are probably the top 3, food and household costs also tend to increase when working. Many of these direct costs are also not fully tax deductible. Opportunity cost is significant not just in terms of not having to hire service providers to do things you no longer have time to do yourself (e.g. child care, repairs, maintenance), but also in things like personal value-producing activities which are not considered income, e.g. gardening, home improvement, home schooling. You're not "better off" if you spend 4160 hours neting $40k of cash, then spend $15k of that on unreimbursed business expense, and could have done more valuable things with your time than $6/hour. So everything works together to lower the net utility dramatically below the alternative of simply not carrying a job, and doing something directly productive to your family with your time.
My thesis is that up to about $100k, the true fully realized benefit for a family of 4 with two adults working full time outside the home is significantly less than $10/hour, and in fact for families consuming significant healthcare is actually negative. This is what I mean by "x^3 shaped curve", and "for a long time working more nets you little to nothing, and then eventually you can pull-out the other side" around $100k for a family of 4. E.g. $6/hour of actual received value is an extremely low bar considering the time and effort required for two people to gross a combined $100k. Compared to if those same two people simply expended the same level of time and effort taking care of their families, their homes, and themselves. If you really do the math and consider the economic value transferred, while the overall economy certainly benefits from all this money swirling around, and taxpayers benefit from decreased social welfare expense, the individual family will see very little gain (i.e. increase in assets or disposable income) if not a loss at the end of the year, after having devoted the majority of their waking life that year to their job.
While historically the workforce participation rate has grown, it has recently been shrinking, and I personally think we will see it continue to shrink for some time, in part due to this almost complete futility of low to middle-class earning power. The only things saving the economy from a mass exodus from these jobs is; first this was only just recently made quite as bad as it is through the ACA Medicaid and SNAP expansion. By giving $5000 of Whole Foods vouchers, and best-in-the-world free healthcare to all non-workers regardless of assets, this strongly altered the value proposition of working, particularly for chronically ill families. These programs also take quite a bit of time and persistence to get into, but we are seeing a massive expansion of these programs every year. Over time more people catch on, sign up, and drop out of the work force.
Means-tested programs are unfortunately not irrelevant. For people in the worst case scenarios (very low assets AND no income), starting to work provides the most damaging effects by immediately canceling benefits, in many cases more than dollar-for-dollar against what is earned. Families who operate in the bottom $40,000 of the curve will almost certainly pass the asset tests, and also face incredibly steep marginal rates (the original point) when you consider these programs, cumulatively they are much worse than 100% marginal. So the people in the absolute worst shape are locked out the hardest from starting to work, because they have $0 assets and literally cannot afford a net loss for adding a new commitment to their day. For example, TANF will pay up to $713/per month in cash, but every dollar in countable gross income reduces the benefit by $1. So if you qualify for TANF then TANF alone produces 100% marginal tax on the first $8772/yr, and then you still need to pay the taxes and direct costs of working! Note that TANF doesn't count SNAP/Medicaid/Section 8 as income, Medicaid doesn't count SSI, etc.// so the 5 programs are largely (not entirely) stackable by design as long as you strictly avoid other earned income.
A second dimension, but I would say a much less pressing problem, is means-testing on its face seems fairly strict (e.g. < $2,500 cash balance in a bank account) but many assets (like your primary residence, your first car, and personal property like jewelry) and some forms of income are also excluded. So in practice it's possible to qualify for the program with substantial non-liquid assets, as long as countable income and cash is tightly controlled.
I do really appreciate your comments, I'm sorry if I wrote way too much here!