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Comment by hkmurakami | Hacker News Reader

Made up largely of older professionals, working married couples and more educated singles, the new rich are those with household income of $250,000 or more at some point during their working lives. That puts them, if sometimes temporarily, in the top 2 percent of earners. Even outside periods of unusual wealth, members of this group generally hover in the $100,000-plus income range, keeping them in the top 20 percent of earners.

This range gets hit the hardest by personal income taxes, so sibling commenter's observation of income, not wealth, is astute. 20% of the population may be in the top 2% of earners in income for one or more years, but they'll be hard pressed to sustain it AND overcome taxes.

Also, I noticed that those interviewed in the article have inherently volatile earning profiles. Stock brokers, day traders, art gallery owners... And early startup employees are a part of the cohort too, with spikes one time payouts.

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Right. Calling someone that makes 250k a single year of their life rich (likely from selling a house, a small business, or some stock options) is as silly as calling someone who was unemployed for one year of their life poor.

The same article could be written in reverse: "Rise of the 'new poor': 5 in 5 Americans earn $0 at some point in life"

You can generally exempt $250,000 of profit from a house, $500,000 if you're married

That strikes me as blatant financial discrimination against single people.

Well, I assume the rule is if you file jointly, or if the deed is in both names. So it's $250,000 a person up to a limit of 2.

Yup. There's balance sheet affluence and then there's income sheet affluence... two often orthogonal properties in most cases. On one extreme, is the cliché stock broker: always broke despite high income... high marginal propensity to consume (MPC) combined with income sheet affluence, which does not necessarily lead to balance sheet affluence. The other extreme is that are some folks lead thrifty lives and aren't income sheet affluent by any measure, but because of prudent investing, are easily characterized as balance sheet affluent. (Example: I know a guy that has investments exceeding 7 digits that makes 40k USD/year and spends no more on average than 2 USD/day.)

There are many, many levels of "rich." In essence, a small amount of wealth reveals how poor someone was and how poor they still are by comparison. Note: comparisons lead to insecurity and unhappiness, by definition.

It's as stupid as the rich lists, because the definition of rich is an inability to count one's net worth (due to illiquid valuation of investments and assets).

> sibling commenter's observation of income, not wealth, is astute

In the U.S., at least, income and wealth are highly correlated, so there isn't a huge distinction to be made. There are indeed some wealthy people with low income, and high-income people with low wealth, but it isn't the norm. See table 5 (pg. 36) in this whitepaper, which shows both net worth by income percentile, and income by net worth percentile: http://www.federalreserve.gov/pubs/feds/2009/200913/200913pa...

Example numbers: the top 1% of 2007 income-earners held 26% of U.S. wealth, and the top 1% of households by net worth in 2006 earned 16% of the year's income. Meanwhile, the bottom 50% of income-earners held only 14% of U.S. wealth, and the bottom 50% by net worth earned only 22% of U.S. income. The general trend holds in the in-between categories as well: the 95-99th percentile of incomes hold about twice as much wealth as the 90-95th percentile, etc.

So the relationship is not perfect, but taking the groups in aggregate, higher-income-earners control considerably more wealth than lower-income-earners. Some of the later figures in the document explicitly plot some ratios.

Progressive taxation also has relatively little impact here. If you converted the income tax to an implied wealth tax (i.e. take tax paid in a year divided by wealth held at that time), U.S. income taxes are in aggregate roughly equivalent to a flat tax on wealth.

I hear you, but you have to discount that for income derived from investments and the wealth and count only wages earned.

This is why basing tax brackets on yearly income has always struck me as flawed. Imagine you're an author that spends a couple years writing a book. For the first three years you make no money, but the forth you make a million. You'll be taxed at a much higher rate than if you had made a consistent 250k a year.

This might be a simplistic model, and the outcome may be avoidable by sufficient tax planning, but I'm sure some entrepreneurs have lost money this way.

Employ rolling averages above historical inflation?

> For the first three years you make no money, but the forth you make a million. You'll be taxed at a much higher rate than if you had made a consistent 250k a year.

Ancient History Item: Before the tax reform act in 1987, you had the ability to do income averaging across tax years to address this situation. It was reformed away.

You can still average your taxes across the years if you're a contractor, by paying taxes in advance - with a simple accounting trick that nobody seems to be aware of:

1. In the first year, suppose you and a corporation (you own this corporation outright) makes no income.

2. In the first year, you make a loan to your corporation ($50k for instance)

3. In the first year, you also pay yourself a salary of $50k. You pay taxes on this "income". Yes, you're paying taxes on money you didn't really truly actually earn yet.

4. In the second year, suppose your corporation makes $100k of income. Your corporation repays your $50k loan. The loan repayment is tax-free, and the remaining $50k then becomes your salary for the year.

If you do not actually have $50k to perform steps 1-2, you do it repeatedly with small bank transfers until you've accumulated enough "loan" and enough "salary".

You then effectively pay two years of $50k income, instead of one year of $0 income and one year of $100k income.

The worst category for this is star professional athletes. They make huge amounts of money their first few years, but then they retire at age 30 and spend the rest of their lives earning far less.

In the author's case, you could imagine a fix; the author could somehow amortize the income over previous years and pay all the money at the appropriate rate. (Though I can imagine a number of fraud- and incentive-related issues there.) But you can't really do that with the pro athletes because a) you don't know when they'll actually stop making money and b) in the future they may not actually have it.

I remember ichiro's last contract with the mariners was going to be paid out over 25 years or something. The guy makes a ton from commercials in japan, but maybe this is actually a decent move?

Edit: on second thought since star athletes are getting paid in the millions, prorating it over 20 years won't change that much in the grand scheme of things. Maybe something like 400k*20% each year before they hit the max bracket anyways.

Interesting. From Wikipedia:

> The Associated Press reported that Ichiro's contract extension defers $25 million of the $90 million at 5.5% interest until after his retirement, with payments through 2032

If he retires at the end of next year, he'll make that money over 18 years. If he made it all at once, today, he'd pay about 9.8 million of that 25 in taxes (just punching things into a naive tax calculator; I'm sure his accountants would improve things. OTOH, it's also slightly low because it puts him in a lower tax bracket for the first 400K, which he doesn't get because of the other income he has). Ignoring the interest for a moment, splitting 25 million over 18 years he pays a total of 8.9 million. So he saves a million dollars doing it this way. Not bad.

With the interest, he'd get paid more; it looks like 1.8 million per year for 18 years, so 32.4 million instead of 25. That's a bit of a raw deal if he has to pay that as regular income tax, since if he got the money now and put it in the market, it would perform about as well, but would get taxed at a capital gains rate.

All in all, I suspect this is a compromise with the Mariners to alleviate cash flow and luxury tax pressure more than it's a shrewd tax move.

Even worse are pehaps pop-stars. Rappers in particular strike me as very prone to this. Its hard to create hit<album<multi platnum and then repeat. But if you don't repeat, you just average. And if you get rich quick, the tax hit is big. And the denominator grows by all those years you don't have breakout success...

Fortunately, they continue to earn royalties. You can certainly quibble about whether latest-hit-centric music culture makes that big enough to offset the upfront tax hit, and even whether they get a reasonable share of that residual revenue, but it's something.

This is a good point, as for atheletes this option is less open to them. And in something like the NFL the career is much shorted that MLB. Only a very few will make concession revenues or have game royalties. Maybe some will become coaches or TV personalities, but that is likely a small number.

I've been getting around this lately...

While I'm working, I contribute the max I can to retirement savings (RSP, 401k, whatever it's called in your country) so I reduce my taxable income by that amount.

In the years I'm not working (don't want to, travel, etc.), I take money out of those retirement savings. If I take out less than the tax-free threshold ($10k/yr in Canada) I pay no tax on that money. If I take out more, it will be less than I earned in my working years, so I'll be in a lower tax bracket anyway.

In this way I'm averaging out the taxes I pay over many years, and it takes out the spikes and dips from working/not-working years.

The only downside to this is that once you've taken money out, you can't get that money back again onto your yearly contribution cap, so when I'm old and grey, my retirement savings likely won't be as high as they otherwise would be (but I don't believe in that anyway, so for me, it's not valid)

In the U.S., lots of tax advantaged accounts have withdrawal penalties.

(I guess the notable exception is that contributions to a Roth IRA can be withdrawn with no penalty. Earnings would all face the penalty)

>In the U.S., lots of tax advantaged accounts have withdrawal penalties.

What's the penalty?

Lots of people think that of tax-free retirement savings (and people keep warning me of it) but in fact, the only penalty I've ever heard of is you must pay tax on that money along with other income.. so if you do it in a regular earning year, you pay lots of income tax. Do it in a year when you earn nothing else, and you pay none or very little. That's not a penalty

Generally, 10% extra tax.

10% extra than what?

Let's say I don't earn any other income in a year and pull out $5k. What's my tax rate?

Let's say I pull out exactly the tax-free threshold. What's my tax rate?

(I ask for the clarification because here in Canada, they withhold a very large amount of whatever you take out.. because they are assuming you have other income. It all comes back at tax time though, based on whatever other income you do have. So I ask because I'm wondering if they force the 10% on you, or if they just withhold it and you can get it back at tax time)

It is an additional 10% tax above whatever other taxes you would owe on that money. I'm not an expert, it isn't obscure, you're better off searching if you still don't believe me. Try "401k early withdrawal penalty".

A quick google shows it's 10% more tax than you would have paid, when included with your other income.

If this withdrawal is your only income, and you keep the withdrawal below the tax-free limit (looks to be $9k), you won't pay any tax, and thus won't pay the 10% penalty either.

The 10% is figured based on the amount of the distribution, not AGI.

(For 2012, it's reported on line 58 of the 1040...)

I'm not American, I need you to explain that please.

AGI is income subject to income taxes.

Distribution means the money taken from the 401k

1040 is the main federal tax form in the U.S.

Line 58 is in the 'Other taxes' section of the form, where the amounts are figured using some basis other than the AGI. It also is where you would look in the 1040 instructions to see how the penalty is calculated.

This is why you have wealthy families doing weird year end selling of investments. Lock in capital losses to reduce tax exposure, sell holdings this year rather than next year for one reason or another, etc

They actually get hit less hard because we don't have enough tax brackets and the tax rate at the upper brackets is way too low: http://i.imgur.com/gogxtbv.jpg

The article isn't talking about the ultra-rich making millions a year - it's talking about people making >$100k.

I'd guess that most people making >$100k per year are making less than $353k, where the taxes start decreasing. So they would, in fact be getting hit hardest by taxes, according to your graph.

For people earning over $350k yes you're right. But no sir, even by the link you posted, those in the $100-350k range are certainly hit the hardest.

First, based just on the data, you see that at these income levels, many many credits and deductions are fully phased-out. AMT becomes a real issue. Etc.

But in an anecdotal sense, my experience of people (like myself and my wife, 2 professionals living in a high CoL area) earning in this $100-350k range, this is often the product of 2 people with "normal" jobs. So most of my income is earned income. But those out in the stratosphere above $350k earn more and more of their income from capital gains and receive favorable tax treatments.

I think you're conflating ordinary income tax rates with long term capital gains tax rate, dividend tax rate, tax free muni bond yields, etc that the 7 figure wealthy and above use.

This is a obviously a study that has been designed to influence politicians on tax.

Volatile, high-profit incomes more closely matches a market based on nature or real progress. It makes sense that high-earners who do real work are doing work that is risky. What is concerning is the 'old rich' who've managed to make obscene profits by market manipulation such as regulatory capture, or removing risk from their operations and moving it to the employees.

The irony is that the 'old rich' are required to create the more real-market-representative positions artificially, and as a result a large percentage of the new rich's work goes to keep the old rich in their current positions.

i.e. the old rich (who were once the new rich) are keeping the new rich from being the new old rich. Often this is done by keeping the new rich from using strategies and tools outside the power of the old rich, thus impeding real progress. Real progress would be outside of the control of the old rich, who, let's face it, are just too old and stupid to make good returns on new things. The general populous does this best, and if the general populous is out-innovating the oligarch, then that would be socialism and socialism is scary because informed markets don't buy sugar water and red labels.

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