Thursday, January 17, 2013

Fiscal Cliff Raises taxes on Yetis, Satyrs, Centaurs, & other Imaginary Beasts

I dare the Wall Street Journal to find a living, breathing
single mother of two children who consistently ears $260,000
of which $35,000 is in investment income.
There is plenty to mock in the Wall Street Journal's profile of some hypothetical households that will see tax increases. For starters, all of these households are now suffering from something well beyond #firstworldproblems. Second, a huge chunk of the tax increase on the fake single mom and fake single can be chalked up to the lapse of the payroll tax holiday, which was opposed primarily by Republicans.

But perhaps the most laughable part of these scenarios is that all of these households realize a substantial portion of their income through taxable investment income. In other words, they have stocks that issued dividends, or they sold stock, in fairly substantial amounts. If this hypothetical single mother got a 5% ROI on their portfolio, it would imply her taxable investment assets--that's outside the 401k, IRA, and possibly college savings plans--were in the $700,000. This single mom isn't just in the top 2% of earned income, she's also got a net worth well in excess of $1 million.

According to Evan Roberts, the Current Population Survey turns up one "single-mother" household with income in this range and 2 children in their annual sampling. They represent less than 0.5% of all single mothers, and fewer than .01% of all households. Now, it's unclear whether or not the CPS is using the tighter definition of "single-mother" households to mean single parents who have never married, but at best that would triple or perhaps quintuple the number of high earning single moms. Given the WSJ's insistence on including an absurdly large amount of investment income in their hypotheticals, it's quite possible that there are zero households that come close to matching these characteristics. They might as well be reporting on how the tax changes will affect Elvis Presley, JFK, and Sasquatch as they hang out somewhere on the dark side of the moon.
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