How to Tell If You’re Rich
by Alexander Green, Investment U Chief Investment Strategist
Monday, January 14, 2013: Issue #1947
One of the biggest points of contention in the last election was whether the rich pay their fair share of taxes. Polls show the majority of voters don’t believe they do.
Of course, this begs the questions: Who is “rich” and what is “fair?”
Answers are largely a matter of opinion. But here is a fact: IRS figures show that the top 10% of income earners make 43% of all the income and pay 70% of all the taxes. Is that fair? If not, how much should they pay: 75%… 90%… all of it? And how about the now widely recognized fact – thanks to Mitt Romney’s secret videographer – that 47% of Americans don’t pay any income taxes. Is that fair? Opinions will vary.
According to the IRS, the top 2% of income earners – the ones that just had their marginal tax rate raised 13% to 39.6% – already pay approximately half of all income taxes. President Obama says it’s about time these folks “chipped in.” What a kidder.
And who is “rich?” For today’s discussion, I’ll leave aside the truism that you are rich if you enjoy good health, a loving family, close friends and varied interests. Politicians (and most voters, apparently) seem to believe that a person’s wealth can be determined by his or her income. I would argue that you determine real wealth by looking at a balance sheet not an income statement. But why not look at both?
According to the Tax Policy Center, if your annual household income is $107,628, you are in the top 20% of income earners. If your income exceeds $148,687, you are in the top 10%. You are in the top 5% if it is $208,810. And if your household income is $521,411, congratulations. You are in the top 1%… and perhaps demonized by those who view hard work and risk-taking as a matter of good genes and good fortune.
However, net worth is a far better measure of wealth, in my view. According to the Federal Reserve Survey of Consumer Finances, a net worth of $415,700 puts you in the top 20% of American households. You are in the top 10% if your net worth is $952,200. (This jives with the findings of Dr. Thomas J. Stanley – author of The Millionaire Next Door – that one in eight American households has a net worth of $1 million or more.) If your nest egg totals $1,863,800, you are in the top 5%. And – trumpets please – if you have a household net worth of $6,816,200, you are again in the top 1%… and possibly frowned upon by redistributionists who resent folks that live beneath their means, save regularly and handle their financial affairs prudently.
How do you get rich if you aren’t currently? The basic formula is pretty simple: Maximize your income (by upgrading your education or job skills). Minimize your outgo (by living beneath your means). Religiously save the difference. (Easier said than done.) And follow proven investment principles. (Which we write about here every week.)
Most millionaires – folks with liquid assets of one million dollars or more – are not big spenders. Quite the opposite, in fact.
According to extensive surveys by Dr. Stanley, the most productive accumulators of wealth spend far less than they can afford on homes, cars, clothing, vacations, food, beverages and entertainment.
The wanna-be’s, on the other hand, (people with higher-than-average incomes but not much net worth) are merely “aspirational.” They buy expensive clothes, top-shelf wines and liquors, luxury cars, powerboats, all kinds of bling, and often more house than they can comfortably afford. Their problem, in essence, is that they’re trying to look rich. This prevents them from ever becoming rich.
It surprises many, but the vast majority of millionaires in the United States:
- Live in a house that costs less than $400,000.
- Are more likely to wear a Timex than a Rolex.
- Generally pay $15 or less for a bottle of wine.
- Have never paid more than $400 for a suit.
- Are more likely to drive a Nissan than a BMW.
- Spend very little on prestige brands and luxury items.
Yes, they’re frugal. But they’re also happy, not to mention financially free. They are not dependent on their families, their employers, or the federal government. What a feeling.
Some can’t abide by this important lesson but the bottom line is clear: If you want to be rich, you have to stop acting rich… and start living like a real millionaire.
Good Investing,
Alex
How to Tell If You’re Rich,Any investment contains risk. Please see our disclaimer.
16 Responses to “How to Tell If You’re Rich”
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So looking at the other side of this, you are saying that 90% of all the rest of income earners pay only 30% of the rest of the taxes. THAT is extremely hard to believe. Although I’m retired now, when I worked, I always paid more than the 14% that Romney paid last year. Why isn’t he paying 35% like he should be? Because of loopholes. With our country in serious financial trouble, I’m amazed how little the rich want to help. Plus, the 47% you and Romney talked about has a lot of retired people that paid into a plan that was promised to us. I wish I would have allowed to invest that money. I would have been a lot further ahead. By the way, I voted for Obama.
Allen
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Allen: It isn’t a loophole – it is tax law. Romney’s income was “investment income”, as opposed to”earned income”. these are simple terms in tax law and apply to everyone, which means they are not a loophole at all. When you (think) you paid more than 14% that was because it was earned income that you were being taxed on. Romney paid all that was requuired to be paid on investment ioncome. Do you think he should have paid more than required? Would you / do you pay more than the IRS requires? He did exactly the right thing by paying a little as possible to the government. Nobody can squander and waste it faster than government. Instead he gave millions to charity that will make much better use of the funds than inefficient government can even imagine. Being an obama voter you should check out what some of your media coddled resentatives do with respect to charity(basically zero), and how well they manage to minimize their tax burdens. You won’t look into it because you have already made up your mind – Democrtats good /
Republicans bad / facts inconvenient and to be ignored.
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Allen, you need to re-read the article.
A few years ago many people (almost) worshipped the wealthy like Gates and Trump. I didn’t agree with that. Now they are the bad guys. I don’t agree with that. I agree with you that I would have preferred to invest my social security money, but isn’t that what Romney was attacked for saying? You also say loopholes should be closed and I agree with you on that. But, isn’t that what Romney said in one of the debates? (Yes he did-I heard him) I think all Americans are self-centered and would take advantage of loopholes if they could. And I also think that Romney has paid a lot more than you and I have in taxes. By the way, I am a registered democrate who dislikes both parties.
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You still don’t get the difference between marginal tax rates and overall tax rates. Family making 100k may have a marginal tax rate of 25% but the average tax rate is significantly less, maybe under 10%.
You have to look at the reasons that Romney’s tax rates were low. Part of the reason for Romneys low tax rate is that he donated something like 30% of his total income. Had he donated 0 like Biden, he would have had significantly more in the bank and he would have paid more taxes but because of the inefficiencies of the government and the efficiencies of charities he donates to, far more good was done than if the government was given the monies(which would have been say 30-35% of the 30% raising his average tax rate to 25%. Further reasons were investment in municipal bonds that allow states and municipalities to borrow at significantly lower rates than they would otherwise. And since states and municipalites are more efficient than the federal government, I would suggest that between monies donated and lower costs to the states and municipalities, society is far better off than if he had “donated” to the black hole of the federal goverment through higher taxes. Also add that he is in a high tax state and there are deductions for state income taxes paid.
Actually, if you consider the tax he paid plus his donations and lower rates he recieved on bonds that he recieved on bonds, he effectively reduced his income by about 45-50 % and even more if you figure in state taxes that he paid. He helped society significantly more than if he had not donated and paid the taxes instead
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By your own figures 10 people in 100 would make say 430k each while the other 90 people would be making say 63k each. Is it fair that the 10 pay more tax per person? Absolutely yes.
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Look at what he said again. $148K is the top 10%. The figure you use is 430K which is close to the top 1% Yes they pay more tax per person. But they also pay much more per dollar earned than people in lower income brackets.
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This is one of the best, most realistic and truthful articles I have read in a long time. Thank you
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I was talking to my senator a few months back asked him about a flat tax. He said do it, the first $30,000 for everyone is exempt. After that everyone pays 10-12%.No deductions.Sounds Fair to me. Don’t want to pay make less than 30 grand. Your thoughts?
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I was always against a flat tax, but now support it. I like his proposalbut would add a second tier(20%?) to those making more than $200,000.
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FLAT TAX: Depending on what is taxable, any taxable item is taxed every time you buy it. Suppose you buy a $2 cup of coffee every day of the year. A 10% flat tax costs 20 cents. Multiply that by 365 days and your coffee bill alone is $7s. Now do the same with everything else you buy and what will your federal tax bill be? Under the income tax your personal tax for coffee and all the others is zero.
New Hampshire doesn’t have an income tax but there real estate taxes are the highest in this area. If you lose your job your chances of losing your home are greater than if there is an income tax you pay zero income tax and lower realestate taxes so your more time to find a job before losing your home.
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Incorrect use of “beg the question”.
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that federal tax analysis is extremely misleading and usually presented by people who believe in trickle down economics (which if you look at history, has never worked and usually has been disastrous). some years ago i did an extensive analysis comparing someone making $75,000 with someone making $75 million and the person making $75k paid a much higher TOTAL tax rate than the person making $75m. the Total taxes are what matters, not just the federal. it’s easy to see how that is possible when you recognize that there are around 1500 different taxes that people pay around the country. just look at the percentage of income for taxes like sales tax, real estate tax, fica, car licenses, the numerous excise taxes and it’s pretty easy to see they amount to a significant percentage of income (approaching 20%, but certainly over 10%) for lower incomes, but they are relatively insignificant if you make millions. it was the reagan tax cuts that hugely proliferated these taxes when he cut federal sharing to states (besides almost tripling the deficit). so those tax cuts resulted in mostly a redistribution of tax sources so that the poorer people pay a much higher share of the taxes.
yes, the last election was somewhat of a confidence vote on trickle down economics – and it lost for very good reason – hoover, reagan and bush, who showed how well it works.
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The numbers don’t lie if the IRS says the 47% pay whatever then that’s the number but for those who don’t pay consider that the debt is increasing and at some point it will drag the economy down with it! Money has legs and will leave a punitive regime and at the end of the day the Government has an unfunded liability of 120-150 trillion dollars, Obama will be recorded as the worst President in History leaving behind the biggest debt and the highest liability of any president ever. serious stuff from a President who has never run a business or hired or fired or risked his own money!
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My idol is Bill Gates. Person who earns lots of money, find full satisfaction in his work, and than he knows when it is enough for him and his family. Many people don t.I respect him because he also think about others who are poor. Personally I like to be financially free and to have power to be the one who can help others. That s what motivates me. It is such a good feeling. Just collecting money more and more and spending more and more is not good enough for me.
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Forwarded to me last year….
> Subject: THE TAX SYSTEM EXPLAINED IN BEER
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> Suppose that once a week, ten men go out for beer and the bill for all ten
> comes to $100. If they paid their bill the way we pay our taxes, it would go
> something like this…
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> The first 4 men (the poorest) would pay nothing.
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> The 5th would pay $1.
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> The 6th would pay $3.
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> The 7th would pay $7.
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> The 8th would pay $12.
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> The 9th would pay $18.
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> And the 10th man (the richest) would pay $59.
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> So, that’s what they decided to do.
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> The ten men drank in the bar every week and seemed quite happy with the
> arrangement until, one day, the owner caused them a little problem. “Since
> you are all such good customers,” he said, “I’m going to reduce the cost of
> your weekly beer by $20.” Drinks for the ten men would now cost just $80.
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> The group still wanted to pay their bill the way we pay our taxes. So the
> first four men were unaffected. They would still drink for free but what
> about the other six men? The paying customers? How could they divide the $20
> windfall so that everyone would get his fair share? They realized that $20
> divided by six is $3.33 but if they subtracted that from everybody’s share
> then not only would the first four men still be drinking for free but the
> fifth and sixth man would each end up being paid to drink his beer.
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> So, the bar owner suggested that it would be fairer to reduce each man’s
> bill by a higher percentage. They decided to follow the principle of the tax
> system they had been using and he proceeded to work out the amounts he
> suggested that each should now pay.
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> And so, the fifth man, like the first four, now paid nothing (a 100%
> saving).
> The sixth man now paid $2 instead of $3 (a 33% saving).
> The seventh man now paid $5 instead of $7 (a 28% saving).
> The eighth man now paid $9 instead of $12 (a 25% saving).
> The ninth man now paid $14 instead of $18 (a 22% saving).
> And the tenth man now paid $50 instead of $59 (a 15% saving).
> Each of the last six was better off than before with the first four
> continuing to drink for free.
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> But, once outside the bar, the men began to compare their savings. “I only
> got $1 out of the $20 saving,” declared the sixth man. He pointed to the
> tenth man, “but he got $9″
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> “Yes, that’s right,” exclaimed the fifth man. “I only saved $1 too. It’s
> unfair that he got nine times more benefit than me”
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> “That’s true” shouted the seventh man. “Why should he get $9 back, when I
> only got $2? The wealthy get all the breaks”
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> “Wait a minute,” yelled the first four men in unison, “we didn’t get
> anything at all. This new tax system exploits the poor” The nine men
> surrounded the tenth and beat him up.
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> The next week the tenth man didn’t show up for drinks, so the nine sat down
> and had their beers without him. But when it came time to pay the bill, they
> discovered something important – they didn’t have enough money between all
> of them to pay for even half of the bill.
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> And that, boys and girls, journalists and government ministers, is how our
> tax system works. The people who already pay the highest taxes will
> naturally get the most benefit from a tax reduction. Tax them too much,
> attack them for being wealthy and they just might not show up anymore. In
> fact, they might start drinking overseas, where the atmosphere is somewhat
> friendlier.
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> David R. Kamerschen, Ph.D.
> Professor of Economics. University of Georgia
> For those who understand, no explanation is needed.
> For those who do not understand, no explanation is possible.
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> Typical – those who contribute the least, complain the most!
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Let’s stop calling deductions that are in the law loopholes. I wish I had deductions available to businesses, but I’m not in business. There are thousands of pages in the tax code because of the special treatment available to various groups. Congress will not simplify any of this because special-interest groups support their re-elections. Everyone should have skin in the game. I’m for a low, flat, no deductions tax, but how to dismantle the Leviathon?
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