
When work doesn't pay for the middle class - viggity
http://www.forbes.com/forbes/2009/1005/taxes-financial-aid-college-roughing-up-middle-class.html
======
ajross
I'm not following some of this. It's true that the marginal benefits of salary
changes for wealthy[1] parents with children in private (US) colleges who also
are applying for a mortgage payment reduction on homes they can't afford is
very small. And for these folks, it may be very tempting to take a part time
position[2] instead of working harder.

But needless to say, that's a rather small population. The article is cherry
picking this small population[3] of kinda-sorta-unfortunates (they're still
making $120k a year!) and using it to argue against a bunch of government
programs that provide real benefits to people with a fraction of their income.

Could things be tuned better? Yeah. Benefits programs are filled with this
kind of unintended side effect. But to write this kind of blanket argument
cautioning against them seems awfully partisan to me. It's a fairly typical
right-wing Forbes editorial in journalism clothing.

[1] $120k per year is in the top 10th percentile or thereabouts -- it's at the
very edge of what most people would consider "middle class".

[2] NOT simply a lower paying one, as the article implies. A lower paying
position is still full time work, after all. The contention that making less
is "bad for the economy" isn't really sound. Downward wage pressure in high-
paying jobs is a good thing for the export economy and a good thing for
profits (companies are paying historically high fractions to their most highly
compensated employees).

[3] That is: gate the income to a small range just big enough to be affected
by the loss of financial and mortgage aid, but not so big that it dillutes
back to the overall tax rate of ~38%. Then pick out only the people who
actually _need_ that tuition _and_ mortgage aid: parents with both underwater
mortgages _and_ privately-school children in the right 4-year age range. If
this isn't cooking the books, I don't know what qualifies.

~~~
gnosis
_"$120k per year is in the top 10th percentile or thereabouts -- it's at the
very edge of what most people would consider "middle class"."_

If 90% of the people are making less, I don't see how it can be considered
"middle class".

~~~
pbhjpbhj
When did middle class become a synonym for a particular range of pay? The
majority in the $120k+ USD pay range may be middle class but I'm sure there
are working class folk in there too. Consider sportsmen, Beckham and Rooney
are very high paid but they're not members of the traditional middle-class.

Membership of various classes is a huge quagmire. If you want to refer to
people solely on what they are paid then talk about wages and steer clear of
notion of class.

Edit: not so stupid now.

~~~
ZachPruckowski
I'd say "Class" can be used to refer to the types of economic problems or
challenges facing people, regardless of salary. In this case, if the question
is "what's the best way to pay for my daughter going to an Ivy" and not "how
on earth can we afford this", they're not middle-class. If mortgage is the
topic and "how are we going to ever pay this off" isn't the question, you're
not lower-class.

I'll certainly agree that the lines are far from clear-cut, but I think it's
best defined in a problem-oriented manner. The middle class gets these tax
breaks because they can't otherwise afford to send their kids to good schools
or own houses, while the upper-class can. They're facing different problems,
and so the solutions are tailored differently for them. This causes confusion
when you have income-to-SoL disparities in the country ($60k goes further in
Kansas than in NYC), so people at different income levels can be facing the
same problems.

~~~
pbhjpbhj
Thanks, your last para clears up the need for a classification, here we'd
probably say middle-income as middle-class is not necessarily related to
earnings.

I guess as class and income in the UK are not coterminous this leads to
confusion. For example I earn well below the poverty line in the UK but would
be described as middle class due to my education and parentage.

Beckham, for example, would probably come in as working class - son of a
kitchen fitter and hairdresser (according to Wikipedia) low academic
achievement, low IQ, no titled lineage.

~~~
ZachPruckowski
Here in America, I'd find it hard to classify Beckham as anything other than
upper-class (upper-income, if you prefer). He's got enough truckloads of money
(and his former-pop-star wife is also likely well-off) that he doesn't deal
with middle-class or lower-class issues like affording his mortgage payments
or saving for retirement or paying for college educations for his kids.

I suspect it's a cultural difference. Here in America, people don't really
care much where your parents came from or how you did in school, they measure
success and class by what you have. We haven't really discriminated on "old-
money"/"new-money" lines in decades at least, and we've never had much in the
way of titled lineages. We don't have the centuries of cultural history of
class immobility that Europeans have (I don't mean that judgmentally, I'm just
saying we don't have that history in the back of our minds).

~~~
pbhjpbhj
This was just linked on Reddit an amusing look at British attitudes to class:
[http://www.timesonline.co.uk/tol/comment/columnists/sathnam_...](http://www.timesonline.co.uk/tol/comment/columnists/sathnam_sanghera/article6992855.ece).

I chatted to a younger friend about it and he couldn't believe I'd be so
gauche as to classify people based on their background, parenting and
education but felt class was and should only be about your income.

------
idm
Ugh... Since Forbes can probably make this argument based only on the facts,
why did they have to invent a "79% tax rate" for this person? It's simply not
true.

Paying college tuition is not tax, and student financial aid usually does not
take the form of a tax rebate. Therefore, including this in their "79%
bogeyman" is inaccurate.

Furthermore, paying your home mortgage is not a tax, and relief on your
mortgages may or may not take the form of a tax rebate. Again, it is
inaccurate to lump this into the so-called 79% tax rate.

Forbes made this even worse by applying these expenses to the top 60,000 of
the person's 120,000 income, and calling the entire thing the "marginal tax
rate."

By my calculations, we're talking about a 27.5% marginal tax rate on the top
60k of her income, and then whatever the tax rate would be on her lower 60k of
income. I'm going to estimate the tax rate is something like 20%, which is far
less horrifying than 79%.

It's still true that income differences will affect financial aid and mortgage
payments, so Forbes should point that out, but it's totally irresponsible to
call this a 79% tax rate.

~~~
marvin
Semantics. The effect of the incentive rules quoted in the article is that by
taking the higher-paying job, the woman will end up with 20% more money while
working twice as hard.

I see the same thing in Norway: If you are able to hold a great-paying job
(equivalent to 200,000 USD a year, for instance, typical for a hard-working
oil industry consultant), the marginal tax greatly reduces the value you get
from your extra effort. (Typical numbers here are 35% tax on everything up to
50000 USD, increasing to 55% for everything above 130000 USD). Given that you
invariably work your ass off in jobs like these, the prospect doesn't seem
very tempting. Why work twice as hard when you only get 50% more money? You
can't even work hard one year and slack the next, because it doesn't pay.

The problem is that you want as many people as possible to do the best work
they can do. The effect of tax/incentive rules such as these is that the
government is telling people capable of holding high-paying jobs to start
slacking. This is bad on many levels.

~~~
gte910h
> Why work twice as hard when you only get 50% more money

1\. Salary doesn't correlate to "hard work". It correlates to "bargaining
position vs work undesirability". It means the responsibilities will either
need to be separated into more jobs, or they'll need to compensate more if
they can't decrease the job shittyness.

2\. If you bring home 80k about 30k of that goes straight to living expenses.
If you bring home 120k, only about 35k of that needs to go to living expenses,
the rest is all disposable income. So you're working for about 80% more
disposable income, not a flat 50% more money. The upper middle class has an
issue realizing what the term "luxury" means.

3\. While there are plenty of individuals who both have the choice between a
120k and 60k job and choose the 60k job for the better quality of life and
subsidies they'll get, there is yet another subsection of the population
who'll choose the 120k a year job for the somewhat extra disposable income.
This is not a problem, companies aren't struggling to fill 120k jobs that much
I'm pretty sure.

------
fortes
> How did a middle-class single mom wind up with a 79% marginal tax rate? At
> $120,000 she would pay $16,500 a year more in federal and state taxes,
> wouldn't qualify for the five-year $12,000-a-year cut in her mortgage
> payments she's applying for and would be eligible for $19,000 a year less in
> need-based college financial aid.

It's a bit disingenuous to include lack of financial aid as a "tax" on her
income .I assume the college is private? Regardless, she's not paying another
$19,000 to the government, just not getting it in aid from another
institution.

Without the financial aid "tax", her marginal tax rate is 47.5% for that
$60,000. Not great, but not absurdly high considering it includes federal and
state taxes (which in NY are quite high).

> Work isn't the only middle-class virtue that is getting punished. The system
> penalizes savings, too--not just through taxes, but also through programs
> that reward debtors, the profligate and college families that show up at the
> financial aid office with empty pockets. Yet another series of tax and
> benefit rules penalizes marriage.

As a non-homeowner and big saver, I agree :)

I think the real issue here is that tax code is far too complex, filled with
favors and subsidies left and right that complicate matters (think spaghetti
code).

------
nazgulnarsil
the disincentive to work is very real, it is not a bogeyman of the free market
advocates. that said, it's also a common mistake of free marketers to think of
a work disincentive as inherently bad. people would do well to remember that
economic statements in themselves are value free: If you do X, Y will happen.
it says nothing about whether Y is good or bad. That is up to the people Y
affects to decide for themselves.

~~~
viggity
I'd like to know when you think an increased economic output is a bad thing?
The only argument I can see for that is to protect people from themselves, but
then again, I really don't like it when the government tries to mettle with
people who are doing no outside harm.

I'd rather have a large supply side driving costs down and improving my
quality of life than otherwise.

~~~
nostrademons
There're costs to that economic output that are not reflected in its dollar
value.

For example, what's the value of having a parent at home full-time? What's the
value of having both parents home for dinner? A bunch of studies have shown
that one of the best predictors for having successful, well-adapted children
is how much time the family spends together. But how do you quantify that? You
won't know what the exact payoff is until 10-15 years later, when the kids are
well into their own careers and having their own children. And it varies a lot
from kid to kid - someone who's performing well academically with a supportive
peer group needs a lot less parental involvement than a loner with no friends
who's threatening to blow up the school.

Or another example: when I went to college, I believe the fin-aid formula was
that the college would take 100% of my assets, based on my age and income.
That meant my gap year was revenue neutral - it didn't matter how much I
worked or what I worked on, I wouldn't be able to keep any of it. But that
gave me the freedom to observe and to try things out, without the stress of
trying to make a lot of money, and in the process I found my eventual career.

You don't want to run an economy like this - there needs to be some
accountability so that people work on things that are actually useful. But a
high school grad who's time-limited to one year of work isn't going to
accomplish anything actually useful anyway - instead, that gap year is an
investment in perspective, a way to understand more of the world before you
commit to four years in college.

The same thing often comes up in research - a short-sighted focus on increased
economic output leads you to miss opportunities that have no obvious dollar
value attached, but can be big economy-changers in the long run. How long did
it take GMail to become profitable, and would it have existed had Google had
the same quarterly bottom-line orientation that most public companies do? How
about Google itself? If Larry and Sergey had done the economically rational
thing in 1995, would we still be searching on AltaVista? Is Twitter making
money yet?

~~~
viggity
"There're costs to that economic output that are not reflected in its dollar
value."

I agree, but I'd rather put that decision in the hands of each individual and
not a bunch of central planning bureaucrats. You're assuming that people
aren't capable of weighing all the costs (dollars or otherwise).

~~~
nostrademons
Well, the tax/finaid structures here also place the decision in the hands of
each individual, they just tilt the incentives.

I'm very much in favor of finaid working the way it does, because it also
opens up the possibility of bright children from backgrounds who _simply would
not be able to afford it_ going to elite colleges. That's supposed to be the
point of education - level the playing field, so that even if you're born to
garment-worker immigrants, you can make it big in your own lifetime. If it
means that middle class families have some skewed incentives, I don't care.

I'm less sure about the tax issues. I'd like to see the tax code simplified in
general, if only because tax preparation is so inefficient now. And I think
disincentives in tax rates may cause more harm than the revenue collected from
them does good.

~~~
fexl
Here's an interesting video about the history of financial aid for education:

[http://schiffforsenate.com/?q=media/how-government-
programs-...](http://schiffforsenate.com/?q=media/how-government-programs-
drive-college-tuitions)

Synopsis:

In 1918, a factory worker at Ford Motor Company earned $5 per day and kept all
of it. In 32 days he would earn $160, enough to cover the annual tuition at
Yale University.

~~~
ZachPruckowski
Real (inflation-adjusted) wages have declined or stayed static since the
1970s. Even if college tuition only increased at the rate of inflation, it
would still be harder to afford today than it was in the past.

Also, Ford workers at that time were making above-average salaries. They
weren't the lower-middle-class to middle-class auto workers of today, they
were solidly upper-middle-class. And 32 days is like 12% of his salary, so it
wasn't exactly cheap for him (though far better than the 30-40% we see now).

Finally, it's disingenuous to compare 1918 colleges to 2008 colleges. Two
major events really shook up the post-high-school landscape in those 90 years:
the GI Bill and Vietnam. The GI Bill sent like 5 million people to college in
the 40s-50s who otherwise couldn't have afforded it. Then Vietnam made college
compulsory for middle-class or upper-middle-class men looking to avoid
military service. Throw in desegregation, affirmative action, and co-
education, and it's pretty clear that college went from being the domain of
the brilliant and affluent to being open to the majority of Americans who
finish high school. This total structural shift and basic re-definition of
college makes pre-70s tuitions irrelevant to today's system.

If you want, you can also toss in the degree to which the job market has
changed to requiring skilled workers with some form of post-secondary
education. While some of this is likely a result of the education levels of
the labor-supply, at least part of it is due to our changing industrial and
commercial landscape.

------
nopinsight
If the parameters are set right, this could potentially increase the overall
happiness of the society.

 _Anyone ever wonders why we earn so much more than our parents and
grandparents, yet we're not any happier?_

Data shows that inter-generational happiness stays the same, despite the fact
that within the same society during the same time period, richer people are
actually happier on average.

My hypothesis is that greater material wealth in the recent past comes with
serious human toll. Higher competition at all levels. Larger and larger gaps
between the rich and the poor, the skilled and the unskilled, the well-
connected and the commoner. These effects offset the materials comfort we gain
from all these fantastic technological innovations.

Focus on and competition for material wealth does shift us away from certain
communal bonds & feelings. To experience an extreme case, try visit a middle-
or lower-end shopping mall in China, you can feel the intense greed and
competitiveness between sellers. That's hyper-competition at work. We feel it
a bit more abstractly in a developed country. But it's certainly there.

I bet many people who has watched Avatar actually want to live as a Navi'.
Their lack of material wealth and powerful technologies are more than
compensated for by community bonds, closeness to the beauty of nature, and
minimal competition for status. Such a community actually exists. Many of them
can be found in a more remote part of the world. Bhutan and certain
communities of Buddhist monks, for example, come to mind.

For more on this, I recommend this TED talk by Matthieu Ricard on the habits
of happiness:
[http://www.ted.com/talks/lang/eng/matthieu_ricard_on_the_hab...](http://www.ted.com/talks/lang/eng/matthieu_ricard_on_the_habits_of_happiness.html)
and the book Happiness: Lessons from a New Science by a noted British
economist Richard Layard [http://www.amazon.com/Happiness-Lessons-Science-
Richard-Laya...](http://www.amazon.com/Happiness-Lessons-Science-Richard-
Layard/dp/0143037013/)

~~~
100k
Rather than increased competition, I think the reason we are not happier is
that wealth levels have risen for all classes[1]. Materially we are better off
than our ancestors but relatively speaking we are the same.

Most people would prefer to have higher status than higher wealth. For
details, I recommend the excellent book "Choosing the Right Pond: Human
Behavior and the Quest for Status" by economist Robert H. Frank.
[http://www.amazon.com/Choosing-Right-Pond-Behavior-
Status/dp...](http://www.amazon.com/Choosing-Right-Pond-Behavior-
Status/dp/0195049454)

[1] There is no question that we are all materially better off than previous
generations. However considering the 30 years of stagnating middle class
incomes, whether this will be true in the future is up for debate. If the
middle class starts declining relative to the super-rich expect major
unhappiness.

------
yardie
Seems like not a lot has changed since I went to school. It seems like
universities cater for the very poor and the very rich. The middle class is
left to carry the brunt of education costs.

Also, welfare isn't indefinite. Most states require you to take a job, any
job, or they reduce your benefits. This is the legislation that came out of
the Clinton era (when Gingrich was claiming welfare queens were living it up
by having 7-10 kids). I'm glad that I'm still young and healthy. It's one
thing to drop COBRA in your 20s, quite another to do it in your 40s.

~~~
jbooth
It's not specific to universities. Go take a look at a chart of middle class
salaries over the last 30 years, adjusted for inflation. Looks awfully flat,
right?

~~~
smokinn
Elizabeth Warren wrote an excellent article about that last year:
[http://www.huffingtonpost.com/elizabeth-warren/america-
witho...](http://www.huffingtonpost.com/elizabeth-warren/america-without-a-
middle_b_377829.html)

~~~
gruseom
That is a good article, thanks. Every time I hear/read something by Elizabeth
Warren I come away thinking that she is a voice of unusual sanity. Pity that
her oversight work isn't amounting to anything.

------
araneae
My mother didn't bother working at all when she lost her job and I was in
college, for exactly this reason.

------
Virax
Holy cow - when you read this article right after this one:

[http://reason.com/archives/2006/03/01/why-poor-countries-
are...](http://reason.com/archives/2006/03/01/why-poor-countries-are-
poor/print)

it really blows your mind. I think the nay-sayers are missing the point of
this article - it doesn't matter if you are sympathetic to the family. You
have to remember that the higher paying job isn't creating 2x the economic
output - her choice to take the lower paying job means that:

There is one fewer position making $120K

There is one more position making $60K

Now consider this: the $120K position is much more likely to be a management
position, which, if done well, could create several $60K positions, lets say
3. This means that for the economy as a whole, there is one less $120K
position and TWO fewer $60K positions.

In my opinion this is very scary.

~~~
Pahalial
Well this is just plain wrong. She has two positions available to her; her
choosing the $60k one does not wink the $120k position out of existence, and
there will certainly be someone else trying for that. Perhaps one of the many
people who do not fall in the narrow description of "parent with a mortgage,
two kids, one in college" that would make it such a seemingly terrible deal.

~~~
fburnaby
>> and there will certainly be someone else trying for that

That deserves an award for understatement of the year. You could probably set
up a five man brawl to the death for that job right now.

------
bediger
Isn't this just another example of Forbes pandering to the ultra-rich? You
know: "Any improvement of services/policies towards the riff-raff will bring
down the Country!"

Forbes: Crypto-fascist puppet of the Imperialistic Elite since 1955!

~~~
dgordon
Did you actually say something, or just toss out a bunch of epithets that have
nearly lost all meaning?

I'll address one: 120k/year is a long, long way from "ultra-rich."

------
jsz0
I don't really understand some of the assumptions made here. It sounds like
someone making $60k a year is simply not eligible for programs designed to
help people making say $35k a year. Is that wrong? $60k/year is a pretty good
amount of money. Opting out of a better job to avoid paying taxes on your
increased income is a really bad career choice. All of the tax rates level
out. So maybe $100k isn't a great spot to be in but you're not going to get to
$150k by opting for the $60k/year job are you? This article just spews out
entitlement. I can't stomach people making $60k+ year crying about how hard
their life is. Try living on $20k/year and see how that works out for you.

~~~
onoj
I think what the article was trying to say is that someone earning 120K is
worse off or the same as someone earning 60K - so there is no benefit in
earning more money in some cases - you will get no real benefit from that
money, you will just have to pay it out for things that others get for free. I
think (again) that the issue was that really high earners 300k plus have real
benefits from the money but everyone from 150k down is screwed. But i could be
wrong.

------
galactus
I have a problem with this part:

"Given a choice between a part-time or easy job paying $60,000 and a
demanding, stress-ridden job paying $120,000, Lederman would be wise to take
the former"

So, people making 60k a year have either part-time or "easy jobs" and those
making 120k are working hard and contributing to the economy, right?

