Tax Hikes over $250K: End of the Upper Middle Class?
[Commentary and an alternative]

After winning a second term, the Obama administration plans to push forward with a tax hike on high income Americans. The current concerns over the fiscal cliff threshold have initiated faster actions, says the Fiscal Times.

Obama wants to start the tax hikes for those making $250,000 or more. This figure also includes working couples who have a combined income of $250,000. The tax increases on high-income earners would deliver about $42 billion in 2013. The increase will create a small 0.1 percent drag on gross domestic product (GDP), according to the Congressional Budget Office. However, the real cost might be much steeper.

No doubt, by most measures, a $250,000 household income is a large sum. Indeed, it is five times the national average -- just 2.9 percent of couples earn that much or more. However, one must also be cognizant of the cost of living in different regions.

• $250,000 is a lot of money -- especially if you live in, say Peoria, Illinois.
• But if you live in or around New York City, Los Angeles, San Francisco, Boston, Chicago or Dallas, you're not rich -- you're simply what is known as "upper middle class," according to Roberton Williams, an analyst at the Tax Policy Center.
• According to Salary.com, the cost of living in New York, for example, is 105.7 percent higher than in Peoria.

A theoretical working couple earning $250,000 annually, who also lives in a region with a high cost of living, has numerous financial responsibilities ranging from college and graduate school debt to housing costs in expensive areas.

• Two years ago, the Fiscal Times asked BDO USA, a national tax accounting firm, to compute the total state, local and federal tax burden of a hypothetical two-career couple with two kids, earning $250,000.
• To factor in varying state and local taxes, as well as drastically different costs of living, BDO placed the couple in seven different locales around the country with top-notch public school districts, using national government data on spending.
• The findings reflect that life is not an easy journey for working families earning $250,000.
• Even with an additional $3,000 in investment income, couples end up in the red -- after taxes, saving for retirement and their children's education, and a middle-of-the-road cost of living -- in seven out of the eight communities in the analysis

So what is the answer? What is a viable alternative?

• First, with the current complicated set of income tax laws and regulations, there is a hidden cost to companies and individuals because they end up paying a price for ensuring compliance. In addition, there is also a cost associated with funding a very large Federal agency to administer such a complicated system.
  
  
• Second, there is a disincentive to innovation and risk taking when a burdensome levy is imposed upon those people and businesses that are successful. The more success, the higher the burden. When this happens economic growth suffers. The current income tax system and the corporate tax rate are having this effect on the U.S. economy.
  
  
• Third, it makes sense for those who benefit from government services to bear some of the costs, regardless of their income level. Since everyone in our nation benefits from things like national defense and other constitutionally grounded services, then everyone should help pay for them.
  
  
• Fourth, we should have a tax system that allows the taxpayers the freedom to control how much they pay in taxes based upon their own choices. Under a Federal sales tax the less a person purchases the less their tax burden. One thing that could be considered is to exempt the sale of food from this tax.

All this assumes that the Federal Income Tax system we now have will be disassembled and phased out. Increasing taxes is not the answer to our economic problems. So, for this to work, the current system would need to be phased out and replaced with a Federal sales tax. While we are at it, there must be a limit placed on the Federal sales tax rate imposed. Any move to increase it above that level should require voter approval. This is what we currently do in our local communities and the same process should be mandated at the national level.