By David Henderson
In a post two months ago, I pointed out the important distinction between being high-income and being rich. I gave an example of a friend, and a couple of the commenters suggested that my friend guest blog about his situation. He didn’t want to identify himself but he gave me permission to tell his story. Here is my story of Mr. X. I add that in my original post, I exaggerated his numbers in both directions. What follows are the accurate numbers, which I checked with him this morning.
Mr. X, like me, earned a Ph.D. in economics. In 1985, at age 36, he decided to leave academia and set up a full-time business with his wife. They ran the business out of their house in a major American city. Here are their income ranges for the last 25 years:
. In 15 of the 25 years, their income was < $100K.
. In 10 of those 15 years in which their income was <$100K, it was also $500K.
. In 1 of those 5 or 6 years, their income was just over $900K.
All of their 5 or 6 high-income years were years in which their marginal tax rate was 39.6% or 35%. In other words, in none of their high-income years were they in the Reagan 28% or the Bush I 31% top tax bracket. And, of course, in those years, various of their deductions didn’t count because they are phased out as income rises.
To make this income, they work 6 to 7 days a week for 10 to 12 hours a day. When I visit X, which I do once a year, he takes a few hours out of his day to go for walks or go out on his boat. He leaves his phone on and often deals with employees or clients.
Because they work so hard, some of the things the rest of us do and don’t hire people for, like gardening, minor repairs to the house, etc., are things they hire people for. These payments are largely non-deductible from their taxable income.
Because they own their own business, their business’s payments for their own family health insurance count as taxable income to them.
They still expect much upside on income because the business has finally become successful, but a huge percent of this upside will be taxed at 39.6% or more from 2011 on. The idea that the government is taking it from those “who did so well in the 1980s and 1990s” does not apply to them.
Because their high-income years came mainly in the last half of this decade and their two daughters are roughly halfway through college, they didn’t qualify for any financial aid. For each daughter, they are paying over $50K a year in tuition, books, and room and board.
I asked him his net worth. It’s about $2 million.