Monday, June 07, 2010

Why do high income people feel so put upon?

A mystery to me is why households earning $250,000 per year seem to resent being called rich.  This income is roughly five times the median US household income.

So it occurred to me that perhaps the marker basket upon which high earners spend has risen in price more rapidly than the CPI.  So for fun (and only for fun--this is not a systematic price index), I looked at four items: income taxes, the price of a BMW 3-series, houses in Los Angeles, Santa Barbara and New York, and Harvard tuition, all going back to 1988.

It is hard to do an apples-to-apples comparison on taxes, but based on the NBER Taxsim Model, wage income for high earners is taxed at about the same level, and capital income is taxed less relative to 1988.

CPI has not quite doubled since then.  While the BMW 3-series is not the same car as it was in 1988 (it is almost certainly better), its price has not quite doubled.  House prices in the California are about 2.7 times higher than in 1988; in New York they are 2.2 times higher (these are MSAs--Malibu and Manhattan are probably different stories).  Harvard tuition is three times higher.

People really notice how much they are paying for their houses and how much it costs to put their kids through school.  So while I continue to think it is silly for people who earn five times the national median to feel anything other than extremely well off, it is possible that those right at the 250k level perceive their living standards to be no better than they were 20 years ago.


Jenna said...

And compare that amount of money and living standards to those living in third world countries...

It really comes down to the fact the wealth is all about perspective and appreciation (not the financial kind).

BradB said...

It may seem like less of a mystery if you consider that households are not static. Many people with high incomes have only recently attained such success. If a high income couple achieved success by investing in education or toiling for years to get a business off the ground they may only be starting to accumulate savings. A high income does not mean a high net worth! Although such high earners are certainly fortunate I don’t think we should be scratching our heads if some of them resent being lumped into the same wealth category i.e. "rich" (and tax bracket) as Donald Trump and Warren Buffett.

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