<p><img src="https://static4.businessinsider.com/image/6091457f34af8d001859aba8-2400/GettyImages-1210092124.jpg" border="0" alt="bethesda maryland" data-mce-source="Bonnie Jo Mount/The Washington Post/Getty Images" data-mce-caption="A home with a turret in the Greenwich Forest neighborhood in Bethesda, Maryland on April 6, 2020."></p><p></p><bi-shortcode id="summary-shortcode" data-type="summary-shortcode" class="mceNonEditable" contenteditable="false">Summary List Placement</bi-shortcode><p>Once again, the "who's really rich'" conversation has reared its head.</p><p>It was kicked off over the weekend by MSNBC's Stephanie Ruhle, who said many people who make $500,000 or more in income <a href="https://webcache.googleusercontent.com/search'q=cache:9r2AhazPqxwJ:https://www.trendsmap.com/twitter/tweet/1388865812803563520+&cd=9&hl=en&ct=clnk&gl=us">don't consider themselves rich</a>a claim that is true, in my experience. After all, a few hundred thousand dollars isn't a lot of money after you've spent it.</p><p>Journalist Matt Zeitlin <a href="https://twitter.com/MattZeitlin/status/1389037737911767046">can't believe we're still doing this</a>, arguing over whether making a half-million dollarshigher than 98% of American families' incomesmakes you rich, as President Biden proposes to raise taxes on families at this high point on the income spectrum.</p><p>The reason the "are these high income earners really rich'" argument is a perennial because it's so easy. Unlike thornier economics questions everybody is qualified to have an opinion and these views vary because everyone seems to define "rich" as starting at an income somewhat higher than their own.</p><p>I think the issue is that people define "rich" as meaning your choices are not constrained by financial concerns, but of course, everybody's choices are constrained by financial concerns. There's always a bigger, more expensive thing you could buy if only you had more money. Even if you're a billionaire with a private island, there's always a bigger island.</p><p>This conversation is fun but it's a little divorced from <em>why</em> we talk about what it means to be rich. In the context of politics, we have this conversation when people are talking about raising taxes, and the real question is: Who should we collect more taxes from' The idea is that someone needs to pay more in tax, because there are important things the government should be doing and someone needs to pay for them.</p><p>So who is it fair to collect that money from'</p><h2>Back in my day, we argued over whether $250,000 made you rich</h2><p>As I pointed out to Matt on Twitter, we're not actually continuing the same conversation we've been having for years. Back in 2015, I wrote an article for The New York Times exploring the question of <a href="https://www.nytimes.com/2015/01/29/upshot/why-obamas-proposal-for-529s-had-no-chance.html">whether a family income of $200,000 a year made you rich</a>. The context at the time was a moribund Obama administration proposal to curtail the tax-advantaged <a href="https://www.businessinsider.com/what-is-a-529-plan">529 college savings account program</a>, which is mostly useful to higher earners, in favor of a program aimed at families with low or moderate incomes.</p><p>Obama abandoned this proposal within days of announcing it because hell hath no fury like a parent with a $200,000 income told they're getting an unwarranted tax break. One thing I noted in that Times article was that parents who <a href="https://www.thefiscaltimes.com/Articles/2010/12/07/Down-and-Out-on-250000-a-Year'page=0%2C1">complain they don't feel rich on $250,000 a year in Bethesda, Maryland</a> should be aware that Washington has other, less-expensive suburbs where they could livea comment that prompted one senior news staffer to take rather rude exception to my writing during an awkward elevator ride at the Times' Washington bureau.</p><p>But that was then, and now President Biden is pledging to <a href="https://www.businessinsider.com/biden-wants-pay-for-spending-with-new-taxes-rich-corporations-2021-4">exclude families with incomes under $400,000</a> from tax increases. So now we are arguing about whether people who make $500,000 a year are "rich" and therefore should pay higher taxes.</p><p>Inflation has been modest, so that's a big increase in the real "rich" threshold income since 2015. Effectively, the "$250,000 isn't rich in Bethesda" side of the argument has won, and now we're arguing about family incomes double that amount. In fact, we should really be talking about an even higher number, as the Biden plan doesn't start imposing tax increases on married couples <a href="https://mobile.twitter.com/ryangrim/status/1389006486546829313">until they make slightly more than $500,000.</a></p><p>This question is even easier than the one we debated in 2015. Obviously, $500,000 of family income makes you rich. But the next question is a little harder: So what'</p><h2>The need to find "pay-fors" is baked into the "who's rich'" conversation</h2><p>Back in 2015, we had to discuss whether the primary users of 529 plans are rich because the Obama administration wanted to expand tuition subsidies for low- and middle-income families, and it perceived that there was a need to find offsetting fiscal savings to pay for those subsidies.</p><p>Pay-fors might be needed for economic reasons (if you add new spending and don't offset it by cutting other spending or raising taxes, that could push up interest rates and/or inflation) for political reasons (voters or politicians think it is "irresponsible" to add spending and not pay for it) or for legal reasons (some federal laws and congressional rules make it easier to pass new spending that is paid for).</p><p>After the 529 backlash, the Obama administration decided a pay-for wasn't needed after all, and it just withdrew the plan to curtail 529s while continuing to seek expanded subsidies. The amount of money at stake just wasn't that large, and so the numbers could just be fudged a little.</p><p>But in the ensuing six years, the whole fiscal policy conversation has turned sharply against the very concept of a pay-for.</p><h2>Nobody cares about budget deficits anymore, so why raise taxes'</h2><p>Since Obama's dust up over 529 accounts, concerns over offsetting large amounts of new spending with tax hikes or cuts elsewhere have largely gone by the wayside.</p><p>Under Donald Trump, Republicans passed their tax reform law that <a href="https://www.businessinsider.com/national-debt-deficit-trump-how-it-compares-obama-bush-clinton-2019-11">added substantially to the deficit</a> and agreed to bipartisan budget deals that pushed spending much higher. Then the coronavirus pandemic hit and there were bipartisan agreements for <a href="https://www.businessinsider.com/budget-deficit-march-record-stimulus-spending-infrastructure-federal-debt-taxes-2021-4">trillions more in new deficit spending</a> and tax credits. After Joe Biden became president he signed <a href="https://www.businessinsider.com/biden-to-sign-19-trillion-american-rescue-plan-on-thursday-2021-3">another $1.9 trillion fiscal package</a>, and he's seeking trillions more in new spending. Throughout this whole time interest rates have still stayed low <a href="https://www.businessinsider.com/inflation-fears-biden-stimulus-package-misplaced-history-suggests-larry-summers-2021-1">and the inflation outlook</a>, though quirky due to COVID-driven supply constraints, also looks pretty modest.</p><p><img src="https://static1.businessinsider.com/image/606e475d30004b0019b268fc-2400/Joe Biden guns.jpg" border="0" alt="Joe Biden" data-mce-source="Chip Somodevilla/Getty Images" data-mce-caption="President Joe Biden holds the first news conference of his presidency at the White House on March 25, 2021. He faced questions about the pandemic, immigration, gun control."></p><p>So the usual story about why we need a tax increase ("We must control the budget deficit to avoid economic problems related to inflation and interest rates") does not apply. Before we decide whether people who make over $500,000 should pay more taxes, we need to figure out why we want a tax increase in the first place.</p><p>One possibility, popular on the left, is that reducing the income and wealth of very wealthy people is an end in itself, as it <a href="https://www.americanprogress.org/issues/economy/reports/2019/06/04/470621/ending-special-tax-treatment-wealthy/">reduces inequality and the power</a> that accrues to the very wealthy. I'm not big on the merits of this argument, nor do I think it's an especially compelling political argument. But I'd also note that it's more of a justification of tax increases on people at the very pinnacle of wealth in societypeople with hundreds of millions of dollars.</p><p>It's not clear to me that taking an extra, say, $10,000 out of the after-tax income of a family making $750,000 a year moves the needle on the interaction between wealth and power in Americaeven though that family could certainly afford to pay the extra $10,000.</p><p>A better theory of why you need to raise taxes right nowthe one I think is actually animating officials in the Democratic partyis that you will eventually need to raise taxes in the future, but Democrats might not run the government in the future so it's best to lock in these increases now.</p><p>The economic environment of the last 20 yearswith tepid global economic growth, modest population growth, and very little interest rate or inflation pressurewill not persist forever. Especially if the recent (welcome) shift toward running the labor market "hot" is successful, we should reach a point where there are once again important trade-offs between different categories of spending, and between government borrowing and private borrowing, that provides a real economic imperative to control budget deficits.</p><p>We don't know when that moment will come, but when it does you will need sustainable revenue sources if you want to keep government programs in place without spending cuts. So if, as Democrats do, you want those sustainable revenue sources to be weighted toward taxing those who can best afford to payand this most certainly includes a family living in Bethesda on $500,000 or $700,000 a yearthen you should probably write such a tax law now, while you can.</p><p>In essence, Democrats are trying to increase these taxes now so that we do not face a choice in the future between cutting programs they favor and raising taxes on the middle class.</p><h2>But can Democrats actually agree on a package of tax increases'</h2><p>There is a big monkey wrench in my suggestion that Democrats might want to lock in higher taxes on rich families now, while they can. One of the top policy agenda items for some Democrats in Congress is a big tax cut for the rich.</p><p>Many Democrats from high-tax blue states like New Jersey and California are focused on including a restoration of federal income tax deductions for state and local income taxes (SALT) paid as part of the next big spending package. This isn't a pay-for; it's a large tax cut that would accrue overwhelmingly to people with high incomes, because the tax deduction becomes more valuable the more state and local income taxes you pay.</p><p>In other words, some Democrats are pushing a tax break that will help that family in Bethesda decide it can go ahead and take a ski vacation at Beaver Creek this year instead of driving to Killington.</p><p>There is a bit of political nuance people often miss in this conversation. The SALT deduction is a priority for high earners, but it's also a priority for public employee unions, because the deduction acts as a subsidy for state and local government spending and makes it easier for states and localities to levy higher tax rates. So multiple stakeholders in the Democratic party coalition favor this tax cut.</p><p>But it's also expensive, and it faces opposition from <a href="https://www.businessinsider.com/aoc-calls-salt-deduction-a-gift-to-billionaires-2021-4">progressives like Rep. Alexandria Ocasio Cortez</a> who point outcorrectlythat it's <a href="https://www.businessinsider.com/democrats-salt-tax-deduction-repeal-benefits-rich-opinion-2019-7">a big tax cut for the rich</a>. That makes it hard to come up with a tax reform agenda that can hold together virtually all Democrats, as you would need to move one through a narrowly divided congress.</p><h2>Low interest rates make spending easy and taking hard</h2><p>The other issue for a tax increase agenda is that the same low-interest rate environment that makes it unusually easy to reach agreements on new spending should make it unusually hard to reach agreements on new taxes. In this context, while spending imposes unusually few economic costs, raising taxes provides unusually few economic benefits.</p><p>This isn't the early 1990s, when the political story to tell about deficit reduction was that it would lower interest rates, making it cheaper for individuals to finance a home and for businesses to make capital investments. There just isn't a great story to tell about how individual voters will benefit because you raise taxes this year.</p><p><a href="https://www.businessinsider.com/democrats-biden-infrastructure-plan-tax-increases-gop-2025-2021-3">As I've written before</a>, most of the tax changes that were imposed in the 2017 tax law are set to expire in 2025. If Democrats control any part of the government then, Republicans will be forced to come to the table and negotiate new tax policies with Democrats if they hope to keep any of those provisions in place.</p><p>Maybe economic conditions will be hotter then, too. If that's the case, the economic, political and legal stars are likely to align for significant tax increases in 2025, especially on the wealthy. This year, it's not so clear.</p><p><a href="https://www.businessinsider.com/people-who-make-500000-a-year-are-rich-biden-taxes-2021-5#comments">Join the conversation about this story »</a></p> <p>NOW WATCH: <a href="https://www.businessinsider.com/worlds-most-expensive-liquid-thoroughbred-horse-semen-2020-3">Why thoroughbred horse semen is the world's most expensive liquid</a></p> Click here to read full news..