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Lessons from Todd Henderson

By Adam Levitin

University of Chicago Law Professor Todd Henderson stirred up a minor blogospheric shitstorm with his post "We Are the Super-Rich" at Truth on the Market.  (No link since Todd has removed the piece from the site and retired from blogging.)  In the post, Todd complained that although his household earns upward of $250k/year, he hardly feels rich--his consumption is, in his view, reasonable, but he doesn't have a lot of discretionary income left over.  He views with dread the impending tax changes that would raise the tax burden of households earning over $250k/year, and he objects to the claim that raising taxes on those earning over $250k/year is just taxing the super-rich.  He sees it as a tax on part of the strapped broad middle class.  

The response to Todd's post was, unfortunately, a lot of personal invective.  It's a shame because I think his post had the potential to tee up a really good discussion about the finances of the broad middle class and how the middle class's economic frustration is being expressed politically.  I think Todd's post misdiagnosed his own economic problem and therefore misdirects his frustration.   The increased size of the federal government and level of federal taxation really isn't the core problem for strapped mass affluent consumers.  There are good reasons to be concerned about the size of government, but in terms of financial burdens, it is, at worst, the straw that breaks the camel's back. Instead, note the financial burdens that Todd describes:  his mortgage, his kids' schooling, his educational debt and his wife's.  Housing and education.  Does that sound familiar to long time Slips readers?  

Housing and education are two of the three areas  (along with health care) that Elizabeth Warren and Amelia Warren-Tyagi identify in The Two-Income Trap (TTIT) as major stresses on middle class finances.  The claim in TTIT is that middle class incomes have stagnated, but housing, education, and health care expenses continue to grow.  A reasonable response to TTIT is to point out that expenses are growing because we are consuming more in each of these categories--larger and nicer houses, better and more costly education, and ever more advanced health care.  If we kept our consumption constant at historical levels, the cost might not actually be increasing.   But is there anyone who is really going to say "I only want 1950s level of housing, education, and health care"?  Of course not.  There's been inflation in middle class standard of living--we're all keeping up with the Joneses--but it strikes me that the real problem that Henderson should be looking to is why we saddle our pediatric oncologists with $250k in education debt, etc.  Is there a more efficient way to house, educate, and care for our health?  

I'd like a reduced tax bill as much as the next guy, but would a reduced tax bill really change the amount of discretionary income available to households?  Only if you don't play out a multi-stage game.  Lower taxes and housing prices will get bid up (that's what the home mortgage interest deduction does).  Lower taxes and public education will suffer, so there will be more demand for the limited supply of private education and prices will be bid up.  Lower taxes and our medical schools will find it harder to educate our doctors at the same level and might look to offset lost tax revenue with higher health care costs (that's what happens when medicare reimbursements are cut).  Sure, there will be some distributional effects in all of this, but the level of taxation really isn't the game changer.   There are plenty of bad policies within the tax system, but taxes aren't what's crushing the middle class.  It's stagnant income and rising consumption costs for what is taken as being the necessary middle class standard of living.  

Full post as published by Credit Slips on September 22, 2010 (boomark / email).