This post is another one of those rants about first world problems, and I'm sure I'll get lots of hate comments and email about it. But I'm going to discuss a concept that I think needs to be brought out into the open. Our federal income tax system is progressive, meaning that those who have more income not only pay more, but actually pay a higher percentage of that income. The tax brackets themselves are progressive, but when you add in the effects of the phaseouts of various credits and deductions, the system is far more progressive than you might at first imagine. However, our tax system is far from the only financial system in our lives that is progressive. Before we get into the details, let's talk about a couple of caveats on the topic.
I'm Not Talking About Benefits For the Poor
The government provides a safety net for all of us. The very poor are entitled to benefits such as food stamps, housing assistance, and Medicaid. While those benefits are clearly progressive, that's not really what I'm talking about in this post. What I'm talking about is financial progressiveness throughout the range of income.
Charity Goes Both Ways
In some ways, contributions to charity are progressive, but in other ways are actually regressive. For example, consider someone who gives a set percentage of income to a charity, such as a Christian who pays tithing. If he pays 10% of his gross pay, that's actually a higher percentage of his net pay than a lower earner. But even if he is paying on his net pay, that's still more money, even if it is the same percentage. But once you apply the effect of the phaseout on itemized deductions, charitable contributions become even more progressive.
However, they are also regressive in certain ways. For example, if you're in the 33% bracket and give $1000 to charity, it really only costs you $670. If you're in the 15% bracket, that will cost you $850. In addition, low earners may not be able to deduct charitable contributions at all, since the total of their itemized deductions is less than the standard deduction, or perhaps only a small amount more. So we'll call charity a wash. Now, let's get into 7 topics that are anything but a wash.
Social Security Benefits
The Social Security system is very interesting when you really examine it. It functions both as a safety net and as a retirement savings plan. That was probably necessary to get the votes to pass it in the first place. But the effect of that combination results in a fairly progressive system. If you are a low earner, comparing your Social Security contributions to your eventual benefits shows those contributions to be an excellent investment. If you're making larger contributions, your benefit does go up, but not by nearly as much. If a doctor calculates out his rate of return on his Social Security contributions, it will make the investment performance of a whole life policy look pretty good by comparison. To make matters worse, higher earners pay more tax on their Social Security benefits, making the system even more progressive.
Health Care Costs
There are several ways in which your health care costs are progressive. Not only are Medicare taxes higher for higher earners (thanks to the special Obamacare taxes) but your Medicare premiums are also means-tested if you make more than $85,000 ($170,000 married.) Even Medicare Part D (the prescription drug benefit) is means-tested. However, that is relatively small compared to the effects of the Obamacare Subsidy. This subsidy gradually decreases as you move from 138% of the poverty line to 400% of the poverty line. In my state, 400% of poverty line for a family of six is $130,280. That's the 97% percentile as far as incomes go. So for basically everyone, health care is now priced quite progressively. Not to mention, of course, that while higher earners get more Social Security benefits for their higher SS tax burden, high earners pay higher Medicare taxes to get the same benefit as everyone else.
Higher Educational Costs
This is a big one. The difference between the sticker price and the actual price at many colleges, especially private colleges, in the country is highly dependent not just the student's income, but also the family's income. For example, at Amherst College (the most progressively priced in the nation, by the way) the highest income tier students have an actual cost of $40,000. The lowest tier? Just $2,000. At Stanford, tuition is free if your parents make less than $125,000. If they make less than $65,000, you get room and board too. If you're going to give it away free to 95% of people, why discriminate against the other 5%? Just make it free for everyone like Berea College. You certainly have the endowment to do it.
Taxes
Another big one, that most people are very familiar with, is the tax code. I mentioned earlier the effect of the progressive federal tax brackets as well as the phaseouts. But it gets even better. Many states have progressive income tax systems. In California, it starts at 1% and goes as high as 13.30%. The federal and many state estate tax systems are also generally quite progressive. For instance, at the federal level, the exemption is $5.45 Million ($10.9 Million married.) Above that, you're looking at brackets that start at 18% and rapidly climb to 40%. And don't forget the capital gains tax system. If you're in the 15% federal income tax bracket or below, your capital gains rate is 0%. If you're in the 25% to 35% brackets, you pay 15% on capital gains. If you're in the highest (39.6%) bracket, your capital gains rate is 20%. The Obamacare taxes are stacked on top of these. So if you make more than $200,000 ($250,000 married) you pay an extra 3.6% on your investment income and an additional 0.9% on your earned income.
Licensing Fees
How about your licensing fees? Most of you have heard about Utah's Medicaid Expansion Plan where the legislature wanted to increase the physician license fee to $5,000. But even before looking at that outrageous idea, license fees were quite progressive. In Utah, a physician license, not including the DEA license and multi-state licensing agency fees (which total over $1,000) is $200. A dietitian? $60. And don't think the price is lower because practicing medicine is more complex than being a dietitian. There are other people who practice medicine, PAs are $180 and NPs/CRNAs are $140. There is definitely a progressive component there above and beyond the costs of running the program.
The Doctor Price
If you've never been asked to pay a higher price “because you can afford it” either directly or indirectly, you're just not paying attention. It has gotten to the point where I'm ready to take the diploma off the wall when contractors come over. When people ask what I do for a living, I'm a blogger or a writer. Sounds like I make a lot less money, right? They don't need to know that I make about as much writing and blogging as practicing medicine. Guess what? It gets me cheaper prices.
Family Expectations
Many doctors, especially those who come from relatively poor backgrounds have experienced this. It isn't so much of a deal for us because we both come from middle class backgrounds and our siblings generally have pretty good incomes. But for many docs, there is an expectation that since you've “made it big” that you will be providing more cash support for parents, providing loans to siblings, or simply chipping in more for family functions. In some families, that support is quite explicit. I have had some doctors tell me about how their father demanded to see their W-2 so he could calculate how much he should get from it. In other families, the expectations are unsaid, but still remain. Family dynamics are different across cultures and even individual families within a culture, but much of the time there is a progressive nature to them.
What To Do About Progressive Financial Systems
When you add up all of these effects, it is easy to see why many physicians and other high income professionals don't really feel very rich. At first glance, progressiveness seems like a good idea- those who have more should pay more. But you have to be careful about unintended consequences. Imagine someone in California with marginal tax rates of 39.6% (federal), 3.8% (payroll), and 13.3% (state) who also pays 10% of his gross income to his church but is phased out of the deduction for it. He only gets to spend 1/3 of his next dollar. I don't know about you, but I'm not willing to do a whole lot of extra work for 1/3 the pay, especially when I already have “enough.” I'm much more likely to go canyoneering instead. Meanwhile, you get to see fewer blog posts and society has to wait longer to get emergency care. Unintended consequences. In a perfectly progressive system, there is no incentive to work at all. Luckily, even with all of these progressive financial systems in our society, it is still not perfectly progressive. But it is probably far more progressive than most people think.
So, now that you're aware of these systems, what can you do about them? As you can see, there are huge incentives to make less money. So if additional money isn't making you any happier, work less and make less. Not only will you pay less in taxes, but your kid's college education will be cheaper and your health care will be cheaper. You are also incentivized to get less of your income from work, and more from more passive activities. Even better if that income occurs in retirement accounts- since that doesn't show up on your tax return at all- so be sure to max those out. It will lower the effect of progressive tax systems this year and for years into the future.
Perhaps most importantly, you can learn the rules of the game. For example, if your kid is really interested in Stanford, perhaps it is time to go part-time this year instead of next. Or perhaps you'll liquidate your taxable account despite the taxes instead of withdrawing from an IRA, since taxable assets count more against you in the Expected Family Contribution calculation. Maybe you'll move from California to Nevada or Texas. Or take your diploma off the wall and not put that “School of Medicine” sticker on the back of the car. Or choose to give up your medical license at retirement rather than keep it in order to do some charitable medical work. Perhaps most importantly, you can decide to be happy with less, a la Mr. Money Mustache. If you can be happy spending $50K or even $100K a year, you can avoid a lot of these effects and spend a heck of a lot less time in your life working for pay. By paying off your student loans and mortgage relatively early in your career, you can free yourself up to simply earn less and take advantage of these progressive systems without feeling deprived financially.
Another First World Problem- Getting all that mud and sand out of my wetsuit after these trips
Now, of course all this is a “first world” problem, just like “burnout” and “work-life balance.” My detractors will surely accuse me of being a “rich whiner.” But who are we trying to kid? This entire website is filled with solutions to first world problems. That's all I ever write about. Obviously, I prefer a higher income to a lower one, despite the additional costs. There is only so much I'm willing to do to reduce the progressiveness of my financial life. But it is good to be aware of this sort of thing because it should have an impact on the decisions you make about how much to work, how much to spend, and how much to save. Find the balance that is right for you.
What do you think? Are there any other areas in life where the price you pay is progressive? What changes have you made in your financial life as a result of the progressiveness of the tax system, the health care system, the college system, or your family? Comment below!
Nice!
I love posts that bring out the hate – it means you are doing either something right or something very, very wrong, lol! Nice one WCI!
I think the whole point here is that there are hidden costs to being a high earning physician. Your spending power at the end of the day is not linear, but most people in the lower 80% or so see it this way. They think that someone making 300k/yr is 3 times richer than a person making 100k/yr. This is simply not true.
THAT being said there are a few things mentioned in the post that are progressive only by choice. The family expectations for example. Expectations are not real money. They are a choice. You choose to have them cost more. Pay the cost if you want to, but it’s not the same as a progressive tax.
Good summary.
Well put. I faced the same choices when I was a small businessman, running a business that about the same size as a small medical practice. Would I buy a new car, or a piece of equipment that might bring in some profit? Nothing unique about medicine in such choices.
wow, a sane comment! Thanks happyphilospher. well said
Hahaha, thanks. Every now and then these random thoughts bouncing around in my head coalesce to form something useful 😉
Non linear is the exact right way to think about it, well put.
To answer WCI’s question, “What changes have you made in your financial life as a result of the progressiveness of the tax system?”…
Two years ago I turned down a job that to an uneducated financial mind appeared to double my income from $150K (as W-2 employee with “full benefits” including company match + additional funds for loan repayment) to $300K as a 1099 independent contractor.
After careful mathematical examination, including the items discussed accurately in this post, it became clear to me that in fact I would not be doubling my income, not even close. I realized there were some major benefits of living in this “sweet spot” of being married with kids, and a mortgage, and paying tithing, and maxing my retirement accounts, and having an AGI ~$130K.
Then I grew my money mustache and learned about the concept of hedonic adaptation which WCI also articulated very well just a week or so ago. Once I realized the progressive nature of the financial world I live in and learned that I won’t be progressively happier with more money I decided to stay at a job I like with an excellent and predictable income rather take a job I didn’t know as much about just for the (empty) promise of being richer and therefore happier.
Good point that happiness is definitely very progressive, in that you’re not significantly happier making and spending $200K than you are $100K.
For what it’s worth, even though there has been increased progressive taxation on incomes, capital gains, etc., and many of the issues detailed in the post, the incomes and wealth of higher-earners are going up much faster (by percent, never mind dollar amount) than that of the broader population. I don’t know about doctors specifically, though.
By the way, the income tax brackets the last couple decades never really made much sense to me. Even supposing that we want a progressive system that produces roughly the amount of revenue that it does, the steps are all kinds of strange. Why such a big leap between the 15% and 25% tax brackets (which is also the difference between 0% LTCG and 15% LTCG)? To me, though I haven’t pored over the data, it seems like the top brackets come too early. Why not extend up the range of the 33% and 35% brackets, as well as the 39.6% (giving a slight tax break to many highly paid professionals), and make up the difference with an additional top bracket of say ~45%? No need to go as extreme as 70% or even 90% at the top, as was done 30+ years ago. In any case, there could well be more tax brackets, even if only to smooth some of the gradations in the middle. It’s not like the number of tax brackets adds any complexity to the tax code.
In any case, that’s with the current primarily income-tax based system, where the biggest problem is in the mess of exemptions, deductions, credits, etc. that obviously don’t form any cohesive plan.
My comment is that it is somewhat tacky for physicians to complain about Medicare taxes when most physicians are generating 40% of their income off government insurance payments. It is hypocritical.
In general I usually find your posts to have a minimal political bias, but your derision of the additional taxes levied for the Affordable Care Act or as you and most Fox News pundits call it, Obamacare, makes me groan. I would prefer if you just called the law by its appropriate name.
You would hate the billboards in my town encouraging people to sign up for….you guessed it….Obamacare….before the deadline. It’s now simply the common name for the law, even if it started as a derisive term. PPACA, however, is far less work to type. 🙂
While 40% of my patients are on Medicaid or Medicare, those payments make up far less than 40% of my physician income. Many doctors don’t take Medicaid at all because there isn’t enough pay there to cover their costs, much less generate a profit. Medicare is usually at least minimally profitable. Doctors simply don’t look at those particular payors as some huge government largesse and so have no qualms complaining about the taxes that support them. “Hypocritical” would be a fair criticism if a doc had a different point of view of those programs.
Thanks for your reply. I find that the term Obamacare tends to be used to disparage the law while those who find that it helped them use ACA. It probably won’t change how you refer to it, but I do appreciate your thoughtful reply.
Sure, commercial insurance pays better, but prior to Medicare you would be getting a bushel of apples to pay for the doctor’s bill. Anyway, don’t want to turn this into a someone said something wrong on the internet thread.
You do realize that I get less than a bushel of apples from 20% of my patients, right? The bushel of apples sounds pretty good sometimes.
Bob,
Do you watch the debates or the state of the union? The democrats call it Obamacare. Obama calls it Obamacare.
“It may not be polling well, but President Barack Obama isn’t too worried about the Affordable Care Act’s nickname, Obamacare, or the health care law’s impact on his legacy.
“I like it. I don’t mind,” the president told former NBA star Charles Barkley in an interview that aired Sunday about the term Obamacare. “And I tell you, five years from now, when everybody’s saying, ‘Man, I’m sure glad we got health care,’ there are going to be a whole bunch of people who don’t call it Obamacare anymore because they don’t want me to get the credit.”
Not only is your suggestion that physicians profit from Medicaid laughable and wrong as WCI pointed out. The tone and tenor of your comment about “being tacky” and “hypocritical” is difficult to stomach when you are wrong on your facts. If you are going to call out hard working doctors for being tacky and hypocrites at least take the time to make sure you know what you are talking about.
Great points Jim… While I have no problem paying taxes. I am certainly very reluctant to pull in that extra shift considering the amount I get to keep. A progressive system definitely disincentives work for me.
a little bit of first world problem whining? yes. But c’mon folks, this is just an opinion piece explaining the progressive nature of many aspects of life as a high earner.
WCI may be complaining about it, I for one, am happy its a “problem” I have to deal with…But I don’t know how long that shine will last.
I’ve always been liberal politically, and now for the first time in my life I will be entering the highest tax bracket. For those who are not there, you cant understand how painful it is to fork over $150k to the government and see crappy results.
The results look just as crappy to those of us who have less means and thus pay less in taxes. The worst problem, most would agree, is the dysfunctional Congress. Don’t want to go on, because this is a WCI head, not a political discussion site, which I generally avoid.
Dysfunctional Congress
Bloated government
Corruption
Waste
Fraud
War
Fix all the above we would be running at a surplus paying off debt.
Progressive taxation absolutely disincentives spouses of employees who have high earning careers from working. The marginal financial benefit of working doesn’t outweigh the cost of childcare, the opportunity cost of spending time with your children, and added burden on the higher earning spouse.
So true. If my wife got a good full time job in her field, she could “earn” $40k to $50k. We would see half of that.
It works out much better for us for her to be a stay-at-home mom / homemaker. We never have to worry about work schedules conflicting, coordinating vacation time, childcare / getting kids where they need to be, picking them up when they’re sick, getting to and from school and activities, laundry getting done… I’m starting to convince myself that this aspect may be blessing in disguise.
Alternatively, if your spouse is also a physician (or dentist, lawyer, other high paying field), it may be worthwhile for both of you to work, at least part-time. Half of $200k or $300k is still a 6-figure addition to your take-home pay.
I have two physician colleges who got married. The following year they paid almost an extra $30K in taxes just for being married. The IRS penalizes marriage.
There are both marriage penalties and marriage benefits. It’s about whether you’re married to a high earner or not. My spouse lowers my taxes dramatically.
I believe I remember a post of yours maybe several months back discussing how it is not worth your wife going to work.
I wish there was a way to only view the latest replies so I do not have to search all 100+ comments to find the new ones
I’d like to second this. As the spouse of a physician in the top tax-bracket, I simply can’t get a job (in my chosen field of secondary education or any other) that is worth my time, as no matter what I do my earnings would be taxed at the top state (9.85% in my state) and federal marginal rate + payroll and Obamacare tax. It’s definitely a first world problem, but it’s actually quite distressing. What man wants to feel that he can’t possibly make a meaningful financial contribution to his family, or pursue a satisfying career that results in any reasonable financial achievement because he will never be able to keep more than thirty-something percent of what he earns? I’m not lazy – I want to work and attain success, but it’s extremely difficult to feel motivated knowing that I will never keep even a semi-reasonable portion of what I earn.
I feel you, Veritas. There are plenty of meaningful things you can do with your time to aid your spouse. Like ice fishing and snowmobiling 😉
Let’s not discount the very real financial value of having one spouse working less than full-time.
I can definitely relate to being charged a “doctor price” recently.
A contractor that was doing a few projects for us mentioned that she could have a multi-zone mini split a/c system installed rather than the window units we intended to replace (we live in NYC). She called her “a/c guy” and though the conversation was in Russian (which I don’t speak), I definitely understood one word: doctor. I chose not to go with the suggested upgrade.
I respect your courage in discussing a controversial topic knowing that some may (and clearly do!) disagree with some of your points.
I think what you are really driving at is more of a fundamental ethical concept of fairness and fair treatment. Most would agree everyone, as an individual person, should be treated fairly and equitably unless he/she has done something wrong to justify otherwise. And I think you are raising the question of whether, for example, you are being treated unfairly by the tax code or whether it is unfair (and wrong) for a contractor to charge you more when they learn you are a doctor. In the latter case, I think it is reasonable to say you have probably done nothing wrong to justify being charged more for the same work–the fact that they perceive you are “a rich doctor” is not a good reason and it is unfair and wrong for the contractor to do that. I have directly experienced that myself, and I have had to adjust my behavior to insist on firm fixed price bids, and I inform the contractor I am getting 3-4 other firm bids for comparison and will take the lowest price in order to protect myself.
With regard to the tax code, clearly there are aspects of it which raise questions of fairness and I think every taxpayer has an obligation to question the system and seek change where appropriate.
The point of the post wasn’t really to argue about what was fair or not. The fact that it got nearly 200 comments indicates to me that my point didn’t really come across as well as I’d hoped. Obviously my fault for terrible writing. My point was mostly “this is how life is, make your calculations and decisions based on it.” Not “we should change this” nor “rich folks are getting soaked.”
“Fairness” is a difficult concept, because it is so subjective. Living in Eastern Europe 20 years ago, I found that the cultural idea of fairness there was much different from here.
That said, there any many instances in our society when pricing is not “fair”. Airlines mess with prices all the time. You may pay twice as much for a ticket as the person next to you, and they could care less whether you are a doctor or whatever. The gas station a mile away charges more or less for the identical product. What about senior citizen discounts? I get some things cheaper than people years younger who may not be as well off. Or the pro bono work that many docs do? And so on.
The only way to deal with it is to decide how much YOU are willing to pay for whatever, and walk away if you think it is too high. But consider this: How likely are you to walk if you think you are getting an “unfairly” low price/? That happens, too, for a variety of reasons.
Lets not get started on airline pricing. Nothing drives me crazier than trying to compare a couple flights and settle on one only to have it go up because the sites realized you are serious and looking very specifically.
One, brilliant programming, and also a total bs game. Has happened nearly every time in the last year. I think I should have some separate cpu with a different ip address just for comparison shopping or something.
The message of this post is why I LOVE, LOVE, LOVE shopping at Walmart. I am allowed to pay the same prices as everyone else there. Walmart treats me as an equal.
I like that about Wal-mart too. If only the quality of a lot of the stuff was better.
Yeah, and I’ll bet that you love the fact that they pay their employees so poorly that many also qualify for welfare and other benefits, not to mention Medicaid, because they cannot afford other medical coverage. I make a lot less than most docs, but I avoid Walmart because I think their employee practices are detestable. They also squeeze their vendors until they can hardly make a profit, pull out of any neighborhood where they don’t make loads of money, buy a lot of stuff made in foreign sweatshops, etc. etc. So much for idealistic doctors with their $80K boats and half million dollar (or more) homes.
I get more crap about that boat on the internet than anything else I’ve ever done. Apparently even though you’re saving a large percentage of your income, donating a large percentage of your income to charity, and seeing 20% of your patients for free, don’t spend any of your money on anything you enjoy or you’ll be the object of derision for anonymous people on the internet.
I send my patients to Wal-mart for their meds because its cheaper thanks to Wal-mart’s philosophy of “Always Low Prices.” You’re welcome to pay “Never Low Prices” and use your portfolio to short Wal-mart stock in an effort to make a change in the world. I would suggest a perusal of Don Quixote prior to doing so, however. I’d also read this article:
https://www.bostonglobe.com/magazine/2014/06/06/why-still-shop-walmart/Ln99ntbdeE451OrgwJYiIL/story.html
Walmart ( via low prices ) has done more to assist the Gov’t Dependents, the Gov’t Assisteds, and Working Poor than any other shop in our county. Because you don’t shop there, you have no idea how satisfied the customers are.
Yes, the lower your income, the more lower prices matter.
Taxes are way too high and go to social welfare programs and not to defense, police, the court system. The things that were initially mandated by the Constitution. Government is only for the protection of life, liberty and property it is not to subsidize the incomes of people who are unwilling to work.
James Madison rejected federal money for a canal in New York saying that the people of Georgia would never use it and so their money should not be used in the construction. How many of us will drive on most of the roads of this country over our lifetime?
Our country is so far away from the original intent of our founders that it is disgusting. No man has a right to the sweat of another man’s brow.
Sounds like you should move to one of the handful of states that have no income tax. I think the shortage of docs is pretty much nationwide. Police and courts seem to work passably well here, too. Nationally, the crime rate has been falling for a decade or more. As for defense, it has been bloated since I was on active duty a half century ago. Look at the money wasted on the F35 and the Littoral Combat Ship. Both are going way over costs, yet can’t carry out their missions. Give me five Warthogs (or more), for each useless F35. I doubt if Madison (whom I admire) could foresee that. I agree re welfare, which is why I strongly support better education. With the changing workplace, only well-educated people will have decent jobs in the future. Of course, Walmart is cutting back hours for people who WANT to work, so is it any wonder?
The triple progressiveness of social security benefits (higher benefits at lower income bc on bend points, higher percentage of benefits taxed, and then higher marginal tax rate on the benefits) and the inexplicable progressivity of private college tuition are two of my pet gripes no one seems to talk about. As the son of a family practice doctor I never once considered even applying to big name private colleges because I was planning on going to grad school of some sort, and how could they literally both provide no merit scholarships like I got, and charge so much more simply because of what my parents made? It seemed so unfair at the time and I understand it has only gotten worse. My parents were not going to pay that much more for something so it was only punishing me, as it would have just been loans I would have had to take out.