Don't confuse high earners with wealthy

March 04, 2009|By RON SMITH

I was listening to Brian Kroneberger's financial report on our morning show Monday. After listing all the negatives shaping up for the week in the markets, he said, matter-of-factly, "I want to wish good luck to all investors." Ordinarily, this kind of sentiment would herald a market bottom. When hope is lost, we expect the beginning of a rebound. At least we do in a business-cycle kind of recession. We are coming to understand, however, that the present mess is not merely a business recession but rather a global depression whose depth and duration are impossible to predict.

Currently, there is no light to be seen at the end of the tunnel, nothing to cling to of substance. The markets are panicked by any number of things - rising unemployment, shrinking profits, the loss of tens of trillions of dollars in devalued assets worldwide - and the remedy concocted by the Obama administration and the Democratic Congress is viewed with dread by most of the investor class (and indeed by anyone who has an income in the middle six figures, since they are to be targeted for a "stealth tax" increase).

During his campaign, Barack Obama pledged that though he would increase income taxes on "the wealthy," they would only be raised to levels seen during the Clinton years. Oops. Sorry about that, folks, but they're instead to see a reduction in mortgage interest rate and charitable contribution deductions. What this does, under the alternative minimum tax, is increase the taxes to be taken from what Fortune editor Shawn Tully calls "HENRYs, for High Earners Not Rich Yet." They are families who make between $250,000 and $500,000 per year. HENRYs include a lot of the people who make America tick: doctors, attorneys, architects, accountants and small-business entrepreneurs of all sorts.

As Mr. Tully points out, these people are not really "the wealthy"; they are high earners, which is something else. High net worth is what denotes real wealth, and these people are not in that class, though no doubt they aspire to be. And they're people already saddled with big income tax obligations, soaring property taxes, mortgage payments, tuition expenses, etc. The truth is, the odds are against most of them ever becoming what an objective observer would call "rich."

I don't expect many ordinary folks to worry much about the HENRYs, whose plight might seem like small potatoes compared with what confronts the working classes in this economic meltdown. Keep in mind, though, that it is those high earners who create many jobs in the private sector. They are a key part of the economic engine now sputtering so fitfully.

The time bomb, ticking in the background, is that the stimulus bill is largely a bailout of state and local government elected officials and their workers. What's explosive is pension and benefit costs that are raging out of control. Municipal finances around the country are in crisis mode. John P. Avlon reported in City Journal that new government accounting standards have forced local governments to produce balance sheets that account for the full projected costs of unfunded pension and health benefit costs over a 30-year period. This has already resulted in the bankruptcy of Vallejo, Calif., last year. Another California city, Stockton, is pondering bankruptcy, as are two smaller towns north of San Francisco, Isleton and Rio Vista.

There are 22.5 million public sector employees in the United States. According to the Employee Benefit Research Institute, they average 46 percent more in wages and benefits than workers in the private sector. Paying for this is now all but impossible. Many states and municipalities are insolvent. Pension funds have shrunk in the market meltdown, but their obligations haven't.

Echoing Brian Kroneberger, I want to wish all of us good luck.

Ron Smith can be heard weekdays, 3 p.m. to 6 p.m., on 1090 WBAL-AM and WBAL.com. His column appears Wednesdays in The Baltimore Sun. His e-mail is rsmith@wbal.com.

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