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Millionaires on the dole

What often gets overlooked is that when the government gives a dollar to one person, it must take it from another.

By Karen Datko Aug 4, 2010 11:26AM

This guest post comes from Frank Curmudgeon at Bad Money Advice.

 

Last week WalletPop broke the news that IRS data shows that some millionaires claimed unemployment benefits in 2008. Using the increasingly rare definition of millionaire as a person or household with more than $1 million in income, rather than net worth, it disclosed that according to IRS data (found here on Table 1.4) 2,840 returns showing more than a million in adjusted gross income reported some unemployment compensation.

So the secret is out. I certainly did not qualify as a millionaire under the income test in 2008, but, as I have previously confessed, using the commonplace net worth criteria I do clear the (lower) bar. And, if you must know, I drew unemployment benefits for pretty much the whole of 2008. Oh, the shame!

 

I realize that few of you readers are part of my elite economic strata. So let me share some of my world with you. Not only do we fat cats draw unemployment when unemployed, when old we get Social Security and Medicare. Some of us even send our kids to public school. We drive our luxury automobiles on public roads and when our mansions catch on fire we call the municipal fire department to put it out.

 

Shocking, I know.

 

But seriously, if anything the count of 2,840 returns with both incomes over $1 million and some unemployment compensation is surprisingly low. A total of 321,294 returns reported more than $1 million in income in 2008. Of those, only 264,186 showed any income at all from salaries and wages, meaning that 57,108 were without employment for the entire year. Numerous others, we presume, were employed for some of the year but not all of it.

 

It is pretty clear to me that more than 2,840 were eligible for unemployment compensation but did not choose to take it. Perhaps they have a lower tolerance for dealing with bureaucracy than I do. Or a stronger sense of dignity.

 

Not worth the hassle

It is also possible that on an after-tax basis they decided the unemployment checks were just not worth the considerable hassle. Unemployment compensation, you see, is taxed as income at both the state and federal level. People who have never drawn it tend to be surprised by this. Welcome to my world.

 

Actually, it is not quite that simple. In 2008, and in years before that, unemployment benefits were fully taxable. But the stimulus package passed in early 2009 included amongst its many delicious pieces of pork an exemption from federal tax on the first $2,400 in unemployment compensation for 2009. Last I heard, this was not renewed for 2010, so it was a one-shot deal.

If you think about it, and I am betting that very few in Washington did, exempting the first $2,400 was a spectacularly regressive policy. It did nothing to help the person whose only source of income was unemployment compensation. For the long-term unemployed just getting by on the weekly checks, the first $2,400 was not going to be taxed anyway.

 

On the other hand, for the kind of people for whom getting unemployment compensation might not be worth the hassle and shame, exempting $2,400 from tax was a nice little sweetener. If, for example, you had investment income and a wife with a good job such that your marginal federal income tax rate was 35%, then the exemption was worth $840. Thank you, Mr. President!

 

The WalletPop post treats the fact that the very rich sometimes draw unemployment compensation as a great revelation. Further, the unmistakable subtext is that it ought to be a scandal.

 

I have little sympathy with those who are surprised about the rich getting unemployment. Anybody with a simple understanding of how that system works, and I consider that sort of understanding to be basic personal-finance literacy, should be able to work out on their own that yes, of course, even rich folks sometimes get benefits.

 

For similar reasons, I have trouble considering it a scandal. But there is a legitimate question as to whether or not this is the way the system ought to work.

 

I liked getting those checks. Who wouldn't? But I am not going to claim to be much of a charity case. Without them our lifestyle would have been exactly the same. We would have eaten the same food, lived in the same place, and shopped in the same stores. The only difference would have been that we would now have a very slightly lower net worth.

 

To be clear, I was legitimately entitled to the checks. I paid, or had paid on my behalf, unemployment insurance premiums for many years. And my being eligible for benefits was no fluke or loophole. The system worked exactly as designed and intended.

 

And yet I imagine lots of people are not particularly happy to hear that I got a weekly $575 check from the government. It is similar to the minor hullabaloo a few months back about food stamps being used at Whole Foods.

 

The real question

Congress recently extended unemployment benefits again, which occasioned a brief bit of sniping on the subject. Much of the bickering focused on the fairly silly question of whether or not unemployment compensation is an incentive to stay unemployed. Lost was the larger question of fairness.

 

What often gets overlooked is that when the government gives a dollar to one person, it must take it from another. You cannot really evaluate the fairness of that wealth transfer unless you compare the recipient with the payer, the so-called Forgotten Man.

 

And it is here that millionaires getting unemployment compensation they do not really need and hipsters using food stamps at Whole Foods strikes a nerve. It is not that the recipients do not deserve the money, per se, it is that they do not obviously need it any more than those from whom the government took it.

 

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