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Religion, Politics and World Events They make great dinner conversation, don't you think? plus Political Film

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Old 10-16-07, 12:53 PM   #1
wabio
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MSNBC report on cost of living and Middle Class America

http://www.msnbc.msn.com/id/21309318/?GT1=10450

Life is Harder Now, Some Experts Say.

Generation gap: After paying the bills, middle-class pockets are emptier




The sight of shoppers pounding the pavement leads some to think the middle-class squeeze is a myth. But government data show today's consumers spend much less of their income on items like clothes, food, and appliances than their parents -- leading some experts to call accusations of hyper-consumption a myth.

By Bob Sullivan
Technology correspondent
MSNBC
Updated: 7:12 a.m. ET Oct 16, 2007

Shopping malls are packed every weekend. Restaurants can't open fast enough. Everyone seems to be wearing designer shoes, jackets and jeans and sipping $4 lattes. Credit card commercials constantly advocate splurging and, it seems, U.S. consumers are all too ready to comply.

So what's the problem? Why do so many middle class Americans with so much stuff say they feel so squeezed? If they are dogged by debt, isn’t it their own fault?

Perhaps, some experts say, things are not as they appear.

Bankruptcy law expert and Harvard University Professor Elizabeth Warren spent a lot of time crunching consumer spending numbers for her popular books, "The Fragile Middle Class” and “The Two-Income Trap.” In both, she makes this point: Despite all those $200 sneakers you hear about and the long lines at Starbucks, consumers are actually spending less of their income — much less — on discretionary items like clothing, entertainment and food than their parents did. In fact, after taking care of essentials like housing and health care, today’s middle class has about half as much spending money as their parents did in the early 1970s, Warren says.

The basics, according to Warren, now take up close to three-fourths of every family's spending power (it was about 50 percent in 1973), leaving precious little left over at the end of the month — and leaving many families with no cushion in case of a job loss or health crisis.



Warren's theories fly in the face of conventional wisdom and those crowded malls. But the premise is simple: Even though household incomes have risen about 75 percent from 1970, most of that is the result of a second earner — generally a woman — joining the work force. And that added income has been swallowed by rising fixed expenses, such as child care and housing costs, Warren argues. The average family pays at least twice as much for housing compared to its counterpart in the 1970s, Warren says, and in some competitive areas with good schools, housing costs have risen by as much as 600 percent.

Without savings, at risk of job loss
Now consider these factors: Four in 10 Americans don't have even one month's worth of savings for use in case of an emergency, according to a survey by HSBC Bank published in 2006. And with two incomes built into the family budget, the odds of a household getting hit by a layoff have doubled in the last generation. This combination — high housing debt, rising health care costs, lack of savings and greater exposure to unemployment — leaves many families in a precarious financial position.

Yet before Warren can get policymakers to talk about the middle-class squeeze, or at least middle-class worry, she often finds she has to beat back the notion that overconsumption is to blame for the rise in consumer debt — and in middle-class anxiety.

"A growing number of families are in terrible financial trouble, but no matter how many times the accusation is hurled, Prada and HBO are not the reason," Warren says in her book “The Two-Income Trap.”

There is no arguing that most Americans have more gadgets in their living rooms and more clothes in their closets than ever before. Consider the explosion of the closet-organizer business.

But government spending data paint a different picture. Take the often-cited evidence of culinary extravagance. While it's true that Americans are eating out much more than ever — nearly half of all dollars spent on food now go to dining out — overall food costs have plunged in recent decades. Americans now spent only about 10 percent of their money on food each year, compared to nearly 20 percent in the 1970s, according to data collected by the Bureau of Labor Statistics.

And despite the designer brands they buy, the average family of four spends about 20 percent less on clothes today, according to Warren's analysis. Think about your last trip to Target: Thanks in part to the entry of inexpensive imported textiles from China and other trading partners, it's possible to buy a Friday night outfit for under $40. This shows up in BLS data too: On average, Americans spent nearly 7 percent of their money on clothes in 1973, compared to about 4 percent in 2005.

Two weeks work for a fridge?
In fact, many consumer goods are much cheaper than they were in the 1970s. A look at 1971 Sears catalog offers a glimpse of some plummeting prices. In 1971, a basic Sears refrigerator cost $399. Adjusted for inflation, that would be about $2,000 in 2005 dollars, or nearly 10 times the $297 price of a basic fridge in today’s Sears catalog. Put another way, a fridge costs more than two week’s work for an average earner in 1971, but less than two day’s labor today.

Other household items were similarly expensive in 1971 — an 18-inch TV cost $429 (the equivalent of $2,150 today) and a 24-inch dishwasher cost $249 ($1,200 today).

Lower prices are, of course, a boon for the middle class, which now enjoys many conveniences and luxuries that were formerly reserved for the well-to-do. This is the cornerstone point for those who argue that the middle-class squeeze is a myth.

“I can’t hazard a guess as to why there is such a malaise in this country about current living conditions, but ... we have never had it better,” economist Arthur B. Laffer wrote in response to a question from a Gut Check America reader. Laffer is one of a large group of economists and policy-makers who point to crowded malls and high stock market returns as evidence that middle class America has little to complain about.

But Amelia Warren Tyagi, co-author of “The Two-Income Trap,” and also Warren’s daughter, said weekend shopping trip receipts aren’t the best way to examine the state of the middle class.

"Yes, people are spending more on home electronics, but the dollars just aren't that big," Tyagi said. "Maybe they spend a couple of hundred dollars more on stereo equipment. But they are spending less on tobacco. This is not to say that there's no frivolous spending going on, but as you add it all up, there's no more frivolous spending than there was a generation ago."

The source of the anxiety
With government data showing that Americans are spending much less than they did 35 years ago on clothes, food, and even entertainment, Tyagi says the anxiety they are feeling comes from somewhere else: the exploding costs of housing, health care and education.



In housing, recent data is most striking. Household incomes have largely stagnated in recent years, even shrinking 2.8 percent from 2000 to 2006. Housing costs skyrocketed 32 percent in that time.

Even more striking is the amount of income most families are paying to stay in their homes. Banks have long had a standard that said mortgages should not be approved unless the monthly payment was 25 percent or less of the buyer’s income. That limitation clearly is long gone. The U.S. Census Bureau defines “house poor” as spending more than 30 percent of income on housing expenses. In 1999, 26.7 percent of U.S. households were considered house poor. By 2006, the number had jumped to 34.5 percent.

Because of difference in government data collection methods, it's hard to reach back to the 1970s for a precise comparison point. But the rise in house-poor mortgage holders is striking by any measure. A 1975 Census report showed that only 8.9 percent of mortgage holders spent 35 percent or more of their income — including insurance, property taxes, and utilities — on housing.

The number of households spending half their income on housing — an amount that for most would be fiscal suicide — also has dramatically increased, from 10 percent in 2000 to 14 percent in 2006.

The cost of education has similarly spiked. Pre-school was largely non-existent in the 1970s, but today many families pencil in $1,000 a month for child care and early childhood education. On the other end, college costs have easily outpaced the cost of inflation. For example, the average bill for attending a four-year public college rose 52 percent from 2001 to 2007.

Health care costs have climbed steadily as well. According to the BLS, the average household spent 4.7 percent of its income on health care in 1984, and 5.7 percent in 2005.

In the end, the portion of an average family’s budget spent on fixed costs like housing has risen much faster than wages and inflation, while spending on discretionary items has declined. That means mortgages, more than lattes, are the source of middle-class anxiety, says economist Jared Bernstein of the Economic Policy Institute, a generally liberal think tank that focuses on the interests of low- and middle-income Americans.

‘They feel squeezed because they are squeezed’
"Consumers are asking, ‘If the economy is doing so well why am I feeling so squeezed?’” he said. “Well, they feel squeezed because they are squeezed."

Identifying the source of the squeeze requires more than simply comparing overall inflation to overall wage growth, Bernstein said.

"You have to look at a basket of key goods,” he said, like housing and college costs. “If you compare income growth to growth in prices of key goods, that stuff is growing 10 percent faster than income. ... Perhaps (consumers) are beating overall inflation but are they beating inflation in key components of their market basket? No."

More to the point, Bernstein said, rising housing costs have quietly broken a social contract with consumers that promised that a good job with a good income would guarantee a good place to live. While that may have been true in the 1970s, it is often not true today, he said.

"Lodged in the minds of those who come from the middle class is the idea that the middle class is a safe haven. It's not," he said.

That notion is changing. People no longer feel certain they will be better off than their parents, for example. "What really messes with your economic mind is when your expectations and aspirations are violated, Bernstein said. “You think, my parents died in a much better home than they grew up in. Will I?"

Generational trade-offs
Bernstein is not as pessimistic as Tyagi in his interpretation of the data. A comparison of then vs. now needs to be a little more subtle, he said. Clearly, middle class Americans are better off in some ways: larger homes and availability of what were once luxury items, like air conditioning, for instance.

“If a person is arguing that middle class families are worse off in every way, that person hasn't spent enough time at the mall,” he said. “But these are things you don't see at the mall: housing, health care, child care, saving and saving for college. The price of those (are) rising more quickly than inflation in general, rising more quickly than family income. And they are largely responsible for the squeeze that families report feeling."

Middle-class squeeze skeptics often point to rising credit card debt as evidence that consumers have themselves, and their spending habits, to blame for any economic anxiety. But there’s a problem with that theory too — it’s an exaggeration, says Liz Pulliam Weston, author of “Deal With Your Debt” and an MSN Money columnist. The majority of American consumers carry no credit card debt from month to month and very few carry large balances, she notes.

Last year, Americans held about $900 billion in credit card debt, leaving the average household with a bill of about $9,300, according to Federal Reserve data. That sounds like a lot, but a few consumers with very large debts can skew the average. The median balance is — the point at which half of consumers have more debt, and half have less — is a better indicator. The median credit card balance is $2,200, a fairly manageable amount. Only 8.3 percent of households owe more than $9,000 on their credit cards. Meanwhile, one-quarter of all Americans don’t even have credit cards, and another 30 percent pay them off in full every month.

Notion of heavy credit card debt called overblown
“Our national discussions about consumer indebtedness and bankruptcy are being distorted by the idea that we're waddling around with four- and five-figure credit card debts,” Weston wrote recently. “That makes us sound like spendthrifts, when that's not the norm."

Nevertheless, overconsumption and excessive credit card spending persist as explanations for middle-class debt angst. Tyagi has a theory why.

“Frivolous spending is visible, and it’s easy to pass judgment on, she said. “There is a comforting notion that if you are not spending wildly you are safe. If you are deeply invested in the belief that if everyone can solve their problems on their own, then there's no systematic problem, it would be important to think that if anyone is in trouble financially it’s because they did something stupid.”

It might be something their parents would never have done, such as taking out a negative-amortization mortgage or taking out a $100,000 home equity loan to pay for a child’s college, or spend as much money on child care as food.

But you can’t blame that on extravagant living, Warren said.

“Perhaps the most important thing we can do is persuade people that it's not about the lattes,” she said. “I think the "latte factor" is a way to distract people from real changes in the economy. Those who shake their fingers over lattes can feel good about themselves, both for their own economic prosperity and for the fact that those who are in trouble are there because of their own personal failings.”

--------------------------------------------------------------------------


An excellent read. Pretty much what I've been saying all along. Consumer goods are getting cheaper but everything else that's important is getting more expensive. The inflation rate is a joke. Our "robust" economy doesn't seem to have benefitted most Americans.
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Old 10-16-07, 01:11 PM   #2
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stopped half way through but how do they compute 0 to any value as a 1000% increase?
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Old 10-16-07, 01:13 PM   #3
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If they're having such a hard time making expenses, why are they spending $4500 on entertainment and clothes?
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Old 10-16-07, 01:18 PM   #4
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okay, finished it. the article mentions it but doesn't expand on the difference in housing from 1970 to now. The price has gone up, but I'm guessing the size of the house has gone up too. People want more so they spend more
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Old 10-16-07, 01:20 PM   #5
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How is the day care for a 7-year old (who presumably goes to school 180 or so days a year) almost as much as day care for a 3-year old?
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Old 10-16-07, 01:36 PM   #6
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there is no way a couple making that much with 2 kids and a mortgage will pay that much taxes. especially since we now have so many accounts where you can hide a lot of money from taxes
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Old 10-16-07, 01:37 PM   #7
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Originally Posted by Red Dog
How is the day care for a 7-year old (who presumably goes to school 180 or so days a year) almost as much as day care for a 3-year old?

don't argue with the article, the "reporter" needs evidence to make their point
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Old 10-16-07, 01:41 PM   #8
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Quote:
Originally Posted by Venusian
okay, finished it. the article mentions it but doesn't expand on the difference in housing from 1970 to now. The price has gone up, but I'm guessing the size of the house has gone up too. People want more so they spend more
Huh? A house that sold for $15,000 can sell for $300,000 and the size didn't change.

I honestly don't know what people are doing to buy a house now. I thought the price we paid was exorbitant 4 years ago. A starter house is now $250K here.
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Old 10-16-07, 01:41 PM   #9
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Originally Posted by al_bundy
there is no way a couple making that much with 2 kids and a mortgage will pay that much taxes. especially since we now have so many accounts where you can hide a lot of money from taxes

Yeah - 22K in income taxes is absurd on that income particularly w/ dependents.
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Old 10-16-07, 01:43 PM   #10
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I thought the tax numbers looked funny. I guess I wasn't the only one:

http://online.wsj.com/article/SB1187...ays_us_opinion

The author at wsj says that using the author's numbers, the best thing to do to fix the problem is lower taxes
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Old 10-16-07, 01:45 PM   #11
Venusian
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Originally Posted by CRM114
Huh? A house that sold for $15,000 can sell for $300,000 and the size didn't change.

I honestly don't know what people are doing to buy a house now. I thought the price we paid was exorbitant 4 years ago. A starter house is now $250K here.
yeah, but i'm thinking most people aren't buying the same house. Didn't we have an article a while ago that showed the szie of the avg house has gone up?


What's a starter house? I just paid more than that on my house. It is the 2nd house i've bought but i was 26 when i bought it so does that make it a starter house?
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Old 10-16-07, 01:45 PM   #12
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Can you post the text of that piece, Venusian?
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Old 10-16-07, 01:49 PM   #13
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Quote:
Originally Posted by Red Dog
Yeah - 22K in income taxes is absurd on that income particularly w/ dependents.
It didn't say "income taxes" it said "taxes", which is probably a total of Fed income tax, state income tax, sales tax, and property tax.
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Old 10-16-07, 01:51 PM   #14
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Originally Posted by Venusian
What's a starter house? I just paid more than that on my house. It is the 2nd house i've bought but i was 26 when i bought it so does that make it a starter house?
A person or couple's first house. Usually small, say 1500 sq ft, and usually older. Its a starter house presumably because the person or couple does not have 20% down payment for a more expensive house.

See what I mean? You said you paid MORE than $250K so you must earn pretty much. What is that? $2000 mortgage? Our first house, we were stretching to pay $1000 a month.
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Old 10-16-07, 01:55 PM   #15
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73,770.

for 2004, fed taxes would be: 8000 + 25% of amount over 58100. So 11,917.50.

7.65 for fica = 5643.405

So far 17560.905

State = ?

let's say 10% which is way high = 7377

Total = 24,937.91 with no deductions
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Old 10-16-07, 01:56 PM   #16
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Originally Posted by Red Dog
Can you post the text of that piece, Venusian?
The Two-Income Tax Trap
By TODD J. ZYWICKI
August 14, 2007; Page A17

Non-business bankruptcy filings in the United States quintupled during the 1980s and 1990s, to over 1.5 million annually by 2004 from 300,000 in 1980. To address the problem of soaring bankruptcy filings during this period of unprecedented prosperity, two years ago Congress enacted comprehensive, bipartisan bankruptcy reform legislation.


The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 tightened bankruptcy laws to weed out chronic problems of fraud and abuse -- and to restore public confidence in the integrity of the bankruptcy system. Since that time, bankruptcy filings have plummeted to about half of their prior levels, and reports indicate that the law is having few unintended consequences of interfering with the needs of legitimate, good-faith filers.

The reasons for the rapid rise in filings, as well as for BAPCPA's effectiveness, remain unclear. The most plausible explanation for the rise seems to be a change in legal rules, social norms and the economics of consumer credit that increased the advantages of filing for bankruptcy. At least some of these factors were reversed by BAPCPA.

Scholars on the left, however, have argued the recent drop is temporary and that rising bankruptcies will result from new stresses on American households, such as those posed by rising health-care costs and higher mortgage payments for increasingly expensive homes. These new expenses strain the family budget, leaving less discretionary income available to save and to meet other household expenses, and forcing mothers into the workforce. Despite the apparent prosperity of American families over the past several decades and the presence of two regular incomes, American households, on this view, are in a more precarious situation than ever before.

The argument is developed in the book, "The Two Income Trap: Why Middle Class Mothers and Fathers are Going Broke," by Harvard Law School Professor Elizabeth Warren and her daughter Amelia Tyagi. In fact, using their own numbers, it is evident that they have overlooked the most important contributor to the purported household budget crunch -- taxes.

Ms. Warren and Ms. Tyagi compare two middle-class families: an average family in the 1970s versus the 2000s (all dollar values are inflation-adjusted). The typical 1970s family is headed by a working father and a stay-at-home mother with two children. The father's income is $38,700, out of which came $5,310 in mortgage payments, $5,140 a year on car expenses, $1,030 on health insurance, and income taxes "which claim 24% of [the father's] income," leaving $17,834, or about $1,500 per month in "discretionary income" for all other expenses, such as food, clothing, utilities and savings.

The typical 2000s family has two working parents and a higher income of $67,800, an increase of 75% over the 1970s family. But their expenses have also risen: The mortgage payment increases to $9,000, the additional car raises the family obligation to $8,000, and more expensive health insurance premiums cost $1,650. A new expense of full-time daycare so the mother can work is estimated at $9,670. Mother's income bumps the family into a higher tax bracket, so that "the government takes 33% of the family's money." In the end, despite the dramatic increase in family income, the family is left with $17,045 in "discretionary income," less than the earlier generation.

The authors present no explanation for why they present only the tax data in their two examples as percentages instead of dollars. Nor do they ever present the actual dollar value for taxes anywhere in the book. So to conduct an "apples to apples" comparison of all expenses, I converted the tax obligations in the example from percentages to actual dollars.

In fact, for the typical 1970s family, paying 24% of its income in taxes works out to be $9,288. And for the 2000s family, paying 33% of its income is $22,374.

Although income only rose 75%, and expenditures for the mortgage, car and health insurance rose by even less than that, the tax bill increased by $13,086 -- a whopping 140% increase. The percentage of family income dedicated to health insurance, mortgage and automobiles actually declined between the two periods.

During this period, the figures used by Ms. Warren and Ms. Tyagi indicate that annual mortgage obligations increased by $3,690, automobile obligations by $2,860 and health insurance payments by $620 (a total increase of $7,170). Those increases are not trivial -- but they are swamped by the increase in tax obligations. To put this in perspective, the increase in tax obligations is over three times as large as the increase in the mortgage payments and almost double the increase in the mortgage and automobile payments combined. Even the new expenditure on child care is about a quarter less than the increase in taxes.

Overall, the typical family in the 2000s pays substantially more in taxes than the combined expenses of their mortgage, automobile and health insurance. And the change in the tax obligation between the two periods is substantially greater than the change in mortgage, automobile expenses and health-insurance costs combined.

This suggests that the most important change in the balance sheets of middle-class households over the past three decades is a dramatically higher tax burden caused by the progressive nature of the American tax system. In turn it follows that the most effective way of alleviating the household budget crunch would be to adopt lower and flatter tax rates that would reduce the government's take. Another possibility, advocated by Prof. Edward J. McCaffery of the University of Southern California Law School, would eliminate the "secondary earner bias" in the tax system, which causes all of the wife's income to effectively be taxed at a much higher marginal tax rate than the husband's. Any of these reforms seem sensible.

Lower and flatter marginal tax rates generally are not advocated by those who dominate the American legal academy today. But for those who want to consider serious strategies for preventing bankruptcies, less money in Uncle Sam's pockets may mean more money in ours.
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Old 10-16-07, 01:56 PM   #17
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Originally Posted by wendersfan
It didn't say "income taxes" it said "taxes", which is probably a total of Fed income tax, state income tax, sales tax, and property tax.
you post that while i go and spend time looking up 2004 tax tables
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Old 10-16-07, 01:57 PM   #18
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Originally Posted by wendersfan
It didn't say "income taxes" it said "taxes", which is probably a total of Fed income tax, state income tax, sales tax, and property tax.
Maybe. Definitely not clear.
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Old 10-16-07, 01:58 PM   #19
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Originally Posted by CRM114
A person or couple's first house. Usually small, say 1500 sq ft, and usually older. Its a starter house presumably because the person or couple does not have 20% down payment for a more expensive house.

See what I mean? You said you paid MORE than $250K so you must earn pretty much. What is that? $2000 mortgage? Our first house, we were stretching to pay $1000 a month.
Yeah, mine is 1500 sq ft or so, maybe a little more with the basement. 50 years old.

2k mortgage, but I have 2 roommates with another moving in this weekend. There are ways to afford it
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Old 10-16-07, 01:59 PM   #20
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Professor Zywicki taught at my law school. He's a wise man.
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Old 10-16-07, 02:02 PM   #21
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Originally Posted by Venusian
Yeah, mine is 1500 sq ft or so, maybe a little more with the basement. 50 years old.

2k mortgage, but I have 2 roommates with another moving in this weekend. There are ways to afford it
See...I wonder what the price of that house was 10 years ago?

My old house we bought for $97K in '97. We sold it for $145K in 2003. It just sold again for $215K. So how do people just starting out afford a decent house nowadays?
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Old 10-16-07, 02:03 PM   #22
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Another possibility, advocated by Prof. Edward J. McCaffery of the University of Southern California Law School, would eliminate the "secondary earner bias" in the tax system, which causes all of the wife's income to effectively be taxed at a much higher marginal tax rate than the husband's.
I never thought about it that way. Sucks for the wife.
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Old 10-16-07, 02:06 PM   #23
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Why is the wife the 'secondary earner?'
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Old 10-16-07, 02:08 PM   #24
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I assume it is based off the idea that the husband was the only earner in the 70s so now the extra income (which is taxed at a higher rate) comes from the wife
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Old 10-16-07, 02:13 PM   #25
wendersfan
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Quote:
Originally Posted by CRM114
Why is the wife the 'secondary earner?'
Less income, which I guess would make me the "secondary earner" in my house.
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