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HENRYs (pg. 3)

By Shawn Tully with Joan Caplin
Last Updated: October 27, 2008: 12:37 PM ET

How HENRYs feel about tomorrow is crucial for the sales of new cars, PCs, and toys. According to estimates by the American Affluence Research Center, the HENRYs control as much as 15% of the $9 trillion in U.S. consumer spending. An even more important point: The HENRYs are crucial to America's economic health because so many of them own small businesses. The debate over their future is now a major issue in the presidential campaign, courtesy of the unlikely and now overexposed folk hero nicknamed Joe the Plumber (full name: Samuel J. Wurzelbacher). He confronted Obama when the candidate was campaigning in Joe's suburban Toledo neighborhood, telling the nominee that he wants to buy a plumbing company but is worried that Obama will raise taxes on small business. Obama responded, in part, that "when you spread the wealth around, it's good for everybody," which the McCain campaign attacked as socialism. "The whole premise behind Senator Obama's plans is class warfare - let's spread the wealth around," declared McCain.

The engine behind small-business growth

The HENRYs, together with high earners making more than $500,000, own 660,000 small businesses and pay $110 billion in corporate taxes, one-fourth of the U.S. total, on their personal returns. Small businesses created two-thirds of the 6.4 million new private-sector jobs the U.S. economy added between 2003 and 2007. Even so, the undeniable fact is that the HENRYs cannot completely escape America's backlash against the rich. The earnings gap in the U.S. is greater than ever, with the top 1% of U.S. households receiving more than 22% of reported income in 2006. For voters struggling on the median income to save for their kids' college education, the difference between a $250,000 income and $1 million is like comparing gold and platinum: It all looks pretty rich. But it's not just an emotional reaction. The growing sentiment for putting heavier taxes on upper incomes has a rational component as well, pushed by economists who contend that people who are financially successful at this point in the post-industrial age owe a debt to the breakthroughs of the innovators who went before them and hence a greater obligation to society at large.

In a new book called Unjust Deserts, academics Gar Alperovitz and Lew Daly dispute the idea that high taxes would be a disincentive to today's strivers, pointing out that America's most expansive period of economic growth in the postwar era happened at a time when marginal tax rates reached 91%. Even though the HENRYs may be stretched, they're facing a future of higher taxes no matter who's elected President. The stark reality is that with two costly wars, a massive financial bailout, a looming recession, and ballooning deficits, the government is under intense pressure to raise more revenues.

In fact, many HENRYs accept the idea that as some of America's most prosperous citizens, it's their obligation to shoulder an even bigger share of the burden, especially in these tough times. "I'm happy to pay taxes, having been in government all my life," says county administrator Twa. "Do I think we should be paying more than the people making half what we make? Absolutely." Adds Davidson, the California video producer: "I'm fine with higher taxes. You need good roads and good schools. That's what taxes pay for."

How much would the candidates roll back the clock on taxes? Let's get straight to the election headline (those of you reading this after Nov. 4 will have a better idea of what you're facing): The HENRYs would fare notably worse under Obama than under McCain. Obama would substantially increase their capital gains levies; he also advocates a significant hike in Social Security taxes aimed smack at high earners, though he says the increase would come far in the future. By comparison with those measures, Obama's much-discussed pledge to raise tax rates on families earning over $250,000 a year isn't as harsh as it looks. Obama's proposed rate increase would affect only some of the HENRYs because so many of them are already saddled with a curse that can be spelled in three letters - AMT, or alternative minimum tax.

The AMT hammers these Henrys by erasing most of their biggest deductions, including state income taxes and property taxes. And it's almost exclusively aimed at the HENRYs, exempting most of the middle class and the truly rich. McCain, for all his talk about cutting taxes, would essentially preserve the status quo for HENRYs, resulting in more and more of them getting drawn into paying the AMT. Obama's plan would do the same, with one important difference. Under Obama's plan, the highest earners among the HENRYs would leave the AMT. But that's not good news for them. They would graduate by paying even higher taxes. The dreaded parallel tax system known as the AMT might as well be called the "HENRY tax," so precisely does it target that group.

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