I’ve long thought of the FIRE movement as a uniquely middle-class American resistance movement – one where stress-ravaged workers save like barbarians and then retire as early as possible to escape the rat race.
Such a movement is uniquely American because no other advanced economy has as wide of a rich/poor gap or as much of an inequality-based tax and social safety net system.
This is a complex topic, to be sure, but it’s not hard to understand the basic allure of FIRE for the middle-class. When it comes to taxes or the social safety net, the middle-class is the most disadvantaged, and FIRE can erase this disadvantage.
Simply put: the rich are taxed-advantaged and enjoy corporate welfare, the poor are taxed-advantaged and have the social safety net, and the middle-class are tax-disadvantaged and have no social safety net.
Far from a democracy, the U.S. is better described as an oligarchy – one where limited government and de-regulated business is run by the very rich, where the middle-class shoulder the burden as servants, and where a social safety net is given only to the poorest of plebs to keep them from revolting.
Doesn’t the US tax the rich most?
On paper, the US has a progressive tax system – that is a system that levies higher taxes for higher incomes. But in practice, the actual data shows that the US has a regressive tax system – that is an opposite system where the rich pay less taxes. This is due to a complex 4000+ page IRS tax code stuffed with loopholes and written by the rich, for the rich.
No surprise there. Most Americans know that the U.S. is simultaneously the richest and poorest advanced economy in the world. Most Americans have even heard how little billionaires pay, such as oligarch Jeff Bezos who pays an effective tax rate of 0.98%.
But does this mean that middle and even lower income Americans shoulder a larger % tax burden than the rich? Again, that has been argued (on paper), but in practice this statement is only true for the middle class, not for lower income Americans.
According to PEW research, nearly 70 million tax filers (~40% of the population), pay either $0 federal taxes and additionally may even receive thousands in rebates. See image below. (Note: The middle and upper-middle classes pay the high rates at the bottom of the graph, and lower classes pay at the low or negative rates at the top of the graph.)
If we are going to castigate oligarch turds like Bezos or Musk for netting out a ~0% tax using corporate welfare – then it’s only fair to explore the value of low income welfare as well. And this PEW graph is not an isolated case. On any given year, 40-50% of Americans pay zero federal income taxes.
But the fact is a 0$ tax bill or a $1000 rebate check on a $20K salary is hardly enough to prevent marauding gangs of the poor from storming the mansion and beheading aristocrats. That’s where the social safety net comes in as a benefit beyond the tax code: free school lunches, college tuition, healthcare, and myriad other programs that the government provides to lift up the poor.
When you account for tax advantages combined with the extrapolated value of social programs, the total net tax burden of the poor looks like the below. (Note: the top 2 green bars present negative numbers, meaning the amount of free aid)
In short, this graph is saying that the bottom quintile of workers receives a $1.27 from the government for each $1.00 they earn. So a part time McDonalds worker who makes $20,000 a year, for example, would in effect receive an additional $25,400 worth of government aid.
This backstopped support of government social welfare (coupled with corporate tax writeoffs) makes subhuman wages livable for the poor and makes McDonalds (and stock investors) rich.
Meanwhile, the middle-class picks up the tax burden (and the obscene burden of American hustle work culture) to pay for the rich to get richer and the poor to stay poor. In essence, the middle class are American tax mules, carrying the load for everyone else.
And to what end? That government subsidized $3.00 Mcchicken will cost the middle-class worker $6.00 of earned income, after they lose ~50% of their income to federal, FICA, state, property, and sales tax, none of which receive any favorable treatment for the middle-class.
W2 income is the workhorse of the nation
For well over a decade, the FIRE movement has highlighted a broken system that privileges investment income and punishes earned W2 income.
Once you enter the coveted middle-class and make a respectable wage, the U.S System robs you of the government support afforded to only the poor and rich. Instead, like a scene from the Matrix, you are plugged-in and enslaved by a system that works you harder than everyone else, redistributes ~50% of your productivity (earnings) to those not in the matrix, and then spits you out in your 60s (if you make it that far) to live what little life your stress-shot bodies have left. And only then if you saved enough.
Don’t believe me? A simple example can illustrate the middle-class tax burden. I’m going to ignore sales and property taxes in this illustration, which could add as much as 25% onto the middle-class tax burden. Instead, I am going to demonstrate using income tax alone, which includes FICA, federal income, and state (using the flat 5% used by many states).
Lets assume a married family, with 3 children (earning $6000 in Child tax credits on the low end) at 5 different income levels ($30K W2 income on the low end, and $500K capital gains income on the high end). How much income tax will this family pay at different levels of W2 or investment income?
See below for yourself. The blue bars (W2 income) and green bars (investment income) show increasing levels of income, and the yellow line shows the effective income tax rate that will apply to each income level. The middle income unsurprisingly pays the highest income tax rate.
You’ll note the investor family (who does not work and absurdly ignores myriad tax writeoffs in this example) would only pay marginally more in tax % than a hardworking family making $80K. If that same family makes $250K a year in W2 income, they pay almost twice as much in taxes as the rich investor does pulling in $500K without working.
A $250K annual income sounds like a lot, but it’s pretty pedestrian in most U.S. cities, especially as a two earner household income. This is evidenced by the fact that $250K tops out at the middle of our “progressive” tax system at 24%. That’s far from the top tax rate of 37% which takes 3X that income to reach.
The most interesting part of this graph illustrates my point about using FIRE to tap into rich and poor privilege. In the example I created, a FIRE retiree living off $40K in capital gains ends up with a $5K rebate due to child tax credit, similar to the poor family making $30K a year and receiving a net tax liability of -13%.
What is the takeaway? It should be obvious, but I’ll synthesize here. Not only does US policy and social programs privilege only the rich and the poor; the tax system is also exclusively generous at the extreme ends of the poles.
But those in the middle are left out of the government subsidy sweepstakes and foot the bill for everyone else. This middle-class indentured servitude will continue at obscenely unfair tax rates until you turn in your badge, either due to job loss, traditional retirement, or early retirement.
The Great Irony of FIRE
FIRE was invented by middle-class people still reeling from the Great Recession and fearful of being forced to work a stressful 45 year career . . . or getting fired and left out in the cold before saving enough. FIRE cuts career lengths down by 20 or 30 years, allowing people to escape the middle-class tax Matrix before work stress kills their health and before ageism destroys their employability.
Tax avoidance and social welfare access is not the main purpose of FIRE, but it is without a doubt one of its strongest tools.
But what an irony the FIRE outcome is. Fire is a tool used by the middle-class to tap into the tax and social safety net privileges afforded only to poor and upper-classes.
Think of FIRE this way. A middle class worker:
- Lives on a poverty budget
- Invests everything in the stock market (the tool of the rich)
- Retires as early as possible, dropping income to poverty levels
- Taps into the poor class’s social safety net (subsidized healthcare, college education, etc.)
- Taps into the rich class’s tax advantaged investment income at a near 0% tax rate
If successful, FIRE-walkers are released from their middle-class shackles while they still have the vitality to enjoy an American life privileged with the government welfare they were previously denied.
But there is one final irony left to ponder. Is this middle-class early retiree still middle-class? Undoubtedly, most early retirees will make this claim.
After all, after a life of footing the burden to take care of the poor and rich, what early retiree wants to admit they are now either rich or poor, living off government support funded by the taxes of the working class they exited? Better to practice stealth wealth wizardry, and hope the US continues the same inequality-based system you now count on to stay comfortably unemployed.
Welcome to America – richest, poorest, broken, and free . . . that is, free from any obligation to support the middle-class. If you are reading this and are middle-class, FIRE can be your salvation.
If that’s not your flavor, then change your name to Sven Bjorkensen and move to Sweden, or literally any other advanced economy that doesn’t wantonly fuck over the middle-class.
Leave a Reply