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Look who pays for the bailout

Meet the Henrys (high earners, not rich yet). They make $250,000-plus and get taxed to high heaven. And they're about to get socked again.

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

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Bill and Kira Kwon of Peoria, Ill. He is a wealth advisor at Morgan Stanley earning $375,000 a year, and she is a freelance photographer.
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(Fortune magazine) -- Bill Kwon is the embodiment of the American dream. His father - who was arrested by North Korean Communists in the early 1950s for championing democracy - brought the family from Seoul to Illinois when he was a baby. Bill worked himself ragged pursuing every opportunity America's heartland offered, never leaving Peoria.

Just out of college, he was earning a six-figure salary at a telecom company and sleeping in his parents' basement. Now he's a wealth advisor earning $375,000 at Morgan Stanley (MS, Fortune 500), with a five-bedroom brick home, a minivan, a son in private school, and three younger kids to follow. "My dad never made more than $25,000 a year," says the burly, outgoing Kwon, 39. "When I was a kid, this was the top neighborhood in Peoria. I never thought I could live here."

For all his blessings, Kwon gets really steamed when politicians and pundits claim that he and other Americans in his income group aren't shouldering their "fair share" in taxes and should pay more. Nor does he appreciate being branded as "rich" when it's far from certain he'll ever build the kind of lavish nest egg the truly wealthy enjoy, especially after the current market meltdown. "I'm not a trust-fund baby," says Kwon. "Raising taxes for people at my income level is like being punished for success, for working hard." Kwon's total tax bill is already more than $100,000, and the bite is taking an ever-rising share of his raises and bonuses, not to mention his wife's income as a photographer. Kwon fears that America risks killing the incentive for people like him by shrinking the rewards for logging extra hours or starting a business, diminishing the dream that brought his father from Korea.

The Kwon family has plenty of company, representing an income group comprising five million households that earn between $250,000 and $500,000 a year and pay a large chunk of it back in taxes. These folks aren't America's hedge fund managers, investment bankers, or CEOs - who boast net worths in the multimillions and qualify as rich right now. Instead, these are the doctors, consultants, and attorneys, the marketing managers and CIOs, the owners of real estate agencies and security firms. They write the contracts, inspire the sales teams, and integrate computer systems. They own many of America's small businesses. A man aspiring to join this cohort, nicknamed Joe the Plumber, has put a face on a big issue in the presidential campaign: Whether it's fair or wise to raise taxes on the powerful job engine of America's corner stores, maintenance firms, and yes, plumbing contractors.

This is the world of the HENRYs, an acronym we'll use to describe people whose financial situation can be summed up by the phrase "high earners, not rich yet." (I coined the term for a Fortune story in 2003 on the alternative minimum tax, or AMT, the bane of the HENRYs.) Put simply, the HENRYs are the bulwark of the professional and entrepreneurial class that drives the economy. Look in the mirror, Fortune reader, and you'll probably see a HENRY.

They are relentless strivers. Aspiring HENRYs played by the rules and did everything right: They won the best grades in high school, got accepted at good colleges and grad schools, and worked daunting schedules as medical interns or associates in law firms. They're an upwardly mobile group: Most HENRYs used their talent and grit to advance from the middle class, and those who got a hand from affluent parents are determined to do even better for their kids.

"These high earners may come from privileged, upper-middle-class backgrounds or be the children of immigrants," says Phillip Cook, a financial advisor in Torrance, Calif. "What they have in common is that they worked incredibly hard to build their careers and work incredibly hard to move ahead." Now this group of superachievers is being targeted as a cash machine. Barack Obama, the Democratic presidential nominee, has pledged to pay for middle-class tax cuts and credits by raising taxes on the HENRYs. "It's time for folks who make over $250,000 a year to pay their fair share," Obama has declared regularly on the campaign trail.

Obama and the congressional Democrats frequently refer to households earning over $250,000 as the "rich" and the "wealthiest Americans." But whether the HENRYs are truly "rich," or ever will be, is debatable. In Fortune's interviews with two dozen HENRYs from Charlotte to Concord, Calif., what emerged was a portrait of families a world away from the private jets, luxury vacation homes, and heated garages with Bentleys and Porsches lined up headlight to headlight that typically represent America's vision of "rich."

Kelly Lynch, the owner of a commercial maintenance company in Redondo Beach, Calif., is raising two kids with her partner, Jill Fenske, on a household income of $400,000. She's saving $800 a month for the children's college fund and $4,000 a month for retirement - a number that someday might make her rich. "If I blew my money like other people, I'd feel rich," says Lynch. Her views on taxes are befitting a born entrepreneur: "I think it would be unfair if someone tried to raise my taxes," says Lynch. "I don't think people should be penalized because they earn more."

Sure, it's hard to weep for families that earn more than 98% of American households, especially when median family income stands at $50,000 and the middle class is getting pummeled by falling home and stock prices. Unlike millions of Americans, most HENRYs don't need to worry about making the next mortgage or credit card payment. Still, HENRYs are getting a bad rap from those who lump them in with America's conspicuously wealthy.

While there's no consensus definition of how much wealth or income makes someone rich in America, here's a reasonable proposal: Many Americans would consider a family wealthy if it enjoyed either a large net worth today, something on the order of $3 million, or an income big enough to pay for a luxurious lifestyle - with enough left over to save for a comfortable retirement. The $3 million figure would generate around $200,000 in income, plenty to retire on tomorrow. If a couple in their 30s, 40s, or 50s has the option to stop working and live on their ample savings - call it "take this job and shove it" money - they can definitely be classified as rich. The HENRYs don't rate as rich by either standard. They're mostly two-income families. And even with two incomes they don't earn enough for luxurious lifestyles, and their savings don't remotely approach the take-this-job level.

Hit hard by taxes

The reason the HENRYs are strapped for both lifestyle and nest egg is twofold: First, they already face a large and rising burden for federal, state, and property taxes plus the knife of the AMT. "Taxes are by far my biggest expense," says Kwon. Second, the HENRYs invest heavily in a distinct set of high-grade staples that, in effect, defines them. They're all about the kids: saving for private colleges, paying for day care - practically a must, because Mom and Dad are both working - and providing dance, tennis, or gymnastics lessons. These might be seen as luxury items by middle-class workers, but they're absolute necessities to the HENRYs. The big tax bite and what they consider investments in their kids chew up most of the HENRYs' incomes, leaving little for either extravagant living or, in many cases, saving for an affluent retirement. Indeed, the HENRYs consider themselves "well off" and "successful" but nowhere near "rich."

"Wealthy people are those who have lots of cash reserves and don't have to go to work," says John Selden, 35, a dentist in Charlotte with a family income of $350,000. Adds David Twa, county administrator of Contra Costa County in California (salary: $250,000): "I feel middle class. To me, rich is people with golf-club memberships." Tony Molino, 50, an attorney in Rancho Palos Verdes, Calif., speaks for legions of HENRYs: "I've worked 50 to 60 hours my entire life, and I don't have a lot left over at the end of the month. I'm comfortable, but when Joe Biden talks about sucking it up, getting patriotic, and paying more taxes, I get livid."

The HENRYs interviewed by Fortune indulge in virtually none of the toys that brand families as rich. "I eat fast food and take my kids to soccer," says Kwon. Marie Hoffman, a realtor in Hermosa Beach, Calif., keeps hearing about what affluent Americans are supposed to be buying and swears it's not her. "I see $1,400 dresses advertised in Oprah's magazine, and I can't imagine anyone buying a sheath to wear to work at that price," marvels Hoffman.

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