Friday, March 25, 2011

Pity the Suffering Rich

I read a statistic recently that was so frightening I doubted it could possibly be true. When I came across Jenny Smith’s piece on the Our Progress page, the first part in her “Are you Kidding Me” series, I could believe the stat that 42% of millionaires don’t feel wealthy. “The average respondent had $3.5 million in investable assets,” she reported. “They'd ‘like to have more.’” Who wouldn’t? I would bet that people with 3.5 mil in the bank spend less time thinking about small purchases and more time thinking about big ones. When you’re looking at really big price tags, you probably start thinking that three and a half million is nice, but four or five would sure be handy. There but for the grace of God go we, right?

But at the end of the piece, Smith shared a statistic that seemed dubious to me. “Oh, and a not-so-fun fact I learned last week - the richest 400 people in the US have more money than HALF of the country.” Sure, she hyperlinked it to another article, but I didn’t even bother clicking. I wanted to check that for myself. I went to Politifact, a group that fact-checks claims made by politicians and pundits. Sure enough, they reviewed the methodology that came up with the statistic and found that it was not only true when it was calculated using numbers from Forbes from 2009, but the gap between has grown using stats from 2010. It’s true and getting more true. (Where would Ms. Smith’s link have taken me? Turns out it would have taken me to Poltifact. I looked for any site that might dispute their findings but couldn’t find any.)

So, 400 people have more net worth than half the people in this country put together. How could this be? And why isn’t there a greater push toward a more equal distribution of wealth?

I found an answer to that question pretty quickly after I posted the statistic to my Facebook page. One friend and family member quickly responded that the Clintons, the Kerrys, numerous Hollywood big names, Michael Moore, and all the Democratic high rollers are included in those 400, and thus have no authority to speak about income inequality. So I checked through the list (it’s only 400 names, after all.) No Clintons. No Kerrys. No Michael Moore. The only Hollywood name was Oprah Winfrey. Some are certainly contributors to Democratic candidates, though. George Soros is on the list. I’m not sure if Warren Buffet is a Democrat, but he did say, “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” Personally, I think he has the authority to say that.

I don’t begrudge anyone on the Forbes 400 their money (as long as they got it legally and morally). I think my friend is missing the forest for the trees. The problem isn’t the top 400. It’s not the top 1% who have more financial wealth than the bottom 95%. The problem belongs to all the folks in the bottom 50% who believe that the interests of those 400 people must be protected at all costs. They believe this, I think, for two reasons. For one, they think these billionaires are a put-upon minority who require their protection. Second, they believe there’s an off-chance they will someday be in this group themselves, and that by protecting the Forbes 400 they are protecting their future selves.

The Forbes 400 are certainly a minority, but their suffering has been overstated by people who lack the most basic understanding of mathematics. The folks at the bottom worry that burdensome taxation will make these men and women poor. It will take their billions of dollars and winnow away at it until they are paupers. Now, I’m not going to weigh in on who works harder, billionaires or ditch-diggers. These folks have worked hard and they’ve been lucky. Even someone like Oprah, who had a brutal childhood, had the luck to be born in a country where a combination of infrastructure, cultural milieu, and demand for her talents could facilitate her rapid rise to Queen of Television. Did she work her butt off? (Pun avoided here.) Yes. Does she deserve to be rich? Yes. Would increasing her tax burden make her poor? No.

Income tax is… wait for it… tax on income. If income taxes are staggered so that the wealthy pay higher rates, they still make more money than everyone else. Imagine if a millionaire had to pay a 50% tax on their income of $200 thousand a year. They’d pay $100,000. They’d only make $100,000 that year. Only. Now, imagine if a billionaire in that same year had to pay 75% on the $200,000,000 they made that year. They’d make $50 million. Would the long-suffering millionaire who says they would “like to have more” suddenly give up on their financial pursuits? “Well, I wanted to have more, but going from an annual income of one hundred thousand dollars to a mere 50 million simply makes it not worth the trouble.” Find me the millionaire who isn’t interested in having 50 million dollars.

And yet, we’re told that increasing the marginal tax rate will cause these folks to stop trickling their money down to the rest of us. George Bush Sr. called this “Voodoo Economics” for a reason. And it wasn’t because he comes from a long line of rabid socialists. It just doesn’t work. Concentrating wealth in the hands of a few people does not lead to improved employment or higher standards of living for more people. Surprise: It leads to higher standards of living for a few people.

But raising the tax burden would lead these 400 people to leave the country and take their money with them, right? Then we would miss out on all those trickle-down benefits we’ve been enjoying so much! Except that’s not true after all. I got into a debate about an experiment in just this kind of thing with another college friend today. When I posted a link to a petition that would ask Congress to raise taxes on millionaires and billionaires, my friend asked, “How many companies have left Oregon (for example) following the recent tax increase on the top brackets?” He linked to an article about a particular company which was leaving the state. The proprietor who was taking 20 jobs with her said that the decisions was “absolutely tied to (tax measures) 66 & 67.” The problem with this anecdotal example is that it doesn’t gel with the larger statistics about employment. Since the passage of those two tax measures, unemployment has actually dropped here in Oregon by 2%. Those twenty manufacturing jobs might have left the state, but more came in to take their place.

The other little factor my friend’s article gave less prominence than the hostile business climate of post 66 and 67 Oregon: The proprietor had found a buyer for her company in Ohio. So, will the Forbes 400 suddenly emigrate to countries where their income is less threatened by taxes? No, because they make that income here in the United States! Africa has about three times as many people as the United States. I’m sure Oprah could find some despot in Africa who would offer her zero income tax if she would relocate to his country to build her house and store her wealth (and serve as a human shield in the case of a U.S. no-fly zone should his people rise up against him). So why doesn’t Oprah pull her shows off of U.S. TV and relocate? Because she’s not stupid. She knows she can’t possibly make as much money in markets where people don’t have power, let alone TVs. Think Ted Turner (also on the Forbes 400) is going to take TNT and TBS off the air and relocate to Russia if we raise his marginal tax rates? Yeah, right. Think the Koch brothers will give up on mining and drilling in the U.S. if we say they have to pay for the pollution they cause and also have to pay a higher tax rate? Let’s take a little bet on that, shall we?

But I’ll tell you what will make these Forbes 400 leave. If, out of a desire to protect the interests of these 400 people, we de-fund our education systems, cut into our infrastructure spending, and generally do everything we can to provide them with the cheapest, lowest skilled labor possible, we’ll give them a country where they can build call centers and factories, but not one where the people can actually buy the products they’re selling. Tired of hearing someone with a slight Indian accent when you call tech support? Just wait until you’re learning another language to serve the needs of someone who has more buying power than you do in some other country. It will make you wish you’d been a bit nicer to “Bob” and “Mary” from Bangalore. Which language will you be speaking in that call center? I’m not qualified to speculate, but (since this is unapologetic conjecture) let me hazard that it will be the country that realizes the fashionable “austerity measures” that are slowing economic growth are for chumps, and invests in services for the broadest swath of its consumer base. They’ll be the buyers, and buyers lead markets.

The Forbes 400 will be fine, regardless. That’s the kind of security we covet, the ability to roll with the punches of a global economy, and, combined with our innate American optimism, that’s why so many poor and middle class Americans continue to believe that they will someday breathe that rarefied air. And what’s wrong with dreaming, right? I’ve bought a few lottery tickets in my life, not because I thought I’d win but because dreaming is fun and, to a point, healthy. After a point, it’s sick. There is no lottery that will make anyone a member of the Forbes 400.

You will never be that rich.

Read that again.

You will never be that rich.

Whatever job you are currently working at does not create a means wherein, by increasing your effort, you will make a billion dollars. I could be the greatest public school teacher of all time, working 26 hours a day (yes, even if I bent the laws of space and time), creating the most wonderful lessons and meeting all of my students educational needs every day, and they will not pay me a billion dollars.
But this is America, you say. This is the land of opportunity. Anything is possible here.

Yep, but that doesn’t make anything likely. If you really want to increase your chances of getting rich (work smarter, not harder, right?), your first step should be looking into which countries really offer social mobility. You might want to move to Denmark, Australia, Norway, Finland, Canada, Sweden, Germany or Spain. Oh, guess what’s one of the leading predictors of social mobility. Income equality. “The greater a nation's inequality, the harder it is for its children to improve their lot,” Dan Froomkin writes in the Huffington Post. “That confirms findings by other researchers. ‘The way I usually put this is that when the rungs of the ladder are far apart, it becomes more difficult to climb the ladder,’ Brookings Institution economist Isabel Sawhill tells HuffPost. ‘Given that we have more inequality in the U.S. right now than at any time since the 1920s, we should be concerned that this may become a vicious cycle. Inequality in one generation may mean less opportunity for the next generation to get ahead and thus still more inequality in the future.’”

I have no problem with people trying to get rich. If some people from Publishers Clearinghouse show up at my door with a big check tomorrow because of something I sent them ten years ago, I won’t send them away, and you will probably hear me squeal like a six-year-old girl who just got the newest Barbie doll.

But please, if that check is for one billion dollars, and you see me on the Forbes 400, please, please don’t try to protect my financial interests. Because, since social mobility is related to income distribution, when you put my billionaire interests ahead of your own, you aren’t protecting your future self. You’re hurting your children. That’s not hopeful or patriotic. It’s selfish and stupid.


joe mc said...

Brilliant post. I'll be forwarding this around because people need to see this. One thing you forgot to mention about this idea that higher taxes will kill jobs. One point the pundits always seem to avoid is that companies are taxed on their profits. Profits = revenue - expenses. If they wanted to pay less in taxes they should hire more people. This would increase their expenses, decreasing their profits and therefore decreasing their tax "burden".

Anonymous said...

Some of what you say is true - but I've got to ask - have you lived in any of those countries? I have. Sorry, but no one has the right to take 75% of what you earn. It won't stop people investing but it WILL alter their behavior. The things that are the riskiest - such as, for example, the tech startup revolution that's driven much of the economy for the last 30 years - wouldn't happen. Too risky. Only the largest companies will take that kind of a risk in that environment - likely because their shareholders know that they'll be taxed at extortionate rates on any dividends. VC money? Enormously fast, world changing growth from new technologies? With a handful of exceptions those come from countries with tax systems that incent risk. By the way, most of those countries have the equivalent of national sales taxes of up to 25%, gas prices double or more than the US, and no mortgage interest deduction for owner occupied homes. It's OK if that's what society as a whole agrees on - but that's not the history in the US.

joe mc said...

Anon, Have you heard of a proposal to raise anybody's taxes in the USA to 75%? I'm unaware of this proposal, do you have a link? The most aggressive proposal I've seen is to raise taxes on the richest by 2%, bringing them up to about 38%. Still well below the average top tax rate over the last 100 years. I don't believe for a second that raising taxes on the rich by 2% will change their behavior at all.

Benjamin Gorman said...

Sorry my hyperbolic hypothetical number caused confusion. I agree that 75% is too high. My point is not that we need a 75% top marginal tax rate, but that we should be having a rational discussion about a number higher than a 0% increase. Right now we're still debating tax cuts rather than sensible increases. In the context of our situation (400 individuals with half the wealth) that's absolutely backwards.

Anonymous said...

Anon, I think you need to read this:

Well, everyone should read it. It is a very interesting article about how taking away some of the risks associated with starting a business can be better than low taxes for startups.


Benjamin Gorman said...

Garm, that's a great piece. I sent the link off to a friend who'd just made the argument that our country is shifting to the right because Progressivism doesn't work. My argument was that it's not a fault in Progressivism, but that the Dems have generally been weak and inconsistent. It was helpful to be able to show that socialism certainly seems to be working in Norway. Thanks!