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Wednesday, May 30, 2012

The Rich and The Stinking Rich

A few weeks ago, I had an amusing conversation with someone. She stated that I was rich and I laughed out loud.  Coincidentally, I ran across Timothy Noah’s new book, THE GREAT DIVERGENCE (Bloomsbury Press, 2012) the next day.  Noah is known in liberal circles as writing the “TRB” column in THE NEW REPUBLIC. I expected a left wing rant but instead was pleased to read a measured presentation of the facts of income inequality in this country.

For many years, I have told people in lecture halls and client presentations that Gallup has found that 88-90% of us consider ourselves to be middle class. Most of us accept the premise that if we think that we are middle class, then we are. As marketers, this is a very bad idea as we then inject ourselves into some everyman scenario where we believe that if we like a product, then the general public will as well.

To his credit, Mr. Noah does not buy in to the fuzzy everyman thinking. If  you are earning $109,000 a year, you are in the top 10% in 2012 so you are not middle class demographically no matter how average you feel. Noah breaks up the affluent into five general and amusing categories:

1) Sort of Rich—This is income between $109k and $153k which puts one in the bottom half of  the top 10%.
2) Basically Rich—This is people making between $153k and $368K with $368k being the bottom threshold for the top 1%.
3) Undeniably Rich—those making between $368k and $1.7 million ($1.7 million is the bottom of the top 0.1 percent).
4) Really Rich—this group does well. Annual income is between $1.7 million and $9.1 million ($9.1 mm is the bottom threshold for the top 0.01 percent)
5) Stinking Rich—this is the rarified air of the top 0.01 percent , which consists of $9.1 million or more in annual income. Many are ballplayers, entertainers, or financiers.

A lot of people would take issue with these demarcations. If you have a child at an elite college or two in prep school, you do not feel Sort of Rich or Basically Rich. You may even have a balance on your Visa card. Also, to me, wealth has always been a net worth statistic. Some people are rich but have surprisingly low incomes as their wealth is tied up in real estate, art, or low dividend stocks.

The book goes on to talk about a very discernible pattern in the U.S. today and much of the developed world as well. People on the top are gaining pretty consistently while those in the middle are struggling to keep pace.

Noah’s long term worry is that if this trend of income divergence continues it could undermine our democracy. So far, things have been calm with few examples of civil unrest or even anger among the lower 90% of U.S. citizens. To me, the reason for much of this is that America remains an aspirational society. We may not be in the top 1% or even 10%, but we still dream of getting there.  If things get worse over the next few years, I agree with Noah that a backlash could occur.

The author does offer a few solutions or suggestions. Education is failing in the US and has not kept up with technological demands. Right now, news sources say that we are 25th in global math proficiency, which is a real embarrassment. Our immigration policy is warped as it keeps out doctors, scientists and engineers that we badly need but lets in millions of unskilled workers.

So far, so good! To me, he goes off the reservation when he employs a “soak the rich” approach to raising revenue. Now, let me be clear. I think it is ridiculous that Mitt Romney and Warren Buffett pay a tax rate far lower than I do. Over a certain income threshold, say $1.5 million, a minimum tax of say 25% seems equitable to me.

Noah goes much further. He suggests a 70% tax on portions of the Really Rich and all of the Stinking Rich as he defined them.  According to IRS estimates only about 8,400 households make over $10 million per year. So putting a truly confiscatory tax on them will not raise all that much money when we have a deficit of $1.3 trillion this year. All this approach would do is encourage the wealthy to structure their assets in a way to defer income or limit tax liability. A few might even leave the country.

THE GREAT DIVERGENCE lays out the facts beautifully. It is an easy read and his style is breezy and he even makes demographics fun. As marketers, we need to understand the affluent as the divergence in income shows no signs of slowing down.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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