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Friday, December 6, 2013

The Top 1%

These days many of you hear and read a lot about the top 1% in income in the United States. Some research coming very recently from the University of California at Berkeley hit us with some eye-popping statistics including:

--Last year the top 1% or earners in the U.S. collected 19.3% of the nation’s total household income which is an all time high

--Incomes of the top 1% have grown by 31.4% over the last four years while the remaining 99% have experienced a gain of 0.4% (not a typo, my friends--less than one half of 1%).

--The top 10% of earners took home just over 50% of the nation’s total income last year.

--The top 1% earn just over $500,000 per year and if you go to the elite .1% if soars in to multi-millions topped off by a few hedge fund managers who make over a billion dollars per year. The top .1% have nearly 11% of total earnings.

--Separately, the New York Times has reported that the top 10% have 90% of the stock market wealth (not a big surprise!).

Long run, if you are fair minded, it is hard to determine what kind of divisions this is causing or will cause in society but it is safe to say that it will eventually put a strain on social safety nets both on a state basis as well as nationally.

Are you bothered by the 1%? Most of us do not give them more than a passing thought. When I talk with people they either say that they are not as smart as the 1% and others tell me that they are not willing to work as hard as the elite do. Interestingly, I have not heard the term “the idle rich” in a few decades. And, it makes sense. Nearly 100 years ago, in 1916, the top 1% received only 20% of their income from paid work. They “clipped coupons” and lived off the interest on their bond portfolios. Today, it is closer to 70% of the wealthy living on their earnings, not passive bond and dividend income. Most of the elite in the U.S. have not inherited their money--they earn it every day and put it long, even savage hours in many cases.

Surprisingly, the group that seems most resentful of the super elite (.1%) tend to be the folks at the lower end of the 1%! They may be lawyers, accountants, doctors who see the vast wealth of members of the super elite as they are service providers to the posh and the riches of the few seems to annoy many of them. While compared to most of us these professionals appear to be living the American dream, they are jealous of the super elite. I have personally heard snarky comments from those who are lower echelon members of the 1% say, “He has just been lucky” or “I am far more intelligent than he is--why does he have so much money.” So envy surfaces at all strata of society although one might think that anyone in the top 1% would be happy or at least thankful for what they have in today’s uneasy economy.

A few years ago, I talked about the issue of income inequality in “The Gini Coefficent and the Future.” (see Media Realism, January 21, 2010). What surprises me is that the gulf between the wealthy and the rest of us has grown far wider in just a few years. Part of it has to be due to a buoyant stock market in the US. Also, when real estate bottomed out a few years ago in many areas of the country, the top 1% had ready cash and could scoop up some great bargains when foreclosures were soaring. Yet, even a cursory look at the income and wealth spread shows that American is now resembling a developing country rather than a vibrant democracy. Historically, in an economic recovery, the income growth was spread across the entire population. Not so any longer! Allegedly, we are in the fifth year of an economic turnaround, and the asset growth continues to go almost exclusively to the flush and especially the super-flush.

To be clear, in a relatively free market such as ours, there will always be income inequality. Always. The talented, the hard working and yes, the lucky, will rise and do better than most of us. What is alarming is that the middle class is getting hollowed out and the majority of Americans are, at best, simply running in place or losing ground.

What to do? Soak the rich? There are not really all that many of them. Tax reform might be a start. During the 2012 presidential campaign, I along with many who are data junkies, were more than bit annoyed when we saw that Mitt Romney was paying out only 13% of his income in Federal Income taxes while many of us with far more modest incomes were writing checks to the US Treasury as a percentage of our incomes that were two or even three times as much as he did. Now, do not get the wrong impression. Former Governor Romney did not break any laws. He was wealthy enough to structure his affairs in such a way as to minimize his tax bite.

This leads to some saying that the concept of fairness has to be set aside because the super wealthy or even the affluent are “job creators.” I have a problem with that logic, even though people tell me that a private investor such as I is often a “job creator”. If someone takes a flyer on an IPO (Initial Public Offering), he or she is definitely a job creator. Such individuals take a risk and the capital that they provide helps new companies expand and help grow the economy.  Most investors do not buy IPO’s. The overwhelming majority of their investments are stocks bought in the secondary market. Consider this example--let us say that tomorrow one of you buys 1,000 shares of a famous global blue chip company. You hold it for five years and watch with delight as they raise the dividend each year 8-10% giving you a growing stream of income. After five years, the price of the blue chip has doubled and you sell for a nifty profit. How many jobs have you created? The company treats you as a bookkeeping entry with your thousand shares now being owned by someone else. Yet, our tax system gives you preferred capital gains tax treatment. You have created zero jobs.

Here is a modest proposal that makes sense to me. Jobs do not come from “job creators” such as I but rather from businesses. So, slash or eliminate the corporate income tax and tax all capital gains (except IPO’s) and dividends as regular income. Eliminate the “carry trade” which treats some short term trades as capital gains (sorry, Mitt). Perhaps this can right the ship a bit with some job creation and bring some fairness back to the tax code. And, finally, reform the Social Security and Medicare systems with a means test. The top 1% and especially the super elite top .1% may have to fend for themselves. I am confident that they can do it.  :):):)

Why are most people complacent about our growing inequality? I am not sure and often find it hard to get people to speak about it. One thing is certain--this trend cannot continue much longer or we will face significant social unrest at some point down the road.

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

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