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Income Distribution and the Ultra-Rich

A friend wrote to a group I’m part of:

Some folks I know who are at pre-IPO companies are really opposed to Warren Buffett’s support of raising taxes on the ultra-rich, saying that Buffett is helping keep a glass ceiling in place between them and being super rich.

They say we shouldn’t discuss politics in public, because then people won’t like us and we’ll die alone in a gutter. So after much deliberation, I decided to risk ending up in the gutter and posted my response to my friend’s post:

My Response

And thus we find the problem: the vanishingly small percentage of people who stand to benefit from low tax rates on the rich are vocally opposed to changes.

I’m surprised at how vehement and negative my reaction is to your friends’ outrage.

First of all, it’s stupid to complain about taxes and ignore the rest of the costs of their equity.

Tell your friends if they are concerned about increasing their take, they should lobby for the investment banking fees that get withheld from their IPO proceeds to get capped at some rational number. The banking fees are financial rape, but since they’re “standard,” no one bothers to protest. And they should read the prospectus carefully to see how badly their stock and options got diluted by sweetheart deals in the footnotes.

Speaking of which, do they track outstanding shares on a weekly basis and calculate their ongoing dilution? Or market fluctuations? If not, why not? Those effects can have far more effect than the tax rate differences. Did they quiz the founders on the dilution that last round of funding brought, and whether the return to your friends was negatively affected? Was that last round really necessary? Did those capital improvements really need to be made pre-IPO? Etc. Most people cry foul when the government wants a share, but ignore all the others who take a bite. They don’t ask whether those others are providing value for their money.

I’ve been through 4 IPOs and they’ve all been feeding frenzies. Of all the parties who lifted significant sums (sometimes many millions) out of the transaction, at least the government provides something in return:

  • A stable system of contracts, which makes IPO-able business possible in the first place.
  • A public infrastructure that gives them electricity, water, food, etc. so they can spend their time building their business instead of worrying about the logistics of running a server farm when power is spotty and only available for part of the day.
  • Financial markets that, no matter how corrupt individual players may be, at least provides liquidity for those IPO-bound friends.
  • A justice system that enforces the contracts allowing business to rely on them.
  • Etc.

Perhaps your friends should learn something called gratitude for having the privilege of living in one of the very few times in human history where we had an infrastructure that afforded them any chance at an IPO, combined with the incredible luck to be at a company that can viably go public (which only ~.02% of companies do).

On the other hand, I’ve been through 4 IPOs—all when the tax rate was a lot higher than it is now—and still have to work for a living. Maybe I’m just bitter and begrudge your friends a lifetime’s worth of free money without them having to contribute to the upkeep of the system that made it all possible.

How rich is an ultra-rich person?

Most people have no idea how truly ultra one must be to be one of the ultra-rich. Let’s tie the numbers to something real:

A million dollars is 25 years’ income for an American median family (median income is about $40K)

Ten million dollars is 250 years’ income.
100 million dollars is 2,500 years’ income.
A billion is 22,500 years’ income.
Ten billion is 225,000 years’ income.

John Chambers stashed four of those overseas to avoid taxes. Bill Gates has four of those in his bank account. In other words, enough money for a family of four to live at an American median standard of living for a million years, ten times as long as our species has existed.

Explain to me the value system in which there is any way to justify that concentration of wealth.

Yes, the mechanism of the system allows that to be accumulated by one person. But to argue that somehow we should be concerned about his tax rate seems bizarre. Honestly, a 100% marginal tax rate seems perfectly reasonable to me. He has enough to survive for a million years. No matter how hard he works, or what he contributes, he doesn’t need a single cent more.

(Nor do I believe his contribution to the human race approaches the contribution a family of four would make over a million year timespan, no matter how much one may like Windows.)

Tell your friends to use their after-tax proceeds to start another company that’s more successful, only they can do it in another country with a more favorable tax structure. I suggest Haiti. Port-a-Prince is looking for commerce.

Can taxes buy happiness?

In yesterday’s post Can money buy happiness, people seemed to agree that money doesn’t buy happiness directly, but it can buy choices, security, freedom, etc., which can help happiness.

This question isn’t for the book, but for my own curiosity. I was talking with several people from European countries this February. We compared tax rates, and when you add in state, federal, FICA, and sales taxes, I pay as much of each dollar in taxes as they do.

Among the things they get: national health insurance (or in some countries, national health care directly), guaranteed mortgage payments on their home made if they’re past retirement age so they know they’ll have a place to live, six to eight weeks a year of vacation, nanny care for new mothers, etc.

We don’t spend our tax dollars that way. We spend roughly 20% on military, 20% on interest payments on our national debt (increasing at record rates, by the way), and 20% on Medicare. Everything else (education, social programs) all squeezes into the remaining 40%. (See here for reference.)

Once we’re done paying our taxes, if we want any of the freedoms and choices that some other countries have, we must pay for them ourselves with after-tax dollars. (Security’s a fine example. 20% of tax dollars go to physical/military security, but not other forms of security like housing, food, or education/prep-for-future.)

In America, we’ve very successfully adopted the knee-jerk idea that “taxes are bad” so we never look at the other side of the equation: what our tax dollars actually provide.

So here’s the question: if we had social programs provided by or supervised by the government that provided things that gave you more time, choices, or freedoms, would you be willing to pay more in taxes? If so, which choices or freedoms would you want provided? If not, why not–are the choices/freedoms not important to you, are you already happy, etc.?

Tax cut obsession is absurd; vote for tax increases!

Tax cut obsession is absurd; vote for tax increases!

The paper was full of Democrats promising middle-class tax cuts yesterday. I really don’t understand why the national obsession with tax cuts. People seem to think about taxes as if the government is stealing from them. As much as I believe the government does steal on occasion(1), mostly, the money is going to needed common goods and services.

We’d love to believe that cutting taxes makes the government efficient. Nonsense. If a simple lack of money could make an organization efficient, then increasing taxes would make all our families more efficient because we’d have less money. It doesn’t. It just means we feel more pain, can do less, save less, and live our lives at poorer quality.

Do we want an efficient government? If so, we need to train people how to be more efficient! Government employees have neither the training nor the incentive to streamline their operations. In fact, exactly the opposite: when running on less money this year means you get less next year (often the case in government), “lean and mean” becomes a recipe for waste. But money cuts without adequate training and reorganizing won’t do much except kill the quality of the services that remain.

Of course, it would sure help if those cutting the budget demonstrated some money-savvy themselves. They don’t. The Bush Administration granted Halliburton several billion dollars worth of contracts in a no-bid decision. Halliburton promptly spent an extra $61 million on gas, either through incompetence (paying a supplier twice the market rate) or through willfull overcharging. Either way, the message to the rest of the government employees is clear:cost-cutting and efficiency aren’t the measures that matter in doing a job.

And by the way, people, cutting your income taxes won’t even make a big dent in your tax bill. If you make less than about $200,000, your social security (FICA) taxes make up as much or more of your tax burden than your income taxes. And while your employer pays half of your FICA, it’s still taxes being paid that could have been money in your pocket instead if your employer didn’t have to pay Uncle Sam.

Your overall tax bill is probably higher after the tax cuts. Do you own your own home? The federal tax cut meant Massachusetts got less federal aid. The state promptly raised property taxes to help close the gap. My property taxes went up more than I saved on federal taxes, and we still laid off teachers and cut services like graffitti cleanup. And oh, yes, subway prices took a 25% hike as well. Nice. I’m now paying more in taxes overall and receiving fewer services.
(If you rent, don’t gloat too much. Your landlord will be passing through that tax increase momentarily.)

I’ve had fun with all this, of course. We’ve seen an unusually large number of teenagers begging for money for their sports teams, uniforms, etc. this year. I educate them. Their parents got a $300 tax refund. That’s the money that would have paid for their school programs. If their parents chose to blow the $300 on something else, rather than saving it to make up for the services their kids lost, then it’s kind of silly for me to show more care, love, and financial commitment to these kids than their parents showed. It’s a cold, cruel world out there. And taxes are how we join together as a community to make it a warmer, friendlier, and happier world for humans.

Let’s have clean streets. Let’s have decent schools that prepare our kids to succeed(2). Let’s have food inspection that can afford to use “healthy for you” as a standard! That all takes money, and that’s where our taxes go. Instead of blindly voting for tax cuts, think for a few minutes about which services you benefit from. Street cleaning, perhaps? Sewer systems? Water treatment? Toxic waste cleanup? Because when services get cut, the military and terror budgets stay steady and it’s the quality-of-life budgets that get decimated.

(1) See http://www.nytimes.com/reuters/news/news-iraq-halliburton.html?ex=1075349072&ei=1&en=763f8032abf2c364

(2) Except for graduates of 4-year colleges, the U.S. ranked near list in the world in terms of literacy. See the National Institute for Literacy resources: http://www.nifl.gov/nifl/facts/reference.html#sum2002