“The shaping of the will of Congress and the choosing of the American president has become a privilege reserved to the country’s equestrian classes, a.k.a. the 20% of the population that holds 93% of the wealth, the happy few who run the corporations and the banks, own and operate the news and entertainment media, compose the laws and govern the universities, control the philanthropic foundations, the policy institutes, the casinos, and the sports arenas.” – Lewis Lapham [editor of Harper’s]
According to Wikipedia, in 2007, the top 10% wealthiest possessed 80% of all financial assets. In 2007 the richest 1% of the American population owned 35% of the country’s total wealth, and the next 19% owned 50%. Thus, the top 20% of Americans owned 85% of the country’s wealth and the bottom 80% of the population owned 15%. In 2011, financial inequality was greater than inequality in total wealth, with the top 1% of the population owning 43%, the next 19% of Americans owning 50%, and the bottom 80% owning 7%. However, after the Great Recession which started in 2007, the share of total wealth owned by the top 1% of the population grew from 35% to 37%, and that owned by the top 20% of Americans grew from 85% to 88%. The Great Recession also caused a drop of 36% in median household wealth but a drop of only 11% for the top 1%, further widening the gap between the top 1% and the bottom 99%.
According to PolitiFact and others, in 2011 the 400 wealthiest Americans “have more wealth than half of all Americans combined.” Inherited wealth may help explain why many Americans who have become rich may have had a “substantial head start.” In September 2012, according to the Institute for Policy Studies, “over 60 percent” of the Forbes richest 400 Americans “grew up in substantial privilege.”
In 2013 wealth inequality in the U.S. was greater than in most developed countries other than Switzerland and Denmark. In the United States, the use of offshore holdings is exceptionally small compared to Europe, where much of the wealth of the top percentiles is kept in offshore holdings. While the statistical problem is European wide, in Southern Europe statistics become even more unreliable. Less than a thousand people in Italy have declared incomes of more than 1 million euros. Former Prime Minister of Italy described tax evasion as a “national pastime.” According to a 2014 Credit Suisse study, the ratio of wealth to household income is the highest it has been since the Great Depression.
Everyone talks about the 1% — but who are they exactly? Here is the breakdown:
It takes at least $389,000 to make the club: That was the minimum threshold of adjusted gross income in 2011, the most recent year for which the IRS has final data.
In 2001, you had to make at least $306,635 to make the cut. But if you factor in inflation, that’s roughly the same amount as in 2011. The minimum threshold was much higher in 2007, just ahead of the economic collapse. That year you needed $426,439 to be in the top 1%.
The 1% as a group pay a bigger share of income taxes than their share of adjusted gross income: As a group, the top 1% earned nearly 19% of all adjusted gross income reported in 2011 and paid 35% of all federal income taxes. Of course, adjusted gross income doesn’t measure all income, only what must be reported for taxes. So, for instance, it doesn’t include income that those in the top 1% may have made from tax-exempt investments, such as municipal bonds. Nor do federal income taxes represent any income group’s entire tax burden.
The effective tax rate of the top 1% was 23.5%: The average tax rate paid by these high-income households was 23.5% — which represents the percent of their income they paid in federal income taxes. That’s below the 27.6% they paid in 2001 — a high point for the decade that followed.
Some people may think those rates sound low. But they’re still well above the average tax rate paid by others. For instance, the top 50% of filers — who had an AGI of at least $34,823 — paid an average tax rate of just under 14%.
Who’s in the top 1%: There’s been remarkable consistency over the years in terms of which professions typically occupy the top 1%. Analyzing IRS data from 1979 through 2005, tax researchers at Williams College and at the Treasury Department found that five occupations accounted for the lion’s share of the top 1% again and again. They were executives at non-financial companies, financial professionals, doctors, lawyers and an occupational category that lumps together computer, math, engineering and technical jobs in non-financial firms.
Right now our corporate income tax is amongst the highest in the world. This does two things to undermine our future: First, it puts American companies at a distinct disadvantage economically. If an American company earns a billion dollars and is taxed at 40%, that leaves $600M to invest, while if company in the United Kingdom makes a billion dollars and is taxed at only 23%, they have $770M left to invest. That is almost 30% more capital to invest. Over time that kind of competitive financial edge will have a dramatic impact on our international and domestic competitiveness.
And, second, our egregious corporate tax rate encourages American companies to transmigrate to more tax friendly countries, and then, accordingly, it discourages them from ever repatriating their capital. This leads to an enormous cash drain from America that dramatically reduces our collected taxes and domestic corporate investments.
At the last count, at the end of June, Apple had $165B of cash, cash equivalents and marketable securities on its balance sheet – up a heady $18B on just nine months earlier. The vast majority of that money – $138B – is held by Apple’s foreign subsidiaries. From September 2013, its overseas cash mountain increased by $26B.
In April, US Trust, a private bank, calculated that Apple’s hoard, then $160B, was more than twice the UK’s cash reserves, which stand at $70B, or roughly equivalent to Britain’s annual spending on education and housing combined.
What this all means is that there will be an inevitable change to our current inequitable tax structure. I am convinced that our maximum personal income tax will be raised to at least 60% and the corporate income tax will be reduced to 30% [including capital gains tax].
This will have a dramatic impact on the spending of the wealthiest of Americans. With a top rate of 39.6% on personal income tax [which is essentially our corporate tax rate], the wealthiest of Americans are now encouraged by the high corporate tax rate to simply take their enormous income [rather than leaving it in their companies for reinvestment], pay their personal income taxes, and still have enough left over for their conspicuous consumption [which only serves to dramatize the gap in wealth distribution]. This annoyance will assuredly be reduced by a higher personal income tax. If the personal income tax rate climbs to 60% [as I am certain it will], the uber-rich will now have to earn 50% more to have the same spending power.
For example: if someone wants to buy a yacht for $12M, they currently need to earn $20M to net $12M after they pay their 40% [$8M] in taxes. But, with a new tax rate of 60%, the same $12M will call for $30M in pre-tax income. The $30M in income would incur an $18M tax bill, and that would leave the same $12M that it currently takes only $20M to end up with [after taxes].
This will inexorably slow down conspicuous consumption, while a lower corporate tax rate will encourage the wealthiest to leave their income in their corporate environment, making reinvestment decidedly more advantageous.
And that is why I am making the change to C corps for most of my investments. Eventually, I want to be paying a 30% corporate income tax instead of a 60% personal income tax. And I will be more than happy to continue to reinvest with my after-tax earnings.
That’s how I see it. What do you see?