Common Cents for January 25, 2019

January 25, 2019, by John Norris

There seem to be a lot of headlines about this or that way to raise additional tax revenue for the Federal government. Senator Elizabeth Warren has proposed a tax on personal assets in excess of $50 million, and media favorite Representative Alexandra Ocasio-Cortez is pushing for a 70% marginal tax on incomes in excess of $10 million. It doesn’t seem to matter what the scheme is or who is saying it, the message is pretty clear: the element in Washington who want to make the ‘rich pay their fair share’ is becoming more vocal and more visible.

Interestingly enough, each proposal seems to have some sort of support from an academic economist who claims it would be good for overall economic growth. I imagine these are the sort who have never had to meet a budget or explain an income statement. Maybe they believe an endless amount of money into government coffers will lead to an explosion of the G component of the C+I+G +/- Net Exports equation. It won’t.

The reason for it is simple: the government is running a large deficit. Any additional money the Treasury might collect through ‘taxing the rich’ would or should ‘go’ towards reducing it. If so, the amount of money the government spends wouldn’t change, G would remain constant. The Treasury would just have to finance less of the deficit. However, C (consumer) expenditures would likely go down because of the higher tax bill. It is just math.

The only way I can think ‘making the rich pay their fair share’ would work, or could work, would be if the Feds took said tax receipts and earmarked them for wealth generating projects with a high multiplier effect. Of course, that would do much to shrink the annual deficit in the short-term, but it could give the economy a boost…. which would help tax receipts in the future. However, that is a long road, and something of pipedream, really.

I hope this makes sense.

In discussing this with a colleague recently, he asked: “well, aren’t you concerned about the deficit?” To which I replied: “I will be when we can no longer finance it, and when we can no longer service it. At this point in time, we can do both very easily, as is evidenced by a 10-Year Treasury Note yielding 2.75% and a 30-Year Treasury Bond coming home at 3.05%. With the cost of funds at those levels, the US Treasury would be kind of silly to not run a deficit…the money is practically free in real terms.” Seriously.

So, why the preoccupation of making ‘rich’ people pay more? On the flipside, why not? If they can afford it, and all of that jazz. Right? Who can argue FOR the rich?

Part of the problem of ‘soaking the rich’ is the definition. What constitutes it? Or is it one of those things we all know when we see it? After all, wealth is relative.

I once knew a man, I suppose I still do although I haven’t seen him some years, who was wealthy by just about any definition. His net worth was comfortably in excess of $50 million, but he told me on more than one occasion he was easily the poorest of his friends. Knowing his friends by reputation, he spoke the truth: in his crowd, he was poor.

That might be something of an extreme, but I imagine most people reading this sentence are better off than the average, norm, median, or what have you. From the most recent Census Bureau calculation in 2013, the ‘median value of assets for households,’ read median household net worth, was $80,039. I suppose that isn’t that bad of a number. However, the next column in the table show ‘Net Worth (excluding equity in own home).’ Would you care to guess that that number is? $70K? Lower. $60K? Nope, keep going south. $50K? Keep going. I give up, what is it? Okay, according to the table, the answer is $25,116.

If you are over those numbers, congratulations, you are in the upper half…which would, sort of by definition, make you rich. More? Less than 50% of American households have/had a net worth (including home equity) in excess of $100,000. 37% had a net worth less than $25,000.

So, clearly, Warren must be on to something if she wants to drop an extra 2% surcharge on folks with $50+ million in ‘the bank.’ That is umpteen standard deviations to the right, so he gives a darn? Well, you might or should. $50 million? Why $50 million? I mean, only 17% of households have a net worth of $500,000 or more. Shoot, only 30% are worth $250,000 or more.

Why not start lower, I mean if we really want to goose tax receipts? If this is about filling the public coffers, let’s fill them baby. There is a whooping 15,514K households in between $250-500K. If we assume the average of those households is $375,000 and we tax everything over $250,000 at 2%, shoot. That works out to be $38.785 billion from ONLY an additional $2,500 tax bill. I mean, if you have that much money, you can certainly afford to swipe a check like that every year for the greater good, right? Come on.

Hyperbolic, you might say? Why? Socialist governments in the past have ‘gone after’ more with less than that, and with a vengeance too. The reason is pretty simple: there is a 99.999% chance that you, and I mean you reading this, are wealthier than someone. Again, wealth is relative, and you need to be extremely careful in who defines it and how.

Consider this: Elizabeth Warren wants to tax people with a net worth in excess of $50 million, as I have already stated. From what I can tell, her net worth is a paltry $8 million, which puts her in the top 1.5%. Clearly, she is in excess of 2 standard deviations from the median. Why does she exempt herself?

As for Ocasio-Cortez, her salary as a US Representative ($174,000) puts her comfortably in the Top 5%, prior to any speaking gigs and book deals. That puts her in excess of 1 standard deviation from the median. By anyone’s definition, or seemingly so simply looking at the statistics, she is rich as well, no? What say the 96.7% of Americans beneath her, in terms of income?

Admittedly, this all might come across as an attack on these two individuals, and I don’t mean it as such or personally. I simply want to get across a very simple point: wealth is relative, and you have to be extremely wary of people who want to define what wealthy is or means. At some point, the definition of wealthy just might mean you, and probably will if it doesn’t already. Life is a slippery slope when you view it with green eyes.

With that, let me leave you today with the first paragraph of Kurt Vonnegut’s most excellent short story “Harrison Bergeron.” If you are not familiar with it, please search for it on the Internet and give it the 7-minute read it so richly deserves. I will give you a hint, it is about, um, equality.

 

“THE YEAR WAS 2081, and everybody was finally equal. They weren’t only equal before God and the law. They were equal every which way. Nobody was smarter than anybody else. Nobody was better looking than anybody else. Nobody was stronger or quicker than anybody else. All this equality was due to the 211th, 212th, and 213th Amendments to the Constitution, and to the unceasing vigilance of agents of the United States Handicapper General.”

 

Have a great weekend

John Norris