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Don’t Eat the Rich!

Even Republicans are getting in on the class crusade. 

By and From the April 2014 issue

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In America today there is only one group that can be legally discriminated against: the rich and successful. Political rhetoric is increasingly hostile toward those who have climbed the mountain of success. The progressive tax system imposes higher tax rates on the wealthiest Americans and President Obama continues to advocate higher rates because this group “can afford it.” 

Some prominent economists have argued (in the New York Times—naturally) that tax rates could and should rise to more than 70 percent on the super rich. Worse yet, even Republicans in the House of Representatives have joined the class crusade. In February, as part of a tax reform overhaul, they proposed a surtax of 10 percent on families with earnings of more than about $450,000. Call it a government toll for being successful. The theory is that the rich in America got there though luck: a few good stock picks, say, or a generous inheritance. They are simply winners of life’s lottery.

This stereotype of the “undeserving rich” is sometimes reinforced by the wealthy themselves—especially well-off liberals who feel compelled to apologize for their success. Recently the New York Times ran an op-ed by a self-righteous Wall Street investment banker overwhelmed by the guilt of his financial gains. One hoped he would end the story by announcing that he intended to give all his wealth to a worthy charity and take a vow of poverty. No such luck. Instead he absolved his self-loathing by calling on higher tax rates to be imposed on himself and others. We are supposed to walk away respecting this hypocrite. 

Making matters worse is the zero-sum mentality of the redistributonists. A typical sentiment is that the rich “took”—not earned, but took, as if they were bandits—90 percent of the growth in the nation’s income over the past decade. By devouring such a big slice of the pie, it follows, they left the rest of us with crumbs. 

But who are these rich, really, and how did they get where they are? In 2010, about 119 million households filed tax returns with the IRS, meaning the “top 1 percent” refers to about 1.2 million households. According to this data, which has been compiled and distributed by the Congressional Budget Office, the top one percent, whose annual income is above $307,000, received 15 percent of the national household income (before taxes) in 2010, up from 9 percent in 1980. They also paid 37 percent of federal income taxes—or double the share they paid in 1980 when tax rates were almost twice as high. By the way, an annual income of $300,000 hardly qualifies one as a fat cat in expensive cities such as New York, Chicago, Los Angeles, or San Francisco. For the top one tenth of one percent, or the top 120,000 households, the income threshold was about $1.7 million.

Most of those in the top one percent are business owners or executives. Some three of ten are salaried executives at non-financial business firms, 16 percent are doctors, 14 percent are in the financial industry, and (alas) 8 percent are lawyers. Among the “super rich” in the top one tenth of one percent, the distribution still favors business executives (41 percent) over people working in finance (18 percent).

In sum, the vast majority of these people have earned their salaries in small and medium-sized businesses throughout the country—not in the largest firms and definitely not in the financial industry. Of course, there is nothing wrong with making money by running a successful investment firm or trading stocks, which are vital activities in any capitalist economy: How else would the next Apple, Google, or What’s App find funding? Nevertheless only about 20 percent of the earnings of the top one percent comes from capital gains. 

The top one percent, and especially the top one-tenth of that, also includes a growing number of professional athletes and artistic performers: Tiger Woods, Peyton Manning, LeBron James, Julia Roberts, Taylor Swift, and Bon Jovi, all of whom (according to Forbes) earn incomes in excess of $10 million per year. Scores of college football and basketball coaches—Nick Saban and Mike Krzyzewski among them—earn annual salaries in excess of $2 million. The average salary for top-league players ranges from more than $5 million per year in the NBA to, more than $3 million in MLB to, ahem, a mere $2 million plus in the NFL. The minimum pay in all three leagues is sufficient to place every player who draws a salary in the top one percent of the income scale. All of these performers are the very best in the world, and they command high salaries because we are willing to pay to watch the very best skaters or actresses or baseball players with skills developed over the course of lifetimes that leave us breathless and exhilarated.

But here is the other amazing thing about the rich: In America they don’t generally stay rich for long. A few years ago the Department of Treasury examined what happens to the wealth of families across several generations. Guess what: the poor got richer and the rich got poorer. The incomes of poor households rose 80 percent from 1987 to 1996 and then more than doubled from 1996 to 2005. The richer people were at the start of this period, the more income losses they suffered in subsequent years. 

This all makes sense when you think about it. A family that had an income of say, $15,000 a year in 1996 had an income of roughly $31,000 by 2005 (after inflation). Meanwhile, incomes of those in Beverly Hills and other neighborhoods full of millionaires fell. This is not surprising—or least it shouldn’t be: celebrities and athletes’ high earnings tend to be as fleeting as their fame. Think of what has happened to the income of Joe Montana or (the artist formerly known as) Prince or Kareem Abdul-Jabbar. Lady Gaga and Super Bowl quarterback Russell Wilson had better earn all the millions they can while they are able.

Another report, by the IRS, examines the income tax returns of the ridiculously wealthy—the richest 400. The myth is that the super-rich stay at the top of the income ladder year after year, and few new entrants are allowed to break into the elite club. Wrong. The IRS found that only four of the 400 (1 percent) made the cut every year. There were 3,672 different taxpayers who made the top 400 list at least once over the seventeen-year period studied. Over half of them made the list only once or twice. Three quarters of the individuals who rose to the heights of this top 400 list were there for six years or less. There is no permanent upper class in America.

What this tells us is that looking at a single-year snapshot of a person’s income is highly misleading. Incomes fluctuate. Many people who show up as “rich” in annual statistics have engaged in a one-time sale of a business that took a lifetime to create, or a stock portfolio that was built up over decades. 

A final data point worth remembering is that roughly half of those whose incomes place them in the top one percent are either business owners or investors in start-ups. They are the nation’s employers. They sign the front side of the paycheck, not just the back side. Rather than trying to soak these job creators, maybe Washington should just say thank you. 

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About the Author

Stephen Moore is the chief economist at the Heritage Foundation.

About the Author

James Piereson is president of the William E. Simon Foundation and senior fellow at the Manhattan Institute. He is the author of Camelot and the Cultural Rev­olution: How the Assassination of John F. Kennedy Shattered American Liberalism (Encounter Books).