Billionaires-Becker

The wealth of some individuals is so staggering that it is hard for the rest of us to fathom. All of the world's 100 richest individuals are worth much more than $1billion. Even persons with a few billion dollars would not make this exclusive list since Donald and Samuel Newhouse are tied for the bottom spot with $7billion (the rankings are for March of 2007, and were compiled by Forbes magazine-the data are available at http://www.forbes.com/lists/2007/10/07billionaires_The-Worlds-Billionaires_Networth_7.html; see also the excellent discussion of a similar list in a November 7th article by Martin Wolf in the Financial Times). Bill Gates, Warren Buffet, and Carlos Slim of Mexico top the list with a net worth estimated to be between $50-60 billion; the asset values of these and others on this list fluctuate a lot over time with changes in the valuations placed on stock and other assets. This list has 39 Americans, 14 Russians, 8 Indians, and several each from Germany, France, Sweden, and Saudi Arabia. Mainland China has none yet among the wealthiest individuals (Hong Kong has three), but the rapid wealth accumulation in China means that before long several mainlanders will join this exclusive club. The list contains both individuals who inherited most of their wealth,and those who made it by building businesses. Only a couple of those on this list acquired their wealth from just being a CEO of a significant company. I am impressed that the strong majority of the world's richest individuals (about 30 out of the 39 richest Americans) made their money rather than inherited it. The wealthiest individuals are mainly self-made because inherited wealth gets dissipated over a couple of generations through bad investments, or is given to various charities, or gets broken up and divided among many grandchildren, cousins, and divorced members. For this reason, no descendants of John Rockefeller, Andrew Carnegie, or other titans of the beginning of the century are among the very wealthiest. To be sure, some of these "self made" billionaire businessmen accumulated some of their wealth from political connections that gave them protected markets. This category includes Carlos Slim, many of the richest Russians, and some others. They tend to be able businessmen, but there is a vast difference between the contribution to society from starting a Google, Microsoft, Wal-Mart's, Arcelor Mittal, or IKEA, and the extraction of profits from a monopoly position protected by government regulations. If we assume an average rate of return on this wealth of about 6 percent in real terms, then the combined income of the 39 richest Americans amounts to about ¾ of 1 percent of US gross domestic product (GDP). This is a sizable share for only 39 out of 300 million Americans, but Carlos Slim alone gets about 1 percent of Mexico's income. The wealth of the14 richest Russians generate a combined income that is over 4 percent of that country's GDP. Given the enormous wealth of these individuals, it might be surmised that the gap between the incomes of the very richest and the average individual increased substantially during the past 100 years. Actually, the opposite appears to be true. John D. Rockefeller's income was about 1/3 of 1 percent of the much smaller American GDP of his time, whereas Bill Gates' income is less than 1/12 of one percent of current US GDP. More generally, the overall inequality in wealth also declined greatly in the US, UK, and other western European nations during the first 60 years of the 20th century. Inequality has increased significantly since then, but it is still less than at the beginning of the century. Clearly, governments should not offer individuals protected markets that enable them to accumulate such enormous wealth. However, as I indicated earlier, the Americans on this list, and most others from Western Europe, Hong Kong, and India acquired their wealth through creating sizable value to consumers from new products and processes, greater efficiencies, and novel services. Obviously, these individuals were well rewarded for doing this, but consumers have benefited by much greater amounts. Still, there is pressure in most countries to tax heavily the very wealthy. One possible reason to do so would be to prevent their children and other descendants from having large advantages over descendants from financially modest families. But to help in equalizing opportunities, taxes should be on inheritances, not as in the US and many other countries, on estates. Even inheritance taxes, however, do not reduce the advantages from growing up in very wealthy environments, nor do they affect the huge head start from being raised in educated households that are not wealthy. From the perspective of getting a better education and higher earning power, having educated parents is considerably more advantageous than having very wealthy parents. A heavy tax on the very wealthy would also raise tax revenue that could replace income and other taxes on the not so wealthy. I believe that individuals with wealth in excess of hundreds of millions of dollars would tend to work about just as hard when their estates would be heavily taxed as they would without estate taxes, as long as they would still have a very large after-tax estate. However, the revenue raised has to be balanced against the costly evasions and avoidances that such a tax generates. These costs take the form of trusts that skip generations, the use of insurance policies with irrevocable beneficiaries, migration to low taxing countries, and other techniques known much better to the very rich than to me. The US imposes a 45 percent tax on all (taxable) estates above a few million dollars. This tax yields a moderate amount of revenue, but at the cost of creating a large industry of highly skilled estate tax professionals who would have used their talents at more socially productive activities were it not for the demand to find loopholes. One justification for such high taxes that has some appeal even when only modest sums are collected is that high taxes have encouraged the very wealthy to create large tax-exempt educational and charitable foundations in order to reduce their taxes. Yet since Rockefeller, Carnegie, and other highly wealthy individuals also created foundations when estate taxes were low, it is not clear how many modern foundations have been created mainly to avoid these taxes. In any case, larger foundations could still be encouraged with much bigger exemptions from the estate tax-perhaps $50 million or even more. This tax should only affect the extremely wealthy.

Comments

[Jim]

Regarding flat tax-

Sorry, I meant to suggest sales tax. So, you get to keep your federal income tax, and then you pay some national sales tax when you actually buy something. I am sure there are unintended consequences, but this would encourage savings, simplify federal taxes, and certainly not be regressive (like state lotteries, for example). Maybe it creates a stronger incentive for black markets, and I guess you need to not tax the first $40,000 or so (so send all households a check for the tax rate*$40,000). I guess my milk will cost $5.00 instead of $4.00, but having an extra $1,500 every month will help out.

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[Jack]

Marco: Upward mobility in the US has dropped so dramatically that other nations, Germany being one, has a higher rate than we have.

Also, after weighing the posts here and concerns as to the negative effects of a nation of ultra-haves and have nots, does it matter how the super-rich became super rich? BTW I suspect you'd be fairly surprised to learn how many of those claiming to have succeeded without preferential government policy have benefited from market distorting government intervention.

Upward mobility is one goal, as you say, Americans value, however the other concern dictated by the stats of the last three decades is that of those below median income making no progress at all; a situation that causes many of the "problems" that will be front and center during this, long, election cycle. SS, access to health care, all too few having any discretionary income as energy costs consume what little they had before, and, of course the related slowing of the housing market and lackluster retail sales. It's not only an economy that can not fly on one wing but democracy itself.

[Jack]

Jim: Again the "devil's in the details"

Sorry, I meant to suggest sales tax. So, you get to keep your federal income tax, and then you pay some national sales tax when you actually buy something.

.............. Fine if you favor sharply regressive taxation, as the higher one's income the lower the percentage of purchases, which given anything like our current economy would finish it off promptly.

I am sure there are unintended consequences, but this would encourage savings,

......... Probably not, as median income is now so low that all those at, near or below median income have so many unmet needs they'd still be broke all the time.

........... As an aside, while US savings probably are too low, there are times when an economy needs higher savings so as to have the liquidity to build new plant and equipment. Today our utilization rate is quite low (70% is the number I see) and is one reason interest on bonds and returns from the market are low. Especially since housing (about the last leg this economy had) is tanking we in an era of low demand and were someone to create a policy that actually did constrain spending, our, and most of the world economies would go into deep recession.

simplify federal taxes,

........... probably not. More below.

and certainly not be regressive (like state lotteries, for example).

.......... Gee, now THERE's a comparison!! As if paying for education or state government via gambling proceeds was wise policy!

Maybe it creates a stronger incentive for black markets,

.......... indeed! and games. Today the Federal budget takes some 20% of GDP so a sales tax would have to be higher than that as many do not spend all their money on items that might be taxable. Try 25% or more? So how do we duck paying $25k in sales taxes on a new Mercedes? Leasing? Or a cheaper used car? Wouldn't private parties agree to split the fed donations? On a new room addition? Barter?

and I guess you need to not tax the first $40,000 or so (so send all households a check for the tax rate*$40,000).

.......... Well, it IS hard to get blood out of a turnip by any means. But! of course those under $40K (and those who'd like to be under $40K) are again back in the business of filing an income report replete with "allowable deductions" and that is most of the people.

I guess my milk will cost $5.00 instead of $4.00, but having an extra $1,500 every month will help out.

.......... Indeed. And if you were Steve Forbes you'd be helped out many times more which is why he and some rich folk less honest than Buffet try to sell you this scheme.

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