April 30, 2007
How much income did you “defer” from federal taxes last year? If you have a 401(k), you could have stashed away $15,000.
AT&T CEO Edward Whitacre last year stashed away $4.5 million tax-free. He’s now sitting on a mountain of deferred-pay cash worth $73.8 million. He’s also now sitting worry-free. House and Senate negotiators have killed a Senate-passed measure that would have limited deferred pay for top corporate execs to no more than $1 million per year.
Don’t blame the GOP on this one. House Ways and Means Committee chair Charlie Rangel, a Democrat from New York, did the damage. Rangel held a hearing on the Senate-passed legislation that included the deferred-pay cap and only invited critics of the cap to testify.
Rangel’s maneuvering came, by pure coincidence, around the same time the Gallup people were releasing fascinating new polling data on public attitudes toward taxing the rich. What do the data have to say? We have that story — and much more — in this week’s Too Much.
French voters will choose a new president this Sunday. French CEOs should be a little nervous. Both candidates, Ségolène Royal from the left and Nicolas Sarkozy from the right, have been blasting away at CEO pay excess. Sarkozy says he'll ban “golden parachutes” for top executives. That comment came after the CEO of the Airbus parent company walked off with $11.4 million in severance — amid a layoff of 10,000 Airbus workers. Royal says she’ll push, as president, for a limit on executive pay, “in particular stock options and severance packages of all kinds.” Meanwhile, the third-place finisher in the first round of the French presidential voting, the centrist François Bayrou, is attacking Sazkozy for pushing initiatives — cuts in the inheritance tax, for instance — that would nurture inequality. Sazkozy, says Bayrou, “risks aggravating the tears in the social fabric, notably through policies that give an advantage to the richest.”
Gloria Books, a two-year-old London publishing house, has a new title that doesn’t figure to appear at your local bookstore. The company is printing just 1,000 copies of Superyacht, a 600-page, full-color “history of yachting from ancient times.” Each copy, bound in silver Italian silk, will retail at $4,000. Gloria Books officials feel confident they'll sell out the Superyacht pressrun. Last year, the company sold 1,500 copies, at $3,000 each, of a 26-pound book on soccer great Pele. Notes Gloria Books chief exec Ovais Naqvi: “Yachts and superyacht ownership has become a defining phenomenon for the ultra-wealthy in the 21st century. We wanted to create the ultimate book for the ultimate boats.”
The ultimate place to call home, for the world’s ultra-wealthy, may now be the UK. The latest UK Rich List, published by the Sunday Times, counts 1,000 deep-
pockets worth at least $140 million living in Britain. Four of the list's top five — and a huge share of those below — hail from outside the UK. What makes the UK so attractive to global wealth? Foreigners in the UK only pay taxes on money they bring into the country, no matter how much they may be making elsewhere. One recent study found that the 54 billionaires who lived in the UK last year held a combined net worth of $252 billion, yet paid only $28 million in British income tax, less than 1 percent of their estimated income. The new UK Rich List does sport some home-grown Brits. Among them: Simon Cowell, a judge on the American Idol TV show. Cowell now ranks as Britain’s 700th richest person, with a fortune worth $200 million . . .
Two California entrepreneurs who proudly “take risks challenging everyday convention” seem to be reaping ample rewards these days from the firm they founded five years ago “to meet the demand of custom car jewelry.” The Orange County-based Strut company, steered by Geoff Spencer and Scott Struthers, offers auto bling — “crimped mesh, polished surrounds, engraved shields,” among other baubles — for fine motorcars from the likes of Bentley, Mercedes Benz, and Range Rover. Expect to pay up to $50,000 per car for a Strut high-fashion treatment. Spencer and Struthers see nothing untoward about their company's prices. As the pair put it, in their marketing material, “there is no reward without risk.”
Not all risk-takers in the contemporary U.S. economy appear to be as happy with their rewards as the entrepreneurial wunderkinds from Strut. A dozen Wall Street Journal war correspondents have inked an open letter to the corporate board at Dow Jones, the Journal’s parent company, to protest the $4.2 million that Dow Jones CEO Rich Zannino took home last year — and the $10 million in severance Zannino has waiting for him when he exits his executive suite. In 2006, Zannino pocketed $173,441 for commuting expenses alone, more than any of the Journal’s war correspondents made in annual salary. Zannino, notes the Journal reporters, “gets far more just to sit in the back of a limo on his way to work than we get to go into combat.” Concluded their open letter: “It’s very clear: we take the risks; top managers reap the rewards.”
Quote of the Week
“The top 0.1 percent of earners — that’s one taxpayer out of every 1,000 — now brings in 11 percent of the nation’s total income, triple the share that they did just a generation ago. This has happened because the rich have grown ever richer, while the pay of rank-and-file workers hasn’t risen much faster than inflation.”
David Leongardt, What’s Really Squeezing the Middle Class? New York Times, April 25, 2007
New Wisdom
on Wealth
Neil Buchanan, Is it Really So Tough to Be Rich? The New, Brazen, and Completely Dishonest Attack on Progressive Taxation. April 23, 2007. A George Washington University law prof dissects the case against tax fairness.
Sagit Leviner, From deontology to practical application: the vision of a good society and the tax system, Virginia Tax Review. An Israeli tax attorney makes a potent case for using the tax system to break down large concentrations of wealth and income that “endow the wealthy with disproportionate power and influence over fellow citizens.”
A healthy economy manufactures useful goods and provides needed services. Today's U.S. economy more and more seems to manufacture only fortunes.
Those fortunes come increasingly from what some have dubbed the “financialization” of economic life, the wheeling and dealing in stocks and bonds, in mergers and acquisitions, in derivatives and other exotic financial instruments, that drives — and dominates — contemporary corporate decision making.
The dollars for all this wheeling and dealing come, to an ever larger degree, from those shadowy conglomerations of capital known as “hedge funds,” scantily regulated pools of cash raised from wealthy individuals and institutional investors looking for higher returns on their investments.
Sometimes these investors get those high returns from hedge funds. Sometimes they don’t. Either way, the financial whizzes who manage hedge funds get their money. Lots of it.
In 2006, the Alpha magazine trade journal reported last week, the top 25 earners in the hedge fund industry added a combined $14 billion to their personal fortunes. Three of the 25 topped $1 billion in individual earnings.
Hedge fund superstars needed to make at least $240 million in 2006 to make the new Alpha Top 25. In last year’s Alpha list, hedge fund superstars could claim top-25 honors with just $130 million in take-home.
Where do these vast sums come from? Hedge funds charge their investors a management fee, typically 2 percent of the total invested, and claim, on top of that, a share of any profits produced, usually 20 percent. This 2-and-20 formula can produce incredibly huge windfalls for hedge fund managers, even if investors see only modest returns.
The masters of the financial universe who collect these windfalls take varying approaches to their lucrative craft. The top earner on this year’s Alpha 25, former math professor James Simons, “uses computer-driven models to detect pricing anomalies in stocks, commodities, futures and options.” The computer models helped Simons to a $1.7 billion payday in 2006.
Edward Lampert of ESL Investments, on the other hand, has placed most of his hedge fund bets on a single horse. He engineered a takeover of Sears that, over the course of 2006, put an extra $1.3 billion in his personal portfolio.
Still another hedge fund champ, the 32-year-old John Arnold of Centaurus Advisors, mastered his mojo working at Enron’s energy desk. He cleared $400 million in 2006 by betting right on natural gas prices.
Young Mr. Arnold last year took home about 9,000 times more income than the American per capita income average. Back in the 1894 heart of the original Gilded Age, economist Paul Krugman noted Friday, John D. Rockefeller took home only 7,000 times the income of the average American.
Apologists for hedge fund fortunes — and compensation excess throughout the rest of the U.S. economy as well — often argue that average Americans don’t particularly care about how rich the rich have become.
That explains, this argument goes on to contend, why lawmakers have made no new moves to seriously tax, or even inconvenience, the nation's wealthiest.
A leading American polling organization, in a just-released new study, offers a somewhat different take on this lawmaker inaction. Lawmakers aren’t taxing the rich, new poll data from Gallup make plain, because lawmakers aren’t listening — to their constituents.
Earlier this month, pollsters at Gallup asked a national cross-section of Americans if “our government should or should not redistribute wealth by heavy taxes on the rich?” Nearly half of those polled, 49 percent, told Gallup “yes.” A smaller number, 47 percent, dissented.
Nearly a decade ago, a slight majority of Americans, 51 percent, opposed “heavy taxes on the rich.”
The turnaround in the new Gallup numbers, toward approval of these “heavy taxes,” reflects a quite stunning political reality. Not one highly visible political leader on the American scene today is calling for “heavy” new taxes on the rich. Yet nearly 50 percent of Americans support these taxes anyway.
How much higher might that percentage be if visible political leaders were actually out and about making the case for a greater tax load on America’s wealthy? The Gallup pollsters have an opinion on that.
“From a political viewpoint,” concludes Gallup’s Frank Newport, “these data suggest that a political platform focused on addressing the problems of the lower and middle classes contrasted with the rich, including heavier taxes on the upper class, could meet with significant approval, particularly among Democrats and those with lower incomes.”
Stat of the Week
The typical CEO at a U.S.-based corporation worth at least $3 billion saw a 9 percent hike in pay last year, notes a new Bloomberg analysis of 206 major American firms. In 2005, median CEO pay jumped just 6 percent. The Bloomberg study, by pay expert Graef Crystal, finds “hardly any correlation between the size of a CEO’s raise in 2006 and the company’s shareholder return.”
Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954.
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