June 4, 2007
In Minnesota last month, Governor Tim Pawlenty vetoed legislation that would have upped taxes on his state’s wealthiest 1 percent and plowed the revenue from that tax hike into tax relief for 90 percent of the state’s homeowners.
The justification for the veto? The governor's flacks had one. If the 9 percent state tax on income over $400,000 a year that cleared the legislature ever became law, they argued, the wealthy would launch a mass exodus from Minnesota and job-creating entrepreneurs would take their ideas elsewhere.
Do higher taxes on rich people really create a “flight risk” that the rest of us should worry about? We explore that question — and lots more — in this week's Too Much.
The $100 million barrier — on the sales price for a residential property in the United States — has finally come tumbling down! Investment banker Ron Baron last month shelled out $103 million for a 40-acre parcel in the Hamptons, the deep-pocket summer getaway on Long Island’s East End. The top previous price-tag for a U.S. residential property: the $70 million homebuilding CEO Dwight Schar paid for a Palm Beach estate in 2004. The Baron sale didn’t surprise local realtor Diane Saatchi: “People have made an incredible amount of money on Wall Street over the last few years. For them, spending millions on a summer home to be near their friends isn't a big deal.”
Still another $100 million barrier down: Annual income for a U.S. professional athlete, Sports Illustrated reported last week, has finally 
hit nine-digit territory. Tiger Woods will pull in just under $112 million this year, with the vast bulk of that from endorsement deals and appearance fees. The magazine's fourth annual “Fortunate 50” list of top-earning American athletes features 25 basketball players, 12 baseball players, and five football players. The top 50 are averaging $23.4 million each and will pocket, as a group, close to $1.2 billion. One comparative yardstick: The nation's top-earning hedge fund manager — James Simons of Renaissance Technologies — last year pulled in $1.7 billion all by himself . . .
The world’s biggest names in luxury, from Maybach to Riva, were showing off in Shanghai last week at China’s second annual “Millionaire Fair.” Opening night tickets to this international tradeshow for ultra high-end products and services went for $235 each. The audience? China, “the fastest-growing luxury market in the world," now hosts 300,000 millionaires. Exhibition organizers were expecting that at least 20,000 visitors would be getting up close and personal with eye-candy that ranged from $2 million necklaces to $105,000 Siberian huskies . . .
Economic “modernization” in China seems to be creating millionaires and billionaires aplenty — in Australia. The Middle Kingdom’s appetite for iron ore and other Aussie natural resources, news reports last week noted, has boosted the wealth of Australia’s wealthiest 200 by 27 percent over the past year — and jumped the nation’s billionaire total from 21 to 30. Average Australians aren’t doing quite so well. A fifth of the nation’s workers now labor 50 or more hours a week. Despite the extra hours, average-income Australians still can’t afford their own homes. The nation’s housing affordability index last week hit a 23-year low. Observes Paul Shepanski, co-author of a new report “on the connection between working hours and family breakdown”: “People are feeling that, despite all this wealth, there is something rotten in the system.”
Switzerland, a nation notorious for secret bank accounts, doesn't figure to be the sort of society that hosts a campaign against greed. But that's exactly what's now underway in the Alps. Thomas Minder, the CEO of a small Swiss cosmetics company, has set off a drive to slash Swiss corporate executive pay, the world’s second highest — after the United States. Minder’s movement is demanding, among other reforms, that Swiss-based corporate giants like Nestle, Novartis, and Credit Suisse ban “golden parachutes” for exiting executives. The CEO at drugmaker Novartis, Minder pointed out recently, made $35.8 million last year, 22 times more than the Novartis CEO collected in 1996. Minder and fellow activists are currently collecting the 100,000 signatures necessary to place their executive pay reforms up for vote in a national plebiscite.
Quote of the Week
“Why is it so hard for the people at the top to graciously acknowledge their dependency on the labor of others? We need some sort of gravitational force to counter the explosive distancing brought about by greed — before our economy imitates the universe and blows itself to smithereens.”
Barbara Ehrenreich, CEOs vs. Slaves, The Nation, June 11, 2007
New Wisdom
on Wealth
Daniel Brook, Inequality Matters (Even If You Don't Work At Wal-Mart), June 1, 2007. How increasing wealth at the top of America's economic ladder is making life more of a struggle for folks in the middle.
James Petras, China’s and India’s Billionaires, June 1, 2007. A comparative analysis that explains how 20 Chinese super-rich families have accumulated more wealth than the combined net worth of China's poorest 400 million households — and how 35 Indian families have accumulated more wealth than 800 million rural and urban households in India.
The S&P 500-stock index, Wall Street’s most important boom-and-bust barometer, last week hit a new record high, breaking the standard set seven years ago amid the dot.com frenzy.
For the White House, the new record high certifies the wisdom of Bush administration tax cuts on the “investor class” and the robust inner strength of the American economy.
But soaring share prices, America’s hottest stock-picking media celebrity suggests, don’t really tell us much “about the strength of a company’s fundamentals.” To truly understand how Wall Street works, star TV financial analyst James Cramer explains in the current New York, keep your eye on the people who do the vast bulk of Wall Street’s stock trading, the big institutional money managers.
“Stocks,” explains Cramer, a former hedge fund manager himself, “don’t naturally gravitate to a special level where they become ‘properly valued.’ They go where the managers of the institutional funds send them. The market is a plutocracy, not a democracy.”
And how do companies get themselves noticed in this plutocracy? They could, of course, endeavor to offer products that consumers find irresistible. But that sort of effort takes research and real risk — and may not pay off until years after the current CEO has retired.
Corporate execs have perfected a less risky alternative. To make their companies — and shares — more appealing, they play games.
Among the most beloved of these games: the stock “buyback.” Some of America’s most established enterprises are now playing the buyback game, and they’re even borrowing billions to play it.
IBM, for instance, has just borrowed over $11 billion to buy back shares of IBM stock in an “accelerated share repurchase” that, the Wall Street Journal noted last week, will “rapidly” reduce the number of IBM shares on the open market.
IBM's board last month authorized $15 billion in new buyback spending. That's “two and a half times," the AP reports, “what IBM spends annually on research and development.”
Why spend billions on buybacks? Buybacks have charms staid old R&D simply can’t match. After a buyback, with fewer company shares outstanding in the marketplace, a company’s “earnings per share” can jump even if overall company earnings stay flat.
Higher earnings per share, in turn, translate into higher share prices and, not surprisingly, into higher rewards for corporate execs. IBM uses “earnings per share” to help determine executive “performance” — and pay. So do other top U.S. corporations.
The upshot of these “performance” incentives? They've generated a stock market rally that's really nothing more, the Washington Post noted Sunday, than “a debt-driven phenomenon fueled by stock buybacks, hedge fund speculation, and a frenzy of dealmaking by investment banks and private-equity funds.”
Ever since the early 1890s — and the first serious congressional debate over proposals to tax high incomes — the wealthy and their wordsmiths have been pounding home the theme that rich people, if confronted with hefty tax bills, will always rather flee than file.
Americans a century ago would eventually see past this overheated fear of flight and put in place a deeply progressive tax structure. We should, too, argue Dane Smith, the president of the Minnesota-based Growth & Justice, and his colleague Charlie Quimby in a fascinating new analysis just published in the Minneapolis Star Tribune.
“It's impossible to look at the evidence,” the two note, “and conclude that an income tax increase at the top would set off a massive millionaire migration from Minnesota.”
Or anywhere else, for that matter. Quimby and Smith, in their new analysis, document what has actually happened, over the years, when individual states have opted to up taxes on their resident rich. Their research shows “no clear pattern of dollars flowing away from states with high income taxes to states with low or no income taxes.”
“Despite what the antitax echo chamber tells us, the world does not revolve around taxes,” note Quimby and Smith. “Life changes — college graduation, decisions to have children, job opportunities and retirement — are the real sparks to decisions about leaving a place.”
That goes for the ultra-rich as well as the mere millionaire, suggests some new reflections on the hedge fund industry by economic analyst Daniel Gross.
A huge chunk of the world’s $1-billion-and-up hedge funds, Gross relates, site their offices in just two places, a wedge of midtown Manhattan that Gross dubs Lower Hedgistan and the awesomely affluent suburban streets of nearby Greenwich, Connecticut — Upper Hedgistan.
These two spots, Gross points out, rank among the most expensive places in the world to do business.
Hedge fund managers, in today’s electronic age, could obviously base their operations almost anywhere. So why do they choose to locate in Manhattan and Greenwich and face taxes that run much higher than any they would have to pay elsewhere?
“Hedge-fund managers, like other members of the global plutocracy, tend to move in the same small, concentric circles,” Gross ends up concluding. “What’s the point of having alpha money — and all the things it can buy — if nobody can see it?”
Stat of the Week
Homes costing $5 million or more saw their sales leap 18 percent last year, says the Dallas-based Institute for Luxury Home Marketing. They’re selling even faster this year, up 18 percent over the first quarter of 2007.
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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