The Wall Street Journal, citing new IRS data, last week reported that the “richest Americans' share of national income has hit a postwar record.” The Journal asked the President of the United States what he thought about our record inequality.
“First of all, our society has had income inequality for a long time,” President George W. Bush responded. “Secondly, skills gaps yield income gaps.”
In the United States today, under the President's logic, our most skilled people must surely be the managers of America’s private equity and hedge funds. The fees that private equity managers collect have, after inflation, quadrupled since 1994.
We have more, in this week’s Too Much, about private equity managers and the astounding inequality they have brought us.
The 95th richest billionaire in the world, Russian property developer Aras Agalarov, wants to do great things — for his fellow billionaires. Agalarov is now fashioning what he says will become the most exclusive housing development in the world. On 850 acres just outside Moscow, the 51-year-old Agalarov has begun building 200 mansions that will run from $20 to $30 million each. Buyers must agree to abide by Agalarov’s strict community rules and regulations. Among the more unique: All family bodyguards must reside in a special area at the development’s edge. Explains Agalarov: “Most families have five or six bodyguards. Two hundred families means 1,000 bodyguards.”
What can you give people who have everything? Gregory Patrick makes a nice living off knowing the answer. Patrick, who spoke last week at the Reuters Wealth Management Summit in Boston, runs DreamMaker International, a travel company that specializes in creating unique “experiences” for the ultra-rich. How unique? For one wealthy couple vacationing in Italy, DreamMaker arranged a quickie charter jet to Vienna for a Sting concert, followed by an all-night party with the band. Back in Italy, the company set up a shopping trip for the wife with a real-life member of the Gucci family and placed the husband in a luxury car race from Florence to Portofino. Patrick also knows what the wealthy don’t want: any close contact with the hoi polloi. For his deep-pocketed clients, taking a jaunt on a cruise ship would be “out of the question.” Notes Patrick: “They'd rather have a red hot poker shoved in their eye.”
Real health involves a good bit more than just access to health care. But you would never know that from the current political debate in the United States — and its single-minded focus on health insurance. Early next year, fortunately, that focus just might widen. Public TV stations nationwide will be broadcasting a new four-hour series that shows how “inequality in America is — literally — taking years off our lives,” impacting “not just the poorest among us, but the richest, too.” Earlier this month, the Harvard Center for Society and Health previewed the first episode of this new series — entitled Unnatural Causes: Is Inequality Making Us Sick? — and scores of health advocacy groups are already planning special events around the series airing in early 2008. More background on this landmark broadcast now appears online.
Top income distribution analysts from Europe and the United States gathered at a Brussels conference last week to share data on efficiency and fairness “in an age where concerns about the divide between the rich and the poor are growing the world over.” Some nations are doing a considerably better job at narrowing that divide than others, noted Joaquín Almunia, the European commissioner for economic and monetary policy, in his conference welcoming address. In Denmark, Finland, the Netherlands, Sweden, Germany, and the UK — the six European nations with up-to-date data available — the level of national income inequality after taxes and government benefits are taken into account drops an average 40 percent, “almost twice the reduction in inequality calculated for the U.S.”
The world’s private banks — those financial institutions that specialize in managing the wealth of the awesomely wealthy — can’t seem to find enough private bankers, and that shortage, Reuters reported last week, has the banks recruiting money managers from distinctly nontraditional sources. The hotel industry, for instance. In Switzerland, the Julius Baer private banking division is grabbing hires from a local hotel management training academy. What makes hotel managers such great private banker material? They have terrific customer service skills — and dress right. At hotel school, explains Julier Baer private banking chief Boris Collardi, “everyone has to wear a suit, men and ladies.”
Quote of the Week
“When you watch a bunch of presidential candidates on a stage, you are almost invariably looking at a bunch of very rich people. Some of them were born into privilege, like Mitt Romney and John McCain. Some had privilege thrust upon them, like Rudy Giuliani, who parlayed his 9/11 moment into an extraordinarily lucrative public speaking career and consulting business.”
Gail Collins, New York Times, October 11, 2007
New Wisdom
on Wealth
2008 Presidential Candidates' Tax Proposals, Tax Policy Center. This new reference charts the tax plans advanced by candidates for the White House. Missing from the proposals: any initiative to hike the top federal tax rate on high incomes back to the mid-20th century levels in place before Ronald Reagan became President.
Abra Pollock, Stemming the Trickle-Up Effect, Inter Press Service, October 10, 2007. A look at community land trusts and various other forms of social enterprise that offer “keys to a more equitable society.”
In Detroit last week, just days after announcing major new layoffs at five factories, officials at Chrysler cut a deal on a new union contract that leaves workers with less wage, job, and retirement security — and executives at Cerberus Capital, the private equity firm that now owns Chrysler, with a significantly better shot at hitting pay jackpots.
Meanwhile, in Washington, D.C. last week, Senate Majority Leader Harry Reid’s office confirmed that the Senate will take no action this year on closing the tax loophole that saves private equity and other private investment fund managers an estimated $12 billion a year.
Thanks to this loophole, private equity managers — many of them billionaires — pay federal income taxes on the windfalls they make from buying and selling companies like Chrysler at the 15 percent “capital gains” rate, not the 35 percent rate that otherwise would apply.
The three leading Democratic Party Presidential candidates — Hillary Clinton, Barack Obama, and John Edwards — earlier this year all vowed to end this private investment fund tax loophole, and last week two of them, Obama and Edwards, quickly blasted the Reid decision.
“If there was ever a doubt that Washington lobbyists don't actually represent real Americans,” Obama noted, “it's the fact that they stopped leaders of both parties from requiring elite investment firms to pay their fair share of taxes.”
“We have to end,” added Edwards, “the rigged system in Washington.”
Under this rigged system, America’s 20 top private equity and hedge fund managers last year averaged $657.5 million in income.
Lobbyists for the private investment partnerships, for their part, did not claim victory last week.
“The conclusion that the fight is over and done, that’s not the case,” Lisa McGreevy of the Managed Fund Association told Politico. “It’s not over. It’s only just beginning.”
“The issue of the buyout industry’s multiple tax dodges and their impact on the tax burden of working people is not going away,” agreed Stephen Lerner, the director of the Service Employees union’s Private Equity Project. “The tax treatment of buyout industry profits is just the tip of the iceberg.”
Back in the year 2000, with the dot-com stock market bubble near its widest expanse, America’s most affluent 1 percent of tax filers reported 20.8 percent of all personal income in the United States.
That bubble would pop soon after those tax filings. But America’s wealthy, indomitable spirits that they are, have come all the way back.
In 2005, according to new IRS statistics, the top 1 percent of tax filers — everyone who made over $364,657 — took home 21.2 percent of the nation’s income, a new record for the modern American economy.
Need some perspective on that? The bottom half of America’s tax filers, the Wall Street Journal noted last week, took home — all together — just 12.8 percent of national income in 2005.
America’s top 1 percenters paid, on average, 23 percent of their incomes in tax in 2005, down from 27.5 percent five years earlier. Their share of the nation’s after-tax income, between 2000 and 2005, increased from 17.8 to 18.6 percent.
Who makes up the wealthiest of these wealthy? Kingpins from financial world-related companies and partnerships, a recent study by two University of Chicago analysts points out, dominate the ranks of America’s highest-income households.
Indeed, in 2004, executives from non-financial corporations made up just 5 percent of the tax filers in the rarefied air of America’s highest-income 0.01 percent.
The bulk of top 0.01 percent tax filers, the University of Chicago research suggests, come from Wall Street and its side streets, from “executives of financial companies, employees of investment banks, hedge fund managers, venture capitalists, and private equity investors.”
Stat of the Week
China’s 40 richest now hold a combined $120 billion in wealth, over triple the $38 billion collective wealth of China’s 40 richest one year ago, Forbes reported last week. How do the Chinese rich compare to their counterparts in the United States? The richest 40 Americans hold $528 billion in assets, over five times the Chinese total.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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