The Rich of America

There was a conspicuous absence in Barack Obama’s social dialogue to determine his second term’s economic agenda.

No bankers. Not one. Goodbye to the times when Goldman Sachs “outsourced” the Department of the Treasury (by Robert Rubin to Hank Paulson), when JP Morgan Chase and Citigroup had privileged access to the White House. Obama II kicks off with an imprint from the left: hunting season toward the rich has begun. This time, the president seems determined to follow the mandate of his electoral base: a social middle class made up of the lower-middle class, youth, immigrants, with a clear definition of class. It encourages the inundation of studies and essays that denounce the direction of American society, such as “Plutocrats,” a recent work by Reuters Thomson Editor Chrystia Freeland. But who are the rich who will take part in the discussion, in the feverish negotiations between Obama and the Republicans, that later this year will be forced to restore the public deficit and avert the recessive “precipice tax”? The president has indicated a precise threshold: above $200,000 in individual gross annual income (about €150,000 gross per year) or $250,000 for a married couple. Data from the Internal Revenue Service (IRS, the U.S. tax authorities) shows that 2 percent of taxpayers, including about 4 million families, are above this threshold.

But this is a very inaccurate measurement. First, these statistics were derived from the income tax of individuals, and in America, they are just as unreliable as they are in Italy, although for different reasons. In Italy, the unreliability is caused by evasion, while in America incomes are a marginal aspect of inequality. In fact, separate social categories exist, despite abysmal distances. Hospital doctors and engineers, the fire and police chiefs of New York and airline pilots who take increasingly exhausting shifts all land just above the threshold of $200,000 gross per year. They are people who, at the end of the month, after federal, state and city taxes, school fees, health insurance and mortgage payments, often struggle to put money aside for retirement. Among them are many baby-boomers who work until age 70 to “stretch” an insufficient pension fund. They are members of the upper-middle class, and, of course, also wealthy. But the rich? That is another world entirely. It’s that of the chief executive who earns 600 times that of his or her average employee, who when fired for poor performance rakes in the “golden parachute” of tens of millions of ex-ante severance pay negotiated by their powerful lawyers. Carly Fiorina of Hewlett-Packard is one such example.

There are the fortunes of billionaires Warren Buffett and Bill Gates that benefit from the most preferential taxation on capital gains found in the Western world. It is the financial elite that makes up 0.1 percent of American society. They are the ones who have inflated the prices of luxury homes up to $98 million for an apartment in a new skyscraper being built between 57th Street and 7th Avenue in Manhattan. In the middle, between the 2 percent and the 0.1 percent, there are people like Barack Obama, who thanks to royalties of his book (more substantial than his presidential salary) over the past several years has reached or surpassed $1 million in income. He never misses the opportunity to mention that he will be among those who will need to pay more in taxes. For 30 years the limits of idolatry were venerated, thanks to Reagan ideology that identified with the “collective wealth creators” that used the famous image of wealth as a high tide (“lifting up the billionaire’s yacht and the fisherman’s boat, benefiting everyone”).

Today those legends are crushed by reality, and the hunting of the rich has a strong economic basis.

From 2000 to 2010, a typical middle-class American family lost $3,837 in annual income. At the same time, the wealthiest 1 percent of the population captured 17.42 percent of the national income, which is twice as much as it was at the dawn of the Reagan era (1980). A society where inequalities grow in this way is not only ethically unjust; it is inefficient and condemned to decline. This idea was authoritatively confirmed by the International Monetary Fund, which is certainly not an organization of the radical left.

Among the reasons why inequality kills dynamism, one is sufficient: the weakening of meritocracy. Even the American university system, the best in the world, suffers from an oligarchic drift. In the admissions process for Harvard, Yale, Princeton or Stanford, if your father is a billionaire who donated money to research, you will be admitted even if you are not a good student. The gangrene of inequalities can kill the American Dream.

So Obama is making redistributive policies an important area of his second term. But will he successfully not penalize the small business owner who earns $200,000 a year by putting him in the same grade as Larry Ellison, the chief executive of Oracle (and winner of the “America’s Cup”), who earns $15 million annually in addition to $65 million in stock options? Is it right to equate a neurosurgeon who saves lives with a hedge fund trader who lives in speculation and earns much more than those who are in the operating room? Daniel Altman, an economist at the Stern School of Business at New York University, challenges Obama II. “To reduce inequalities, tax wealth, not income,” Altman offers. “But income is not always a good gauge of economic power… over time, wealth inequality rises even as income inequality stays the same, and wealth inequality eventually becomes much more severe.” The proof: in 1992 the richest 10 percent of the population in America controlled 20 times more wealth than 50 percent of the lower middle class.

Today, the disproportion has increased to 65 times. And this inequality is even more anomalous, as it is not the consequence of “inevitable” phenomena such as globalization (competition with Chinese wages for blue-collar Americans) or automation technology (replacing less-skilled workers with machines). No, these inequalities are “manufactured” by fiscal policies. On assets, taxation is regressive; it takes from the poor to give to the rich. Only Scrooges, in fact, have a predominant share of their income that comes from dividends and capital gains. Today, these incomes are affected by a 15 percent tax, less than half of the marginal income tax of employees with medium-high salaries (35 percent plus local taxes). An analysis carried out by the Tax Policy Center shows that the “real” rich of the 0.1 percent each saved an average of $356,000 in taxes in fiscal year 2011.

Here is the “revolutionary” proposal that Altman suggests for Obama: “American household wealth totaled more than $58 trillion in 2010. A flat wealth tax of just 1.5 percent on financial assets and other wealth like housing, cars and business ownership would have been more than enough to replace all the revenue of the income, estate and gift taxes.” To not hit low household savings, Altman imagines that the rate would be from zero up to half a million in wealth, the 1 percent from $500,000 to $1 million, and the 2 percent over $1 million in assets. For most Americans, workers and the middle class, tax savings would be substantial. The assets of the “real rich” would allow the creation of other policies that favor equal opportunity — investments in public schools and in retraining unemployed workers.

One has to expect a counteroffensive by the 0.1 percent. Obama snubbed them by no longer inviting them to the White House, and the bankers on Wall Street have other defenses in store. Their powerful law firms are already preparing more sophisticated loopholes to exploit any technicality and to shelter threatened assets in offshore havens. The hunt for the rich has just begun; plot twists will not be lacking.