Trickle-Up: Wealth Flows to the Top

Coney Island Avenue in Brooklyn is lined with car repair shops, dollar stores, the Bella Pizza takeout place and a couple of delis where people can buy lottery tickets, beer, cigarettes, milk, bananas and cat food. A couple of years ago on a windy day in February, a Statue of Liberty appeared on Coney Island Avenue. At times, Lady Liberty wore sunglasses on her foam rubber tiara. The New York icon was being used as advertising for a new income tax service that had taken over the storefront formerly occupied by a florist.

Then the statue and the office both disappeared. Someone had obviously made a miscalculation: Who would seek tax advice in this neighborhood where cab drivers are among the highest earners? But one year later, both statue and office had reappeared.

Actually, this neighborhood — known as “Little Samarkand” for its mixture of immigrants — was exactly the ideal location for such a tax advisory service because of the earned income tax credit, one of the most popular features in the U.S. tax code. Every year, low earners get a kind of tax refund. Because the minimum wage is often not enough for people to live on, their earnings are supplemented by this credit. Twenty-six million households take advantage of this credit every year to the tune of some $60 billion, the average taxpayer getting around $2,900. That suffices to pay off old bills and maybe buy new clothes for the kids. But in order to qualify for the credit people have to file their taxes and supporting documents by April 15. Because of frequent job changes and other social support income, filing taxes for these individuals can be just as complicated as it is for the rich.

The tax advice industry recognized an opportunity: The professionals can do the details in 30 minutes or less and charge around $400 for their time. Every year at tax time, the offices spring up out of the ground like mushrooms. Even major firms like H&R Block rent extra offices for two to three months to handle these customers.

The trickle-down theory, whereby consumption by wealthy consumers trickles down from the yacht owner to the longshoreman and the dockside bar owner has lost credibility even in the United States. The trickle-up theory, on the other hand, is alive and well. Banks are generous in giving out credit cards and then charging up to 30 percent in interest and late fees. The number of cards given to new customers with shaky credit grew 40 percent last year alone. Automobile loans reached $900 billion, a record high. Loans to subprime borrowers are growing especially rapidly. Wall Street likes to buy and package those since they bring the highest returns.

Investors know: People will make their car payments before their electric bills or their rent because everyone knows they can’t drive their houses to work, as an industry saying goes. The base of the real Statue of Liberty bears the words, “Give me your tired, your poor, your huddled masses yearning to breathe free.”

Sounds a lot like a motto for the trickle-up profiteers.