Marco's Blog

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The Two Numbers We Need

2011-08-10 3 min read Musings marco

I have spoken with many friends about super-taxing the super-rich (according to the Democrats, that’s anyone that makes more than $250,000 a year after deductions). I have heard many different opinions as to why that’s a good thing or a bad thing. In the end, I decided I need more information to make a decision; in particular, I need two numbers.

The first number is an easy one to get: What percentage of the wealth of the super-rich is invested outside this country?

Why does that matter? Because if, as investment advisors tell me, the best thing to do right now is to invest in “emerging markets,” then taxing the super-rich is extremely important. If their money leaves the country and goes to China, India, etc. – where it certainly stands a good chance of becoming a lot more money, and where it helps propping up their economies – then it’s money America loses.

In other words, even if the Trickle Down effect had worked during the Reagan years, it wouldn’t work anymore if enough of that money trickles down abroad. It would be much wiser to take some of that money from the super-rich and invest it in the United States. Maybe by giving students a break on their tuition, or by building some decent infrastructure.

The second number is a bit harder to quantify, but is even more important. Consider the function that ties people’s income and their average wealth. How much wealth do people have in average if they make $10,000 a year, $100,000 a year, $1,000,000 a year?

Why does this function matter? Because my suspicion (based on wealth and income distributions that are readily available) is that the rich have a disproportionate amount of wealth. That is, if you earn ten times as much, you don’t own (wealth) ten times as much, but a lot more than that. That’s due to many factors, amongst them most notable the fact that money generates money.

The data presented by Democrats says that the line of $250,000 a year means 2% of the population. I don’t have the data for 2%, but this article presents the data for the top 1%: 34.6%. A full third of the country’s wealth is owned by only 1% of the population. The same article presents the data point that the top 1% of earners earn 21.3% of the income.

Now, as I usually do, I do not judge riches and poverty from a moral perspective. I am more interested in the argument of practicality and efficiency: is it wise to allow a system in which there is an automatic transfer of wealth from the poor to the rich, which is what needs to have happened for the rich to have a disproportionately high share of the wealth?

My argument works well, because it is not based on individual success and failure, on the luck of the draw, but on statistical facts: if people generate their wealth through income, then the only way for wealth to be more concentrated than income is by a magical redistribution that is invisible to income. The rich have access to forms of wealth generation that the poor don’t touch.

It doesn’t really matter whether this is because the rich can afford lawyers, creative accounting, a party fond of giving them breaks, or divine protection. What really matters is that there is an automatic, invisible transfer of money, and that it makes perfect sense for society to want a share of that automatic transfer.