We will be getting back to “throwing out 400 years of Western thought” in future posts. Right now, I want to say something about what is happening in Baltimore. And almost every place else in America.
Of course, the precipitating event in Baltimore was the abuse of Freddie Grey by Baltimore police, who, as I write, are under indictment for their actions. But I agree with the many commentators who have said that this is not the whole story, not even the biggest part of the story. As Ta-Nehisi Coates said earlier today, this is like telling the history of World War II by starting at the D-Day invasion.
Racism is a huge part of the story. But so is class differential and economic inequality. We live in a country of extraordinary inequity. That is what I want to comment on.
Let me ask you, “Are you rich?”
What is Rich? A thought experiment
Most of you would answer immediately, “No.” Some of you might ask what I meant by “rich.” So, OK, what is Rich?
Most of us know that we are not “rich.” We see in the media stories about people who are rich. They have lots of things that we don’t. They can do lots of things that we can’t. But what does it mean to be really, really rich? Let’s see.
If one has a net worth of a mere $500 million, that does not get you on the Forbes list of the richest 400 people in America. (In 2014, you would have had to have a net worth of $1.55 billion.) But having a half a billion dollars in net worth is definitely “rich” by anyone’s definition. So, how rich is this?
Well, let’s assume that you had such a net worth. (We will pause as you enjoy that fantasy.) And you decided that you didn’t want to work anymore, and you didn’t want to manage your wealth anymore. You wanted to cash it all in and live off of the income from the funds. So, you go to a large bank, and you offer to place your fortune in their bank, as long as they give you a good interest rate as a return.
If I deposited my cashed-in net worth at a bank, I would get an interest rate of about 0.25%. But you are depositing a half a billion dollars, and you are promising to never touch the principle. Forever. That would be a significant percentage of the total assets of most big banks. And they will be able to make a 10% to 20% return on investing that capital. But times are rough, so let’s assume that you were able to get a paltry 6% on your deposit.
(Yes, I know that rich people can’t just cash in their net worth like this, and take a wheel-barrow, or maybe a couple of thousand wheel-barrows, full of money to the bank. It’s a thought experiment, so relax.)
Then, you will take your interest and pay all of your taxes on it. No gimmicks, no hiding behind the vagaries of the tax code, no putting the money in a foreign bank to lower your tax rate. You will pay your complete and fair share of funding America.
What is left is your investment income, the amount you have to live off of. How much does this amount to per year? Or maybe per day?
Let’s see: 6% of $500,000,000 is $30,000,000. And the income tax on that is about roughly 39.6%. This is the highest “marginal tax rate” we charge in the US today.
Marginal tax rates
A marginal tax rate is the amount of tax you pay on the last dollars you earn in a year. If you earn $200,000 in 2014, you will not be paying the 39.6% rate, because it doesn’t kick in until you make more money than that. Having a very high “top marginal rate” means that the people who make the most money have to pay a much larger portion of the money they earn in order to make the country work well. Having a low “top marginal rate” means that the people who make lots and lots of money aren’t paying their share.
When I was born, in 1951, the top marginal rate was 91%. Around when I got to high school, the rate started to fall. It was 70% for many years (1965 to 1982). Right about the start of “the Eighties” (but that’s another posting).
Why did it go down? If you are a supply-side economist, you would say that letting rich people keep more of their money is good for everyone, since they will invest that money, and we will all get jobs from that spending. Trickle-down economics. Voodoo economics. How’s that been workin’ for ya?
I think it went down because politicians caved in to rich people to lower the rate so that rich people could keep more of their money. Simple explanations are often the best.
$49,644 per day
Back to how much money these rich people have to live on, after taxes. So, every year you will pay 39.6% of your income in taxes and keep, after taxes, 60.4% of your interest. If you gave the bank your $500,000,000, your investment income is $18,120,000 per year.
In other words, every day, a person will arrive at your door, and hand you a bag containing $49,644 and change. Every day, Saturday and Sunday. For doing no work and for paying all of your taxes.
Stunning, isn’t it? To be rich is to have access to money that is beyond the imagination of the average person. Could you live on roughly $50 thousand a day? Keep in mind, that if you don’t spend it all, some of it will go back into your capital in the bank, and you will start getting even bigger bags of cash every day.
And having a net worth of “only” $500,000,000 doesn’t make you one of the super-rich in the US. Bill Gates, the richest man in America according to Forbes, has almost a trillion dollars in net worth ($818,000,000,000). That would work out to more than $81 million dollars a day in income! We should praise Bill and Melinda Gates contributions to charity, but if he gives a billion dollars to charity, that is only 12 days worth of income (assuming the rather paltry 6% interest of our thought experiment).
The least rich person on Forbes’ list has a net worth of $1.55 billion. That is over $150,000 per day, every day, Saturday and Sunday, after taxes, with no work and not touching the principal.
Being rich is unimaginable to most of us. Could you manage to live on $150,000 per day? Or on the $49,000 earned by our first hypothetical rich person?
What could you live on?
Could you live on $5,000 per day? That is what you would get from a net worth of only $50 million. There are 45,000 Americans with this net worth.
I am guessing that you are like me – the idea of living off of $500 per day, doing no work and after taxes, sounds great. That net worth, of $5 million, doesn’t get you into the top 1 percent in America ($8.4 million). But I am confident that most of us would be very, very comfortable living off of a net annual income of $180,000.
To be rich in the US is unimaginably beyond the dreams of most Americans. No wonder that, in 2000, when Al Gore was saying that George W. Bush’s tax cuts would only benefit the top 1%, 39% of the American public got excited, because they thought they would benefit directly from Bush’s plans. (Bush jokingly referred to his base as “the Haves.” Very funny.)
Half of that excited group, 20% of Americans, thought they were already in the top 1%, and the rest thought that they were very close to being in that lofty group. Not even close!
In my opinion, if someone has a net worth of $20,000,000 (a daily income of about $2,000) and believes they need more money, I think that qualifies as an illness.
So, part of the story in Baltimore is about extreme disparities in wealth. But most of us don’t really understand what it means to be rich in the US. And how many of us actually understand what it takes to “get by?” Not to be poor, but to just “get by.” We will look at that next.
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