What’s Wrong with Being Rich

This post was originally featured on The Soapbox on November 9, 2012.

This post is in direct response to “What’s Wrong With Being Rich?” by Randy Mitchell.

Uh-oh, here comes the liberal in me roaring out. While I at least make some attempt to remain moderate in my posts on this blog, I can already tell that this post is going to end up far to the left. If that’s not your cup of tea, I understand, but perhaps you’d at least like to jump down to the comments and tell me why I’m so woefully mistaken. For those of you with similar political leanings as me, perhaps you’d like to chime in your support instead. Either way, off we go!

In his post, Mitchell describes a common refrain from the left: “I don’t like Mitt Romney because he’s rich.” Mitchell goes on to rectify this misconception, pointing out that we all strive to be rich someday, and we shouldn’t fault those who have worked hard to reach the position they are in. After all, if given the opportunity, wouldn’t each of us switch positions with Mitt in an instant?

He goes on to lament an increasing sentiment among Americans that the government owes the middle class and that the rich owe the poor. He decries a country where “we have leaders whose belief [sic] go against the American way.” It would seem that only a return to conservative ideals can right this ship and return America to a country that works hard for success instead of whining about its lot.

Too bad the Conservatives have missed the point.

It is true that many people do not like Romney because he is rich. However, that position is usually followed by the sentiment that “he can’t relate to the middle class.” And really, how could he? This is a man who sold stock to pay for college, while the average student has to take out massive loans and/or work side jobs. Certainly, Barack Obama is doing quite well for himself as well, with an estimated net worth of up to $11.8 million, but at the least, his platform and policies seem to indicate his willingness to fight for more than the 1%.

The key thing to remember is that the “class warfare” that has been going on isn’t really between the individuals who are rich or poor—they are merely the pawns. The war is really over a system that has consistently widened the gap between the “haves” and “have-nots” of America. As user Agit8r astutely points out (in response to Mitchell), even our founding fathers recognized the need to correct for class disparity.

Thomas Jefferson notes, “Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise,” and yet the current state of affairs is such that Warren Buffet, the 3rd richest man in the world at the time of this writing, pays a lower percentage tax than his secretary. The biggest offender here is the capital gains tax, for which the top rate is only 15%, while income tax tops out at 35% for the highest bracket. Let’s not just look at one isolated case, however. Here’s some data directly from the IRS. Note Table 3, which shows the effective tax rates for taxpayers with the top 400 adjusted gross incomes. In 2008, the median rate fell somewhere between 15-20%. Furthermore, the rate has fallen over time: in 1992, the median was between 25-30%. The phrase “the first million is the hardest” has never been truer, since it takes money to make money in this world, and if you’ve got it, the system is set up to let you hoard an unfair amount of it.

There are plenty of reasons people have come up with to defend the current capital gains tax rate. One of the most prominent is that it amounts to double-taxing income: once when the company is taxed on its gains, and again when the shareholder is taxed on his/her dividends. Another point that comes to mind is that raising capital gains tax may discourage investment in the stock market, an important component of driving the economy.

The real travesty here is that the GOP has somehow convinced its supporters in the middle class that maintaining this system is somehow in their best interests.

Take a look at this report by Leonard E. Burman presented to the House Committee on Ways and Means and the Senate Committee on Finance. Figure 4 (reproduced below) shows that capital gains tax rates and GDP change aren’t really linked at all. In case you don’t trust your eyes, the report points out: “the correlation is 0.12, the opposite sign from what capital gains tax cut advocates would expect, and not statistically different from zero.”

Thus, it seems fair to conclude that any concerns about the capital gains tax affecting the economy are overblown. But what about double-taxation? Well, while Republicans may point out that corporate tax rates are as high as 35%, the truth is that most companies do not pay this full rate. In his 2011 report, Robert S. McIntyre discovered “that a quarter of the companies in our study paid effective federal tax rates on their U.S. profits of less than 10 percent” and only “an almost equal number of our companies paid close to the full 35 percent.” This seems inherently unfair. At the very least, corporations and investors should both bear an equal brunt of the tax burden, without loopholes for escaping it. I’m not the first one to suggest this; in 2010, Altshuler, Harris, and Toder suggested “taxing capital gains and dividends as ordinary income (subject to a maximum 28% rate on long-term capital gains) would finance a cut in the corporate tax rate from 35% to about 26%.”

Finally, let us return to the Burman report and note that capital gains are a source of income practically reserved for the rich. Figure 1 (reproduced below) breaks down the distribution of capital gains by income quintile. Over 90% of the gains belonged to the top 20% of earners, and roughly 50% to the top 0.1%. The game of investments has become like a high-stakes poker table; the average American simply cannot afford a seat.

The real travesty here is that the GOP has somehow convinced its supporters in the middle class that maintaining this system is somehow in their best interests. They’ve bought into the notion that the rich and super-rich should remain that way so that they can offer jobs and trickle down their success. Unfortunately, trickle-down economics just don’t work. Feel free to offer a counterpoint in the comments, I’ll be waiting.

At the end of the day, we do not begrudge Mitt Romney his wealth. After all, the American dream is to build success, and the Romney family wealth has certainly come from a significant amount of effort. The problem we have is that Governor Romney’s policies and approach to the American economy will continue the great advantages that the rich and super-rich have over the rest of America. If America is to be a fair and balanced country where the American Dream is still a possibility, this inequality must be rectified.