Economics question: How much is healthy for the 1%?

[Loren Pechtel]

If there was no return on investment they wouldn't invest it in the first place. Thus this comparison doesn't tell us if it's proper or not.

This is the whole point. There is much more money available for real investment in the things that build the economy than is needed. The money that can't find a real investment causes problems, asset bubbles, the pressure to capitalize businesses that don't fit the for profit model, etc.

Instead the excess financial capital goes into paper investments that don't build the economy. Money that would boost the economy if it was paid in wages instead of as profits. We have too much supply and not enough demand in the economy.

I am saying that supply obviously doesn't create its own demand. The wealthy are happy to embrace supply side economics when it boosts profits, their income, by suppressing wages. But when it comes to investing their money they become Keynesians, they won't invest in the real economy of producing products for consumption unless there is a demand for the products, unless there is a promise of a return on the investment.

If there wasn't extra money there would be no investment in the first place. What becomes of it is a bit of a problem but far less of a problem than the lack of the extra would be.

 

[Loren Pechtel]

If there was no return on investment they wouldn't invest it in the first place. Thus this comparison doesn't tell us if it's proper or not.

Don, spent hours making that post and all you can do is put out a strawman?

he never called for zero ROI, but you knew that already.

you should try again and actually engage with what don wrote.

Except he was calling that extra money a problem--to avoid that problem requires a 0% return.

 

[bilby]

I provided what was asked for, an explanation of how much wealth is too much for the wealthy to have and why.

I provided a short version and a detailed explanation. I thought that it would challenge the discussion, especially those who said that it was unknowable or that we had to accept what we get, presumably because it is too dangerous to try to change.

It takes me a long time to write anything, hours for the long post above. Please, show me that the effort is of some value to the discussion and to the board.

I found it both interesting and informative; Thank you for taking the time to set things out so clearly.

Of course, as you and I both know, it takes a lot more than reasoned argument to change the entrenched positions of the more polarised (and more prolific) contributors to this forum. But if I might be allowed to speak on behalf of the infrequent contributors and the lurkers, I believe that we get a great deal more from your posts than from the myriad posts made by the more frequent but perhaps less thoughtful posters.

 

[laughing dog]

Don, spent hours making that post and all you can do is put out a strawman?

he never called for zero ROI, but you knew that already.

you should try again and actually engage with what don wrote.

Except he was calling that extra money a problem--to avoid that problem requires a 0% return.

Or taxing it.

 

[fast]

10 billion dollars.

 

[Loren Pechtel]

Except he was calling that extra money a problem--to avoid that problem requires a 0% return.

Or taxing it.

Taxing it away has the same effect.

 

[zorq]

I provided what was asked for, an explanation of how much wealth is too much for the wealthy to have and why.

I provided a short version and a detailed explanation. I thought that it would challenge the discussion, especially those who said that it was unknowable or that we had to accept what we get, presumably because it is too dangerous to try to change.

It takes me a long time to write anything, hours for the long post above. Please, show me that the effort is of some value to the discussion and to the board.

I found it both interesting and informative; Thank you for taking the time to set things out so clearly.

Of course, as you and I both know, it takes a lot more than reasoned argument to change the entrenched positions of the more polarised (and more prolific) contributors to this forum. But if I might be allowed to speak on behalf of the infrequent contributors and the lurkers, I believe that we get a great deal more from your posts than from the myriad posts made by the more frequent but perhaps less thoughtful posters.

Right. I'm one of those lurkers and I appreciated your post, Don.

I'm starting to divide my internal categorizations of investments right now. Previously I would lazily lump all investments into the same category because, after all, isn't my money that I have saved sitting in the bank (kind of a paper investment) really just helping the bank to more easily give loans to innovative entrepreneurs who will use that money for real investment? If that were true then my paper investment would be just as good as a real investment.

But I realize now that the bank is only allowed to loan out a portion of the money and these days the innovative entrepreneur (or the bank itself) may just as often only want the loan as leverage to wager in another paper investment or asset bubble that doesn't actually improve the economy in any significant way.

 

[DBT]

This is the whole point. There is much more money available for real investment in the things that build the economy than is needed. The money that can't find a real investment causes problems, asset bubbles, the pressure to capitalize businesses that don't fit the for profit model, etc.

Instead the excess financial capital goes into paper investments that don't build the economy. Money that would boost the economy if it was paid in wages instead of as profits. We have too much supply and not enough demand in the economy.

I am saying that supply obviously doesn't create its own demand. The wealthy are happy to embrace supply side economics when it boosts profits, their income, by suppressing wages. But when it comes to investing their money they become Keynesians, they won't invest in the real economy of producing products for consumption unless there is a demand for the products, unless there is a promise of a return on the investment.

If there wasn't extra money there would be no investment in the first place. What becomes of it is a bit of a problem but far less of a problem than the lack of the extra would be.

One problem is, the extremely wealthy tend not to pay their share of taxes. Having the power and influence with policy makers, the super rich are able to manipulate the system for their own benefit.

 

[Axulus]

If there wasn't extra money there would be no investment in the first place. What becomes of it is a bit of a problem but far less of a problem than the lack of the extra would be.

One problem is, the extremely wealthy tend not to pay their share of taxes. Having the power and influence with policy makers, the super rich are able to manipulate the system for their own benefit.

Do you have proof of this? What data are you going off of?

 

[DBT]

One problem is, the extremely wealthy tend not to pay their share of taxes. Having the power and influence with policy makers, the super rich are able to manipulate the system for their own benefit.

Do you have proof of this? What data are you going off of?

Several sources. I'll begin with Warren Buffett:

''It's not often you see someone stand up and say, "Tax me more!"

''Yet that's just what famed investor Warren Buffett has done in an op-ed in the New York Times headlined, "Stop Coddling the Super-Rich." Buffett says that very wealthy people like himself pay lower tax rates than the middle class, thanks to special tax categories for investment income. ''

As an example, Buffett said he paid an effective tax rate of 17.4 percent, while people who worked in his office made much less but paid higher effective tax rates of between 33 percent and 41 percent, averaging 36 percent.

"If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot," Buffett wrote. "To understand why, you need to examine the sources of government revenue. Last year about 80 percent of these revenues came from personal income taxes and payroll taxes. The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot."


Key Facts
The richest 1% of Americans own 35% of the nation’s wealth. The bottom 80% own just 11% of the nation’s wealth.
In the 1950s and 1960s, when the economy was booming, the wealthiest Americans paid a top income tax rate of 91%. Today, the top rate is 43.4%.
The richest 1% pay an effective federal income tax rate of 24.7% in 2014; someone making an average of $75,000 is paying a 19.7% rate.
The average federal income tax rate of the richest 400 Americans was just 20 percent in 2009.
Taxing investment income at a much lower rate than salaries and wages are taxed loses $1.3 trillion over 10 years.
1,470 households reported income of more than $1 million in 2009 but paid zero federal income taxes on it.
CEOs of major corporations earn nearly 300 times more than an average worker.
30 percent of income inequality is due to unfair taxes and budget cuts to services and benefits.
The largest contributor to increasing income inequality has been changes in income from capital gains and dividends.

Talking points

It’s time for the wealthiest Americans and big corporations to pay their fair share of taxes. When they take unfair advantage of the many loopholes in the tax code the rest of us pick up the tab.
Instead of cutting education funding for our children, we should ask millionaires to pay a tax rate at least as high their secretary’s.
Instead of cutting Social Security and Medicare, we should ask the wealthy to give up a few tax loopholes so that we can make sure everyone has a secure retirement.

 

[Axulus]

Do you have proof of this? What data are you going off of?

Several sources. I'll begin with Warren Buffett:

''It's not often you see someone stand up and say, "Tax me more!"

''Yet that's just what famed investor Warren Buffett has done in an op-ed in the New York Times headlined, "Stop Coddling the Super-Rich." Buffett says that very wealthy people like himself pay lower tax rates than the middle class, thanks to special tax categories for investment income. ''

As an example, Buffett said he paid an effective tax rate of 17.4 percent, while people who worked in his office made much less but paid higher effective tax rates of between 33 percent and 41 percent, averaging 36 percent.

"If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot," Buffett wrote. "To understand why, you need to examine the sources of government revenue. Last year about 80 percent of these revenues came from personal income taxes and payroll taxes. The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot."


Key Facts
The richest 1% of Americans own 35% of the nation’s wealth. The bottom 80% own just 11% of the nation’s wealth.
In the 1950s and 1960s, when the economy was booming, the wealthiest Americans paid a top income tax rate of 91%. Today, the top rate is 43.4%.
The richest 1% pay an effective federal income tax rate of 24.7% in 2014; someone making an average of $75,000 is paying a 19.7% rate.
The average federal income tax rate of the richest 400 Americans was just 20 percent in 2009.
Taxing investment income at a much lower rate than salaries and wages are taxed loses $1.3 trillion over 10 years.
1,470 households reported income of more than $1 million in 2009 but paid zero federal income taxes on it.
CEOs of major corporations earn nearly 300 times more than an average worker.
30 percent of income inequality is due to unfair taxes and budget cuts to services and benefits.
The largest contributor to increasing income inequality has been changes in income from capital gains and dividends.

Talking points

It’s time for the wealthiest Americans and big corporations to pay their fair share of taxes. When they take unfair advantage of the many loopholes in the tax code the rest of us pick up the tab.
Instead of cutting education funding for our children, we should ask millionaires to pay a tax rate at least as high their secretary’s.
Instead of cutting Social Security and Medicare, we should ask the wealthy to give up a few tax loopholes so that we can make sure everyone has a secure retirement.

The first one is an anecdote. Hardly any kind of data or analysis. Surely you don't expect us to draw conclusions on anecdotes?

The only data on the second one that seems to be of any relevance is the top 400 tax returns. However, this is only because it relates almost entirely to capital gains. The event that most often puts one into the top 400 is the one-time sale of a company that one started. This is hardly representative of this individual's tax rate over their lifetime. Is your only point that the top 400 don't pay their "fair share" - are these the only ones you define as "extremely wealthy"?

In regards to the 1,470 households with reported income of over $1,000,000 that paid zero federal taxes, that is cherry picked and most likely relates to special tax code deductions. It's less than 1% of the nearly 237,000 returns with incomes above $1 million, and thus hardly representative of millionaire households.

Second, would you say that New Zealand, which has a 0% capital gains tax rate, is under a far greater control of the rich, who are much further from your "ideal" of paying their "fair share"? How about Austria, Switzerland, and Netherlands?

 

[ksen]

Second, would you say that New Zealand, which has a 0% capital gains tax rate, is under a far greater control of the rich, who are much further from your "ideal" of paying their "fair share"? How about Austria, Switzerland, and Netherlands?

NZ taxes dividends at a 30% rate (with a credt for taxes paid on the profits by the company).

http://www.investogain.co.nz/shares/taxes

Not sure why you're picking the capital gains tax rate as the measuring stick.

 

[laughing dog]

Or taxing it.

Taxing it away has the same effect.

No, it doesn't. Taxing it away shifts those resources elsewhere. Maybe to something more socially productive.

 

[SimpleDon]

This is the whole point. There is much more money available for real investment in the things that build the economy than is needed. The money that can't find a real investment causes problems, asset bubbles, the pressure to capitalize businesses that don't fit the for profit model, etc.

Instead the excess financial capital goes into paper investments that don't build the economy. Money that would boost the economy if it was paid in wages instead of as profits. We have too much supply and not enough demand in the economy.

I am saying that supply obviously doesn't create its own demand. The wealthy are happy to embrace supply side economics when it boosts profits, their income, by suppressing wages. But when it comes to investing their money they become Keynesians, they won't invest in the real economy of producing products for consumption unless there is a demand for the products, unless there is a promise of a return on the investment.

If there wasn't extra money there would be no investment in the first place. What becomes of it is a bit of a problem but far less of a problem than the lack of the extra would be.

By extra money I mean more money than the real business investment in the economy. This is what corporate profits are for, to invest in the economy, to build production facilities to produce products for consumption, right?

Once again, the question is how income and wealth above and beyond the economy's real business investment do we need? We currently have more than three times the real investment also going to the wealthy, money that isn't being invested in the real economy, money that is going into paper investments.

There is an argument that we need a stock* of financial capital available as a cushion, a rainy day fund for the economy, if you will. But since it is a stock it will build up over time, like your savings. Therefore my 10 to 25% extra on top of the money required for real investment.

But you have to agree that three times is excessive extra money?

And I am at something of a loss to describe how this fund would be used, what will draw it down, for the money that is distributed to shareholders. Obviously corporate retained earnings are the main source of real investment and can be used to ride through downturns and to cover extra ordinary expenses.

* Sorry, I have used the econspeak of "flows and stocks." A "flow" is something moving through the economy, say from person to person. A "stock” is an accumulation of a flow. Income is a flow and wealth is a stock of income, for example.

 

[Axulus]

Second, would you say that New Zealand, which has a 0% capital gains tax rate, is under a far greater control of the rich, who are much further from your "ideal" of paying their "fair share"? How about Austria, Switzerland, and Netherlands?

NZ taxes dividends at a 30% rate (with a credt for taxes paid on the profits by the company).

http://www.investogain.co.nz/shares/taxes

Not sure why you're picking the capital gains tax rate as the measuring stick.

I'm not the one who did that, DBT did with his citation of the average tax rates of the top 400 which, if you look at the source from the link he provided, was due almost entirely to capital gains taxes.

So, in addition to what is now a 23.8% top capital gains tax rate (his data was from 2009), we also have a 23.8% top dividend rate, plus a 35% corporate tax rate.

 

[Axulus]

If there wasn't extra money there would be no investment in the first place. What becomes of it is a bit of a problem but far less of a problem than the lack of the extra would be.

By extra money I mean more money than the real business investment in the economy. This is what corporate profits are for, to invest in the economy, to build production facilities to produce products for consumption, right?

Once again, the question is how income and wealth above and beyond the economy's real business investment do we need? We currently have more than three times the real investment also going to the wealthy, money that isn't being invested in the real economy, money that is going into paper investments.

There is an argument that we need a stock* of financial capital available as a cushion, a rainy day fund for the economy, if you will. But since it is a stock it will build up over time, like your savings. Therefore my 10 to 25% extra on top of the money required for real investment.

But you have to agree that three times is excessive extra money?

And I am at something of a loss to describe how this fund would be used, what will draw it down, for the money that is distributed to shareholders. Obviously corporate retained earnings are the main source of real investment and can be used to ride through downturns and to cover extra ordinary expenses.

* Sorry, I have used the econspeak of "flows and stocks." A "flow" is something moving through the economy, say from person to person. A "stock” is an accumulation of a flow. Income is a flow and wealth is a stock of income, for example.

What is the difference between "investment in the real economy" and "paper investments"? If you are referring to a stock purchase in the secondary market, are you accounting for the fact that for every buyer, there is a seller? That there are two sides to every trade involving "paper investments"? How does this fit with your claims?

 

[coloradoatheist]

By extra money I mean more money than the real business investment in the economy. This is what corporate profits are for, to invest in the economy, to build production facilities to produce products for consumption, right?

Once again, the question is how income and wealth above and beyond the economy's real business investment do we need? We currently have more than three times the real investment also going to the wealthy, money that isn't being invested in the real economy, money that is going into paper investments.

There is an argument that we need a stock* of financial capital available as a cushion, a rainy day fund for the economy, if you will. But since it is a stock it will build up over time, like your savings. Therefore my 10 to 25% extra on top of the money required for real investment.

But you have to agree that three times is excessive extra money?

And I am at something of a loss to describe how this fund would be used, what will draw it down, for the money that is distributed to shareholders. Obviously corporate retained earnings are the main source of real investment and can be used to ride through downturns and to cover extra ordinary expenses.

* Sorry, I have used the econspeak of "flows and stocks." A "flow" is something moving through the economy, say from person to person. A "stock” is an accumulation of a flow. Income is a flow and wealth is a stock of income, for example.

What is the difference between "investment in the real economy" and "paper investments"? If you are referring to a stock purchase in the secondary market, are you accounting for the fact that for every buyer, there is a seller? That there are two sides to every trade involving "paper investments"? How does this fit with your claims?

It is an interesting question because another question is the investment going into the stock market going into a form that companies (new and existing) can use compare to just propping up big ones. I don't have a problem with SimpleDon's explanation, he just wants to blame Reagan so bad even though there have been major policy shifts afterward that have bigger impacts.

 

[arkirk]

When you go to a casino, there are TWO SIDES TO THAT EXCHANGE AS WELL...and it works the same way. You want to know how much the 1% should have?
SOMEWHERE AROUND 1% We need to quit this pissing game and get about reasoned and humane governance.

 

[coloradoatheist]

When you go to a casino, there are TWO SIDES TO THAT EXCHANGE AS WELL...and it works the same way. You want to know how much the 1% should have?
SOMEWHERE AROUND 1% We need to quit this pissing game and get about reasoned and humane governance.

Thanks for the good laugh. The question though that should be asked, is what is the wealth that people have access to and control, not just what paper wealth someone has.

 

[arkirk]

When you go to a casino, there are TWO SIDES TO THAT EXCHANGE AS WELL...and it works the same way. You want to know how much the 1% should have?
SOMEWHERE AROUND 1% We need to quit this pissing game and get about reasoned and humane governance.

Thanks for the good laugh. The question though that should be asked, is what is the wealth that people have access to and control, not just what paper wealth someone has.

You have some objection to my answer. You want to laugh. I agree I am talking in terms of a physical economy...not casino winnings which should never be allowed to disrupt the real physical economy. My answer seems to make you nervous? I can see that. But your idea is to start with a static unfair distribution of wealth and continue in this manner which approaches the 99% having nothing at all, and when that end point is reached the value of the holdings of the 1% also approaches nothing and in a precipitous manner. Wealth addiction of the 1% is actually not any different from drug addiction in terms of patterns of human behavior. Aberrent accumulations of wealth and power cloys the judgement of these excessively rich people and we have the same patterns of denial that come from meth heads, less the pimples and rotting teeth. It is an addiction however that is licensed by our slavish adherrence to an economic theory that parallels the childhood game King of the mountain. These rich people begin to equate the existence of their personal wealth with morality and seem willing to do anything to maintain it, regardless of their actual personal needs, which actually could be well met with about 1% of the wealth. This is not rocket science, but you know in your heart, it is reality.