Income Inequality is a Deadly Misdirection

Income inequality has caused wealth inequality. In fact the latter is a natural result and we should not be surprised or angered by this. These are some of the reasons America has been great. Neither issue would be a problem if that income & wealth were redistributed naturally through healthy economic activity. If every billionaire found a way to live paycheck to paycheck the dollars spent would fuel corporate profits and more growth. Unfortunately for society there is a great correlation to savings rates and wealth creation. The guy who make $10mm per year can easily afford to save 50% of his take home pay whereas the guy making 50k has very little room to save anything at all. If the first guy lived more like the second, his spent dollars would find their way through the tax system via sales tax and further wage tax. Economic activity would be supported and companies would hire to fill demand.

Instead the Great Accumulation of the last 30 years has created a conundrum of sleeping capital. The top 1% of wealthy Americans control 40% of the nations wealth. They are rich beyond their capacity to spend (recycle) those dollars. They have built investment portfolios comprised predominantly of investment assets as opposed to operating assets. Many of those investments (I.e. treasuries paying 2%) are simply unproductive to economic activity.

What this country needs to do is to wake up from the dream that some utopia exists if the highest earners are “justly” taxed. This might help mitigate inequality in the future, bit it will not solve the current problem of 1% controlling 40% of wealth. While there may be a need to alter the tax code, most don’t realize that a dramatic overhaul of our current tax system to raise taxes on the new 1% would serve an ulterior if even an unintended consequence.

If you make it harder for new individuals to create substantial wealth then you will seal the doors to a socio economic class of people who will enjoy added protection of their current status. In short taxing the guy like me who aspires to be in the 1% in a manner that the current 1% has not previously been taxed helps ensure that I will not be able to join their ranks. Doing this would close the doors to the American Aristocracy, sealing the entry for would-be wannabes, and ultimately robbing America of one of its best features, the motivation for creativity, innovation, and visionary thinking.

Let’s not forget that no one has asked what we would do with all the hypothetical tax revenue if the Buffet Rule were put into effect. What would happen to the excess revenues into the Treasury’s coffers? Are we to believe that any future politician when faced with the option of implementing austerity or buying votes will not choose to buy votes? Do we need an even larger entitlement system? Do we need government to continue to step into private industry?

My suggestion is that we leave the rules of the game mostly in tact. Don’t penalize the guy who is at the cusp of massive financial success. Sure, maybe make it a little harder for the wealth gap to grow but after all, most people who have made millions or billions have more than likely created jobs. What needs to be done is we need to address the massive amounts of unproductive sleeping capital: wealth that is not getting recycled and will never get recycled until generational dilution forces a fixed pool of wealth into the hands of many generations of offspring.

Personally a major change to the estate tax would hurt me. However, the privilege of being an American is not the result of my winning the “ovarian lottery” as Warren Buffet likes to call it, but rather the opportunity to create and do anything I want to do. The American Privilege is one of being able to dream and execute your own vision regardless if your original circumstances.

An estate tax policy built upon a “you can’t take it with you” philosophy accomplishes a few things. First, it forces more of that first generation wealth to be consumed rather than saved. Second it ensures that the incentives to “win the game” don’t change so much that we alter the great American Experiment of entrepreneurship, capitalism and democracy. Third it will help mitigate the proliferation of an elite dynasty class that could permanently subvert power from the 99% by controlling the vast majority of American wealth. Fourth it helps rebalance the American opportunity with the true cost of the American economic ecosystem. Defense spending, education, public works, science and technology breakthroughs and a host of other foundations for American success need to be funded with the wealth our system currently creates AND that it HAS ALREADY created.

We also ought to rethink our current philanthropic landscape that enables tremendous amounts of capital to be separated from its highest and best use. Tax exempt endowments and foundations often support worthwhile causes and constituencies. However, left unchecked we have parked trillions of dollars with asset managers looking to earn no less than 5% but often times no more either. 5% is the required
Distribution amount for a non profit to keep their tax status, they must spend 5% of their corpus every year. They typically try to earn more to grow the asset base but their boards are generally risk averse focused first on capital preservation. In a country where wealth preservation is the driving motivation for a substantial amount of the capital base it becomes nearly impossible to reinvigorate wealth creation because risk becomes something that is controlled by the few and no longer taken by the many. This may in part explain the growing popularity of crowd sourcing and micro venture funding. Most of those who have “won the game” are now in a “risk-off” mode.

The US is at a crossroads. We must face the reality that the future can no longer mimic the past. Change is going to happen and somehow everyone will be worse off, at least for a period of time. I implore our leaders to think above the policy and above the zeitgeist so that what sits past the pain is a new utopia with new rules and new limits but with the same general sense of opportunity and patriotism that got us this far. If we continue to debate the pain, we are not ensuring that our future can be better. In order to do that we need to first debate the utopia we want to create. From there the changes and sacrifices will be clearer, more palatable to the many, and ultimately the right sacrifices to make.

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