Jabbing the 1%

 Wondering why millions and millions of Red State voters detested the Blue State elite? Here's a clue from the Dow Jones Newswires:

These are the loopholes America's 1% can use to get early access to the COVID-19 vaccine

Actually, the "loopholes" sound too cramped to accommodate the whole 1%. Maybe the 0.1%.

From Unmentionable to Unmeaningful

Up until the 1980s, I bet there wasn’t one reference to “wealth” or “rich people” in the  newsletters Merrill Anderson churns out for bank and trust companies. “Wealth” was unspeakable. Those who had managed to hang onto their fortunes during the Depression and World War II didn’t want attention. That meant newsletter articles had to signal their target market with euphemisms: people of means…affluent...with substantial assets…extensive resources.*

In the 1980s a new Boomer financial elite emerged – “If you’ve got it, show it!” William Safire noticed the trend in a 1981 On Language column. The New Money, and those aspiring to it, were talking fancier:

Only fuddy-duddies go to the gym, or to the drugstore, or to Europe; the upscale (formerly hoity-toity) crowd goes to the spa, or to the pharmacy, or to the Continent.

*** 

A decade ago, the passé people would say rich while the with-it types would say affluent; now the passé say affluent and the with-its say wealthy….

Wealth was mentionable again! And just it time.  Investment advisers faced a marketing challenge. Index funds had emerged, diminishing the perceived usefulness of active investment management. Advisers were responding by broadening their services – more estate planning, retirement planning, tax planning. Now they needed a term to describe their broader role – something with more pizazz than "financial planning."

Thanks to the renewed acceptability of "wealth," the solution was simple. Investment advisers became wealth managers. By the 1990’s the term “wealth management” had soared in popularity, as  this Google Ngram indicates.

"Wealth management" was a big-tent concept. Brokers offered it, insurance companies spun off wealth management units, bank trust departments hurried to rename themselves. Now, well into the 21st century, familiarity has bred confusion. 

Most people now think wealth means something nice but vague, Yale researchers have found. Who can blame them? Many years of marketing campaigns have told them "wealth is a life well lived," "wealth is peace of mind and happiness."

Only about one person in five, said the researchers, knows that wealth is what you have left after subtracting your debts from your assets. 

* On TV the other day I heard poor children euphemized as “under-resourced kids." 

What’s “Wealth”? Most Americans Aren’t Sure

According to Yale researchers, most Americans underestimate the wealth gap between white Americans and black Americans. Most also have trouble defining “wealth."

Wealth can be a difficult concept to get ahold of. If you get into the weeds, economists and accountants may disagree about what exactly should be counted. But for a basic definition wealth is assets minus debts. In our own samples, when we ask people to define wealth, only about 20% of our respondents are getting that right. Most talk about money along with things like values. That’s consistent with the messaging of asset management firms. Their websites have testimonials that highlight happiness, retirement, and providing for your family. Whatever the reason, the study participants don’t understand wealth well.

Tax Wealth by Taxing the “Squatters”?

When it comes to taxing wealth, Eugene Steuerle believes we should pay more attention to three issues.

1. A stockholder’s investment income is already taxed twice, at the corporate and personal levels. Current proposals for an annual wealth tax would result in what amounts to triple taxation.

2. If most returns on investment wealth receive a stepped-up basis at the owner’s death, why are inherited investment gains taxed when the heir withdraws them from an IRA?

3. The best time to tax the returns from wealth is at the owner’s death, as productive New Money passes to heirs and becomes less productive Old Money.

To bolster his last point, Steuerle quotes Winston Churchill:

 “The process of creation of new wealth is beneficial to the whole community. The process of squatting on old wealth though valuable is a far less lively agent.”

Dirigiste Plan Features Pigovian Tax

Learned two new words the other day.

Steven Rattner's op-ed, critiquing Senator Warren's plan for funding universal Medicare by "taxing the  rich," introduced me to dirigiste. The noun form is dirigisme, borrowed from the French, and it means state control of economic and social matters. Dirigisme is the opposite of laissez-faire.

Neil Irwin's column describes Warren's proposed 6% annual tax on billionaires' wealth as Pigovian. A Pigovian tax is "intended to reduce the prevalence of whatever it targets." Taxing cigarettes helped to reduce the number of smokers. Taxing billionaires could help to turn them into an endangered species.

Almost nobody (probably including Senator Warren) expects the wealth tax to become a reality in 2021. What might a Democrat controlled Congress do instead to raise revenue from the rich? Here's what Rattner suggests:

Raise the top federal income tax rate, imposed on incomes over half a million or so, from 37% to at least 42%.

Tax capital gains at regular income tax rates and do away with stepped-up basis for calculating gains on inherited assets.

Close egregious loopholes, like treating fund managers' "carried interest" income as tax-favored capital gain.

How many proposals to tax carried interest as regular income have you heard over the years?

Some tax breaks seem indestructible.

"Taxing the Rich"

Funding the government by taxing the wealthy has always had political appeal. In 1913 the ancestor of today's federal income tax was introduced to chastise the rich by imposing a tax ranging from 2 percent to 6 percent.

The 2 percent bracket started at an income level, in today's dollars, of over $500,000.

The top rate of 6 percent only hit incomes, again in todays' dollars, of $13 million or more.

Times have changed, haven't they? 

Taxes on wealth may trickle down even before they are enacted. Elizabeth Warren's proposed 2 percent tax on wealth over $50 million, for instance. One of her advisers has already suggested a lower tax bracket starting at $l million. 

This Tax Deduction Does Matter

Tax deductions don't matter after the Trump tax cuts? Well, that depends on the deduction.

Although far fewer taxpayers were able to claim deductions for mortgage interest or charitable contributions on their income tax returns for 2018, home sales and charitable donations seemed to survive unscathed.

Because of the expanded standard deduction, use of the SALT deduction for state and local taxes also declined. What's more, upper-income taxpayers who did claim the deduction couldn't claim much – the deduction was capped at $10,000 per couple.

As a result of the cap, income-rich residents of New York, California and other high-tax states now have an added incentive to pull up stakes. According to estimates cited by The Wall Street Journal, a Manhattanite couple with income of $500,000 could save $50,000 in state and city income taxes by moving to a no-tax state such as Florida. Californians with $500,000 incomes could save more than $46,000 by establishing residency in no-tax Nevada.

Connecticut, Merrill Anderson's home state, is feeling the pain. (A hypothetical $500,000 Connecticut couple might save over $32,000 in taxes by becoming Floridian). High income Wall Streeters flocked to Connecticut in recent decades, a migration encouraged by the destruction of the World Trade Center. Banks built huge trading floors in Stamford. Hedge funds flocked to Greenwich.

Then came the great recession. Connecticut's role as Wall Street East began to fade. High-income financial types have been leaving – a few involuntarily. Most have departed in search of friendlier tax climates.

 Like Florida. Especially the Palm Beach area.

Kelly Smallridge, president and CEO of Palm Beach County’s Business Development Board, told FOX Business that more than 70 financial services companies have moved into Palm Beach County within the last three years. Currently, the organization is working with another 15.

“I cannot keep up with the number of companies coming in,” Smallridge said. “Some are headquarters, some of them are regional operations. Many of them, once they get here, within short order establish [Palm Beach] as their home base." 

Firms are primarily coming from three main areas – New York, Boston and Connecticut (specifically Greenwich).

As Greenwich and Connecticut have discovered, extremely-high-income-people aren't willing to remain sitting targets for state and local taxes. They and their advisers are adept at sheltering wealth from taxation. That's something for Elizabeth Warren to keep in mind if she's able to pursue her idea for an annual wealth tax.

Guardian Columnist Disses Northern Ad

Today's admeisters stress pinpoint accuracy: Deliver your sales pitch for gold-plated garlic presses only to people who think gold-plated garlic presses are totally cool.

Aspirational advertising spreads a wider net. Generations have learned what to buy when they get rich by leafing through the pages of The New Yorker. (You're unlikely to purchase a Rolex or a Bentley someday if you've never heard of them.)

If Thomas Ricks had recognized the value of aspirational advertising, his Guardian column might have been less grumpy. Northern Trust's "Greater" message draws particular ire:

[T}he full page ad that set me off on this tear came on page 10, when a relatively young man – his bearded thirty-ish face illuminated as he stares off to the side – is shown behind the capitalized headline “GREATER IS ELEVATING THE FAMILY NAME INTO AN ICON.” The text below, from a trust company, explains that, OK, you have your “business ownership and personal wealth”, but now you have to move up to the next step, “build something that lasts”. Not only is being comfortable no longer the goal, being wealthy is no longer enough.

Admittedly, Northern's message encourages greed and egotism:

"How do you feel now that you're taking $50 million out of the company?"  

"I feel great." 

"So why are you moping around like a dog who lost his bone?"

"I want to feel greater."

But greed, Michael Douglas reminded us in "Wall Street," is good. And although audiences were supposed to scorn that sentiment, the film reportedly inspired a good number of young people to seek a Wall Street career.

Thoughts on Wealth

Do you know the only thing that gives me pleasure? It is to see my dividends coming in.
– John D. Rockefeller

The only way not to think about money is to have a great deal of it.
– Edith Wharton

It isn't necessary to be rich and famous to be happy. It's only necessary to be rich.
– Alan Alda

Wealth Is Just Luck? Two Views

Wealth is just luck? Jim Gust questioned, reacting to a research study. Like most topics these days, the question has become politicized. Liberal Democrats think wealth is just a lottery ticket away; old-line Republicans say you have to work and sweat for it.  Jim leans toward the latter view.

Michael Lewis does not. In his frequently cited 2012 address to graduating Princetonians, the author insisted his wealth and success was luck all the way. At a dinner party he happened to run into people from Salomon Brothers. Salomon Brothers happened to put him to work flogging mortgage-backed securities. And he happened to realize he could write a best seller about grown men manufacturing derivatives.

All luck? Maybe, but his M.A. in economics and his extraordinary talent for turning financial intricacies into ripping good yarns didn't hurt.

Here's a more realistic view of the role of luck, heard on NPR the other day. Read or better yet listen to Sir James Dyson, inventor of the bagless vacuum cleaner.

When the interviewer asked if he believed in luck, Sir James mentioned hard work and perseverance before mentioning luck. Then he backtracked:

I do believe, though, that you create your own luck. Because luck is around. You know.  

I did long-distance running at school. And you only succeed by doing a huge amount of training and then having great stamina, understanding that other people are also feeling tired. So when you feel tired, you should accelerate. That's when you start winning.

I've learnt that with developing new technology, that when you feel like giving up is precisely the point everybody else gives up. So it's at that point that you must put in extra effort. And you do that, and then success is literally just around the corner. 

Whose view of luck do you favor? Michael Lewis? Sir James Dyson?

Before deciding, you should know that Sir James almost certainly has the larger yacht.

Yacht Nahlin, built in 1930 and restored by Sir James

The Agonies of Wealth

Why can't I be sure I won't go broke?
Why can't my money buy love?
Why doesn't my money boost my self esteem?
Is everyone after my money?

The average member of Tiger 21 has over $87 million in investable assets. (It takes a minimum of $10 million to join.) Yet the Tiger 21 member mentioned in this NY Times story finds wealth a source of anxieties and insecurity.

Many Times readers, including your obedient blogger, find it hard to sympathize with the burdens of life as an UHNWI.

Wealth managers, on the other hand, welcome the new-business opportunities offered by traumatized Gilded Agers. Wealth worries also help support groups such as Tiger 21 and (minimum wealth $30 million) the Institute for Private Investors.

Johnny Depp's Lost MIllions

In Brewster's Millions, a movie I remember fondly, the hero receives good news and bad news.

The good news: His uncle has left him $8 million.

The bad news: He must spend the first million in two months, without keeping any assets, or lose the entire inheritance. Back in 1945, when the movie was made, spending a whole million quickly wasn't that easy.

If Hollywood plans a new remake, Johnny Depp deserves the starring role. Over the years the gifted actor has made $650 million. But his gifts as a spender – and perhaps his disinterest in wealth management – have left him in a financial crisis.

Very Rich? Deep in Debt? Perhaps It's All the Same

As wealth grows it tends to become more volatile, harder to appraise. "If you can count your money," J. Paul Getty once explained, "you don't have a billion dollars."

Aubrey McClendon (Wikipedia)

Extreme case in point: The pile of debts – or, possibly, the significant wealth – left by Aubrey MeClendon after his death in a car crash a year ago.

McClendon borrowed heavily as he he started over after his ouster from Chesapeake Energy, and the plunge in oil prices may have brought him to financial ruin. Could the dramatic rebound in oil put McClendon's estate back in the black?

Wall Street Journal subscribers can read the story here.

The NY Times Looks at Wealth-Shielding Trusts

Nevada is the star of this Times story. Here in New Hampshire, we resent being called a "wannabe" in the wealth-sheltering business.

Comments on the article are mostly unkind to the 1%. Yet as one commentator observed, there's little reason for jealousy: 

"I don't know too many happy wealthy people or lawyers, and I know a lot of wealthy people and lawyers."

$10 Million is the New $5 Million

If $5 million is the new million, other measures of wealthiness also need adjusting.

Sure enough, this year JP Morgan raised the threshold for obtaining its Private Bank services from $5 million to $10 million. Bessemer Trust and others already have a $10-million minimum.

Most private banking clients at Morgan won't be effected. They have over $10 million. Half have $100 million or more.

Although most of us would happily settle for $10 million, it ranks low on today's wealthiness scale. The average S&P 500 CEO makes more than that every year. Certainly someone who used to have $100 million and lost all but $10 million doesn't feel rich.

"The Secret of Wealth"

For no good reason (maybe Siri's looking for a more luxurious lifestyle) my iPad presented me with the results of searching this blog for "the secret of wealth." The posts are worth revisiting. You can read them here.

For those considering dynasty trusts as well as the rest of us, the "secret" is clear: Families can enjoy lasting wealth only if it's replenished from time to time.

Wealthiest 400 Pay More Tax

Jim Gust wanted tax data more current than 2012. It's here, and it shows that the top 400 taxpayers took a heavy hit.

Bashing Billionaires, Front-Paging Affluenza

The MSM, or at least the NY Tines, has decided: Great wealth is uncool. 

For the Wealthiest, a Private Tax System That Saves Them Billions, the article Jim Gust spotted online, was the front-page lead in today's print edition. Below the fold, surely not by coincidence (and not the sort of tabloid fodder the Times generally front-pages) was the capture of Ethan Couch, ‘Affluenza’ Teenager.

His case made national headlines twice: The first time was when a psychologist testified for the defense that Mr. Couch had “affluenza” and was too influenced by privilege and his parents’ permissiveness to know right from wrong.

The second was when a judge appeared to accept the argument, handing down a sentence of 10 years' probation, not prison.

We'll be watching a number of trends in the new year: The demand for lower investment costs. The rise of socially responsible investing.  The craze for unicorns, Warhols and other alternative assets. Could the growing distaste for people making $10 million, $100 million or more prove to be a bigger wealth-management story in 2016?

How the Rich Really Spend

A recent post refers you to data showing upper-income people spend more on education and financial products and less, proportionate to their incomes, on basics such as food or transportation.

Eeven B. Owen, prominent hedge fund manager, has expressed outrage:

Do you know how much I spend on meals? Even my breakfast – full English, with kippers, flown in daily from London– costs me a fortune. Transportation? When you need a private jet to get to Greenwich from your yacht in the Caribbean, your commuting costs are off the chart!

 Sorry, couldn't resist. Anyone who doesn't realize that people with high incomes spend proportionately less on the basics isn't likely to read The Atlantic or The Wall Street Journal.

What do upper-income people really spend their money on? Federal income tax. The top 20% of earners pay 84% of the tax.  The bottom 40% pay nothing; most receive money via tax credits.

When you expand the data to include payroll taxes, the bottom 40% does pay a little, but only 5% of the total. And as an expert at the Tax Policy Center observes, payroll taxes are different from the federal income tax because paying them brings the promise of a future benefit.

“The richest old generation we’ve ever seen”

By the time Depression Babies finished school, they had become The Silent Generation. They were relatively small in number, and that fact turned out to be their good fortune. In the post-WWII boom the supply of entry level jobs exceeded demand. Though housing prices seemed to be going through the roof (a house worth $8,000 in 1945 was selling for two or three times as much by 1960) homes proved to be a great investment. 

The result, according to Bloomberg Businessweek:  Generation Rich.