Millionaire Goggles: Why Romney has no clue about the American Dream

Recent polls show that income disparity is increasingly a  concern across all sectors of the population (including Republicans).  However, 43 percent of respondents said that the rich became wealthy ”mainly because of their own hard work, ambition or education.”  The belief that being rich is transitory by nature is part of the fabric that makes up the American dream.  People think if the rich became rich by their own efforts, perhaps they can get rich too.

Unfortunately, although we cling to this romantic belief, it is becoming less true every day.  The reason this part of the American dream is becoming a thing of the past is directly linked to the income disparity caused by the concentration of wealth discussed in previous articles.  As we become more aristocratic, more or our wealthy are born into wealth, rather then becoming wealthy based on their own efforts.  Inheritance tax not withstanding, the trend of more and more of the rich inheriting their wealth as opposed to earning in on their own is an undisputable  consequence of the concentration of wealth.

It is perhaps even more unfortunate that many of our political elite come from such a background because in a sense it separates them from the rest of us.  They simply have never faced the everyday challenges that the majority of the population experiences.  Do you think George H.W. Bush ever had to bus tables at a local diner to pay for his college education?  Did he ever need a paper route in order to buy baseball cards for trading?  I doubt it.  I would suspect that he never would have owned a major league baseball team if not for the high level oil executive job he was able to get right out of college.  Were you offered such a position just after graduating from college?  These are just some of the privileges enjoyed by the wealthy upper class.

Perhaps today’s most concerning example is presumed Republican presidential nominee Mitt Romney.  Recently he tried to connect with voters by saying that there were times he worried about getting a pink slip.  He was trying to say that he know what it felt like to be worried about getting fired.  I seriously doubt it!

Let’s run some numbers.  Romney’s net worth is reported to be $250 million.  Let’s assume a safe conservative investment return of 5%.  (Note:  In 2012 5% is a pretty optimistic expected rate of return for the average non-wealthy individual.  However, historically it would be considered a conservative assumption.  Also, if you are worth $250 million, you can afford some pretty high end money managers using “absolute return” strategies and almost guarantee a rate of return at least that high.)  So on $250 million, Mitt Romney can safely expect to earn $12.5 million dollars per year on his investments alone.  That is equal to $34,246 per day.  That is over $34,000 per day, every day, without working a day.  Now, if you had that kind income derived solely from existing  wealth do you think you would worry much about losing your job?

The average American worries about losing a job because that means he might not be able to pay his rent or mortgage!  There certainly must be a substantially higher level of fear for that person.  I seriously doubt that Mitt Romney has EVER experience this type of fear and uncertainty.

It’s true that Mitt Romney was not always worth $250 million dollars.  The manner he earned much of it was by what Newt Gingrich recently called “vulture” rather than “venture” capitalism (most likely the subject of a future article).  But he certainly was born into money.  My favorite quote about Bush (43) was when Ann Richards said “he was born with a silver foot in his mouth”.  Today columnist Reuben Navarrette said of Romney, “it’s one thing to be born with a silver spoon in your mouth, and it’s another to have been saddled with a 20-piece set of sterling flatware.”

So Mitt Romney got rich by being born into the wealthiest segment of our society.  If a big part of the American Dream is that anyone can get rich by their own hard work, then Mitt Romney certainly doesn’t have a clue about that.

What makes a Millionaire, Wealth or Income?

This week Senator Jim DeMint (R, SC) was on Jon Stewart’s “The Daily Show”.  He was defending the Right Wing’s economic policies that overwhelmingly favor rich people.  He said that there are many many misconceptions about the rich in our country, and then made an assertion that demands examination.  He stated that most “millionaires” are only millionaires for one year, and one year only (see quote below).

My first reaction was that this statement is flat out patently false.  But then I realized the rationalization he was using to make such an assertion.  In defining a millionaire, he was making the common mistake of confusing income and wealth.  The distinction between the two is incredibly important.  This distinction is often blurred, which is incredibly unfortunate, because it is at the center of the debates on wealth disparity and tax policy in this country.

If one defines a millionaire as anyone who received a million dollars in annual income, then his assertion may indeed be correct.  It is fairly easy to think of examples of individuals that make a million dollars in one year, but do so for only one year.  Think about the guy that invented the Pet Rock which was a short lived fad back in the 1970′s.  He most likely made a million dollars that year, and I doubt that he ever did again.  Or consider employee numbers 20-50 of a high tech start-up that just launched their I.P.O.  Many of these folk might make a million dollars in the year of the I.P.O. but their annual salaries on a continuing basis are nowhere near seven figures.  Even a small business owner with a healthy on-going annual income might a have single banner year where they make a million dollars.

I believe that a millionaire is more traditionally defined as someone who has a net worth over a million dollars.  In the investment industry, this definition also excludes the value of one’s home.  So a millionaire is someone that has over one million dollars of invest-able assets.  If you make one million dollars in a single year, you are going to pay at least 30% in taxes, and you’ll most likely spend another 10% on living expenses for the year.  So even the frugal one million dollar income earner would have a net worth of about $600,000 at the end of a single year with that income.  Such a person would not be considered a “millionaire” under the traditional definition.

So our friend Senator DeMint is defining a millionaire by income rather than wealth an that does not make any sense.  Any true millionaire with a bit of intelligence and a modestly conservative investment philosophy will remain a millionaire not only for one year, but indefinitely!  Many people who enjoy a one year of million dollar income will enjoy a comfortable life, but they are not millionaires.

There are a good number of reasons that this distinction is so important.  For starters, once you are a millionaire, your wealth can provide enough income for you to live on via investments.  You no longer have to work for income.  You live on “investment income” rather than “earned income”.  Everyone else that is not a millionaire must trade their time for money doing something for someone other than themselves.  In short, they have to have a job.  They must work.  They don’t have any other choice.

I call this precept the “endowment concept”.  Generally an endowment is used to fund a cause using only income earned on the endowment itself.  The principle of the endowment is never spent, and thus the cause can be supported at a certain level forever.  Any individual that has over a million dollars in investable assets is self-endowed.  That person can choose to never work again, and live at a modestly comfortable level in secure manner forever.  In fact, the endowment can be passed on to another generation.  One million dollars can support a single person forever.  Perhaps in some parts of the county such as New York or San Francisco this number is more like 1.5 or even 2 million (based on a 5% return providing $50,000 dollars of annual income).  Granted, this level of income is modest, but it will support an individual, or even a small family in most parts of the country today.  Many folks live on a lot less!

But people should be entitled to live beyond this modest level.  Living larger is part of the American dream.  True indeed, but the the point is that everything beyond this level is by choice.  Most millionaire choose to continuing working in some capacity to become even richer.  But that is their choice.  For those without a million dollars, there is no choice other than to work.

Another reason the distinction between income and wealth is so important is the role it plays in our system of taxation.  A tremendous amount of our tax system is based on income rather than wealth.  That is why it is called an “income tax”.  Government revenue is based on how much people (and corporations) earn in a year, rather than how much wealth they own or control.  Senator DeMint’s assertion is based on this concept.  Much our our tax policy debate centers around setting tax rates and defining the wealthy by income.  In some ways this makes sense.  It would be difficult for example to force a company to sell some factory equipment to settle a tax debt based on the value of that equipment, or to force a rich guy to sell part of a car or business to settle a tax debt based on his total net wealth which includes that car or business.  Taxing wealth is difficult because it is seldom liquid whereas taxing income is easier because annual income is generally liquid.

However, remember our friend the millionaire who lives on investment income rather than earned income.  Thanks in part to the Bush Tax cuts, he mostly pays a tax rate of 15% (the current capital gains tax rate for investment income in place since the Bush Tax cuts) rather that 35% (the top tax rate for people who work for a living).  Why we tax income that people must work for at a higher rate than we tax income that people earn simply for being rich already is beyond me!

The important thing is to understand that the lower tax rate on investment income is the reason the Bush Tax cuts mainly benefit the wealthy.  Tax policy is at the center of this country’s economic problems and is likely to be a major topic in this year’s elections.  During the debate, you will hear many politicians and pundits use the concepts of wealth and income interchangeably as if they were the same thing.  It is critically important that the distinction between income and wealth is recognized and dealt with fairly in public policy.  Let’s hope our leaders truly understand the difference, and consider it when they talk about millionaires and then institute a fair policy of taxation!

Quote of Jim DeMint of “The Daily Show” 1/11/2012
“ There is lot of mis-information about the rich in our country. Fifty percent of the people in our country who are millionaires, are millionaire for one year. So we have this kind of revolving door.  We don’t have this kind of permanant class of millionaires like a lot of other countries.”

Anti-Terror Provision Embarrassingly Wrong (But I’m not too worried about it.)

The Anti-Terror provision that was included in the defense spending bill recently signed into law has civil libertarians crying foul.  They are understandably angry that Congress just passed a law that allows the U.S. government to detain anyone it suspects of terrorism, indefinitely without charges, even if they are a U.S. citizen and even if caught on American soil.

Obama signed the law, but rather honorably issued an statement essentially saying his administration did not plan to use it.*

It would seem that this provision violates the 4th Amendment’s protection against unlawful detention, which it clearly does.  The provision is clearly unconstitutional and is unlikely to survive any challenge in court.  More importantly, it is a rather embarrassing blemish on our national character.  It should not have been passed in the first place, the President should have vetoed it, and it should be repealed immediately.

Due process is at the core of legal system.  In fact it is an integral part of the fabric that makes up what it means to be an American.  We are all taught about the sacred protections enshrined in the Bill of Rights.  While we may argue about exact interpretations of these rights, no one, on the left or on the right, would argue that the Bill of Rights is un-American or un-Patriotic.  These rights are in fact what make us who we are as a nation.  (Iran recently held a few Americans for over a year without charges.  If this provision is utilized, remind me, what makes us better that them?)

Clearly this law will not stand up in court, and thus I am not too worried about it.

However, if it is used, and then challenged, it could bring up a rather ironic outcome.  Think about it.  It is more likely to be used on a truly dangerous individual than on an innocent citizen regardless of the political affiliation of the administration that invokes its use.  In that case, the challenge that inevitably ends up in front of the Supreme Court will involve a truly potentially harmful criminal.  When the law is overturned and his detention determined to be unlawful, we may end having to free the very person from whom the law was meant to protect us!

Wouldn’t we be safer if we simply used the the due process which has worked pretty will to date?

*A little irony from the other side of the aisle:  While Obama objected to the provision, he did so for the wrong reason.  The provision provides for a specific time table for a indefinite detainee to be provided a hearing regarding his detention.  The President objected to Congress’s specific requirements regarding the ways indefinite detainees are handled.  He believed that the entire process should be controlled by the executive branch.  Thus, his objection was over a Congressional intrusion into executive power rather than to the more controversial elements of the provision.

As a supporter of the current administration, I am disappointed with Obama for taking such a stand.  I believe his statement saying it would not be used is merely convenient political “cover” since most people will never know the true reasoning behind his objection.  However, in fighting for the integrity of the executive branch, Obama is following a long tradition of such efforts by past presidents.  I didn’t like it when Bush (43) did it, and I don’t like it now, but I do recognize that it is a normal process in our three branch form of government.  Thus, I begrudgingly respect Obama for acting in a manner that supersedes his administration and transcends the events of our current times.

Editors Note:  Certain existing situations in today’s society seem completely our of touch with reality or common sense.  From time to time this blog will argue such points in the category “Un-Common Sense”.

Corporations are NOT people. PERIOD!

Contrary to the now infamous Citizens United ruling by the Supreme Court, corporations are simply not people and should not be provided the civil rights protections meant to cover individuals in the first ten amendments to our constitution.

The most simple argument is as follows.  THEY CAN’T VOTE.  Nor should they be able to vote.  Corporations are legal and economic entities sanctioned by the government to provide protection, via separation, between people and the corporate entity itself.  In other words, corporations exist specifically to be an entity that is separate from the human individuals that own and control it.  This separation allows for certain liability protections for these individuals.  It also provides a mechanism for separating the economic interests of the “entity” from those of the people who control it.

Let’s put it in less technical terms.  By forming a corporation you can separate your income and costs from those of the corporation.  The corporation can make a ton of money, and even though you own the corporation itself, you don’t pay taxes on this money.  You only pay personal income taxes on the money the corporation pays you as income.  The corporation pays it’s own taxes, based on a completely different set of tax laws.  To put it simply, you are not the corporation.  The corporation stands on its own.  That is its purpose!

Our democracy is based on the simple principle of “one man, one vote”.  Young school children can understand this simple concept.  It is just Common Sense (Thomas Paine reference intentional).  Each person gets one equal vote in the selection of our government.  Rich people don’t get extra votes because they are rich.  That would not makes sense.  And corporations don’t get any vote at all, they are not people.

If a corporation wants to spend money on an elections, it is free to pay any individuals as much money as it wants, and encourage them to donate or spend that money on the elections subject to the campaign finance laws written for individuals.  The corporation would have to report this money as compensation, and the individual might owe income tax.  In addition, the individual would now control the assets and might choose the spend the money in another way.  But all of this makes sense.  It’s legal and it is the way it should work.  No individual’s civil rights have been affected in any way.

However, the Citizen’s United ruling has allowed corporations to be protected under the individual’s right to free speech, and free speech equals money.  The net effect has been that corporations can spend unlimited amounts of money on elections and are not subject to campaign financing laws covering amounts and disclosures.  So let’s review.  Even though corporations can not vote, they are free to influence elections through spending in manner that far exceeds what is legal for individuals citizens, who can vote.

Does that sound right to you?

Editors Note:  Certain existing situations in today’s society seem completely our of touch with reality or common sense.  From time to time this blog will argue such points in the category “Un-Common Sense”.