 | January 23, 2012 |
| THIS WEEK | |
Life of late hasn’t exactly been a bed of roses for the financial wizards who tend America’s hedge funds. First came reports that hedge funds last year ended up losing their investors, on average, 4.8 percent. John Paulson, the hedge demigod who took home $5 billion in 2010, lost his fund over half its assets in 2011. Then last week federal prosecutors announced a fourth round of insider trading indictments against hedge fund power suits. Not all those double-digit hedge fund returns of recent years, turns out, reflected sheer financial genius. More indictments, promises the FBI’s Janice Fedarcyk, are coming: “Each wave of charges and arrests seems to produce leads that lead us to the next phase.” So how are the hedgies responding to all this bad news? They’re now readying plans to sue Greece in the European Court of Human Rights. Greece wants hedge funds to take less interest on the bonds they hold so the budget-squeezed Greeks can afford to import medicine and keep garbage from piling up. Any bondholder “haircut,” the hedge fund billionaires maintain, would constitute a violation of their “human rights.” They no doubt actually believe that. We have plenty more on billionaires — and their infinite wisdom — in this week's Too Much. | |
| GREED AT A GLANCE | |
Birthing can be such a bother, unless, of course, you have the financial resources to turn a hospital delivery into an experience that rivals a stay at a five-star hotel. And many deep pockets certainly do. New moms of means, says “baby planner” Ellie Miller of Los Angeles, are now bringing entire teams of helpers to help smooth the way for new family arrivals. A typical team might include: a massage therapist, interior decorator, chef, photographer, and makeup artist — “because where there are photographers, there must be makeup.” A deluxe three-room maternity suite in one L.A. hospital runs $3,800 per day. In New York, a similar three-room suite — with Central Park views — now runs $4,000 . . .  Almost everybody knows that CEOs at companies that make prescription drugsmake big money. But few people know that the CEO at the company that delivers drugs to nursing homes and drugstore chains makes even bigger money. John Hammergren, the top exec at the California-based McKesson, last year pocketed$145 million, after cashing out stock options. That prodigious sum came on top of a $55 million take-home in 2010, $37 million in 2009, and $41 million in 2008. Will Hammergren’s gravy train end if some private equity giant decides to take over McKesson? Actually, a takeover would only speed up Hammergren’s gravy train. Hammergren’s contract with McKesson, GMI group researchers have discovered, entitles him to $469 million in severance should a takeover cost him his job. | |
| PETULANT PLUTOCRAT OF THE WEEK | |
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| INEQUALITY BY THE NUMBERS | |
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| IN FOCUS | |
Should We All Start Praying for Mitt Romney? The GOP Presidential hopeful from Bain Capital has become a walking, talking object lesson on how our plutocracy works — and why we desperately need to end it. Egalitarians seem to be doing a lot of praying since Saturday's GOP primary in South Carolina. If you listen closely, you can almost hear their prayer: Please, Lord, let Mitt Romney win the 2012 Republican Presidential nomination. Why this swelling of affection for one of the richest Americans ever to run for the White House? Over recent weeks, Mitt Romney has put a long-overdue “human face” on American plutocracy at its job-destroying, tax-avoiding worst. Thanks to Mitt Romney, millions of Americans now understand how private equity kingpins funnel fortunes — to themselves — out of middle class misfortune. And millions more, thanks to Mitt’s on-the-stump candor, now have a window into the world of people so rich that $370,000 — Mitt’s income from speaking fees last year — rates as “not very much.” Every day seems to bring another “teachable moment” on plutocracy from the Romney campaign: the intricacies of the “carried interest” loophole one moment, the allure of Cayman Islands offshore tax havens the next. All of this came before Mitt released his tax returns. That release, now expected tomorrow, will only redouble the scrutiny. Mitt has, to be sure, already spilled his basic tax return beans. His overall federal income tax rate last year, Romney has shared, hovered around only 15 percent. Mitt's campaign as a teachable moment machine does have one other fantastic advantage: Matt had a wealthy father. Even better, Mitt’s wealthy father, American Motors CEO George Romney, released 12 years of his tax returns when he ran for the 1968 GOP Presidential nomination. These papa Romney tax returns offer a window of their own — into just how amazingly rich people-friendly America’s current tax code has become. From 1955 through 1966, George Romney reported income of $2.97 million — about $22 million in today’s dollars — and paid 36.9 percent of that in federal income tax. George in his heyday rated as one of America’s highest income-earners. In 1960, his rewards from American Motors helped bring his total personal income to $661,423, a bit over $5 million today. The IRS only counted 533 taxpayers who made between $500,000 and $750,000 in 1960 — and only 508 taxpayers in the entire country who made more than $750,000. How did George Romney’s tax rate compare to the tax rate of his fellow rich? George actually paid a smaller share of his income to Uncle Sam than his peers, mainly because he donated almost a quarter of his income to charity and church. America's 1960 rich in George's $500,000-to-$750,000 cohort — a range that would equal from $3.8 to $5.7 million today — paid an average 45.3 percent of their incomes in federal taxes, after exploiting every tax loophole they could find. The true millionaires of 1960 — the 306 taxpayers who reported at least $1 million in income, the equivalent of $7.6 million today — paid taxes at a slightly higher rate, 45.8 percent. These millionaires only averaged, in today’s dollars, about a little over $15 million each in income. How does that $15 million average for America’s richest in 1960 compare to the income of America’s richest today? The 1960 rich, even after adjusting for inflation, only made a tiny fraction of the incomes our rich today are pulling down. Last spring, the hedge fund industry trade journal reported that America’s top 25 hedge fund managers averaged $882.8 million — each — the year before. Their tax rate? We don’t know that for sure. But hedge fund managers exploit the same “carried interest” loophole that has proved so lucrative to private equity power suits like Mitt Romney. The top 25 hedge fund manager federal income tax rate most likely floats between 15 percent — the same rate Mitt pays his taxes at — and 18.1 percent, the average federal income tax rate on America’s 400 richest taxpayers in 2008, the most recent year with IRS data available. So let’s review the bidding here. Today’s top hedge fund managers make 59 times more income than the richest Americans in 1960, after taking inflation into account. Yet the richest Americans of 1960 paid three times more of their income in federal income taxes than today’s top hedge fund managers pay. Statistics as revealing as these haven’t yet filtered into America’s political consciousness. But just wait. If Mitt Romney gets the Republican nod, the wonderfully illuminating national seminar on inequality that his campaign has become will be running, glory be, straight into November. | |
| IN REVIEW | |
Bossy Billionaires Can Now Boss Forever Lawrence W. Waggoner, From Here to Eternity: The Folly of Perpetual Trusts. University of Michigan Public Law Working Paper, December 20, 2011.  Money can buy many things. But money can’t buy immortality, right? That may once have been true, legal scholars Lawrence Waggoner and Michael Vincent argue in two new and chilling scholarly papers, but not anymore. Billionaires today — and mere mega millionaires, too — now have all the tools they need to impose their values on future generations essentially forever. Lawrence Waggoner, an emeritus University of Michigan law school prof, tracesthe modern evolution of these tools back to the 1986 federal tax “reform” that created a monster loophole for the owners of the new grand fortunes then just beginning to pop up all across America’s economic landscape. The details can get complicated. The simple story: The rich have always been able to create “trusts” for their heirs. In a common trust situation, people of means set aside nest-eggs of multiple millions, let their kids who survived them live off the income from those millions, then had the trust’s millions revert to the grandkids. At that point, the principal in the trust would face estate taxation. The 1986 legislation created a tax on those trust millions every time a generation passed on, but also gave rich people and their heirs an exemption that shielded part of those original trust millions. Trusts now became even more attractive to the rich — and the longer a trust could last, the better. But before 1986, trusts couldn't last long. State statutes typically limited trust length to no more than 90 or so years. The new 1986 loophole gave the rich — and the bankers and lawyers who make fortunes setting up and running trusts — an incentive to kill these state laws that prohibited “perpetual” trusts. In a few years, enough of these state laws died to nurture a new national industry dedicated, Lawrence Waggoner notes, to creating “trusts that can last for several centuries or even forever.” The old common law “rule against perpetuities” actually went centuries back on its own. Legal philosophers had long warned against letting the “dead hand” of the past rule the lives of the living. And perpetual trusts would give the dead rich that ruling power. Those rich could, for instance, have their trust instruments deny income distributions to heirs who engage in certain behaviors. Not to worry about this ancient legal wisdom, argue bankers and lawyers who pushed the new state laws that permit perpetual trusts. A trust may now be able to last forever, their argument goes, but human trustees administer trusts. “Human discretion,” we're assured, will limit any trust restrictions future generations might find untoward — and end the trust altogether if future heirs who hold legal title to a trust property find that termination beneficial. So we have no need to worry? Not exactly, advises University of Arizona law professor Michael Vincent. The super rich, he points out, don’t just have the legal tools they need to create perpetual trusts. They now have the computer tools they need to take “human discretion” out of the equation. Vincent takes us into the near-future world of the “robo-trust,” a trust instrument that uses computer “AI” — artificial intelligence — to impose a dead billionaire’s will on generation after generation. The combination “of breathtaking advancements in computer technology” and “the abolition of the rule against perpetuities,” Vincent explains, lets our contemporary rich create trusts that continue living long after their deaths, in the process perpetuating their “values and beliefs” as if they remained still alive. Vincent vividly paints the eminently plausible technological possibilities. A rich person’s descendants petition a robo-trust for an income distribution. The robo-trust “analyzes the content and sincerity of the appeal” with face-recognition software, then considers “the person’s income, marital status, net worth, religion, and general life history,” then “decides whether to pay out.” Far-fetched? Not at all. Notes the University of Arizona's Vincent: “The first computer-run trust may already be waiting in a safe deposit box.” How can we prevent a robo “perpetual trust” future? Both Michael Vincent and Lawrence Waggoner see the same answer. Congress can simply re-instate the old common-law “rule against perpetuities.” But lawmakers need to act soon. “Society,” Vincent warns, “must be on guard for the dying man with just enough money to be dangerous — after five hundred years of compounding interest.” | |
Quote of the Week
“A country run in the interests of the wealthiest 1 percent systematically underinvests in public goods; systematically silences, disempowers, and underinvests in its workers; and in the end is less competitive and creates fewer jobs than a country that focuses on the interests of the 99 percent.”
Richard Trumka, AFL-CIO president, Dissent from President's Job Council report, January 17, 2012
Stat of the Week
In 2010, notes Syracuse University tax expert Len Burman, the average American earning under $200,000 had a capital loss, not a gain. Those Americans making over $1 million had $258 billion of the $261 billion of the year’s net capital gains.
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Bill Moyers, Jacob Hacker and Paul Pierson on Engineered Inequality,Moyers & Co., January 17, 2012. An interview with two political scientists whose work has detailed how corporate political power has left the nation’s wealth dangerously concentrated.
Mark Thoma, Are the wealthy paying too much in taxes? MoneyWatch, January 18, 2012. The facts that undermine the claim by friends of the fortunate that the rich are bearing too much of the U.S. tax burden.
Justin Wolfers, Is Higher Income Inequality Associated with Lower Intergenerational Mobility? Freakonomics, January 19, 2012. A wonk face-off concludes: “It’s striking just how closely related inequality and mobility are.”
Peter Oborne, The rise of the overclass, Telegraph, January 20, 2012. On the “new class of super-rich who seem to be immune from the restraints that govern the lives of ordinary people.”
David Morris, Five misconceptions about economic fairness,Minneapolis Star Tribune, January 21, 2012. Is concern about inequality just a matter of envy? Not in the least, says the vice president of the Institute for Local Self-Reliance.
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