The 1%

I have some misgivings about attempting to write this post. I make a very strenuous effort to keep my politics out of this blog. The goal here is to increase my financial wisdom and share anything I have learned that works (or that doesn’t work) with my readers. Then as I outlined this post in my mind, it became so complex I was not sure I was up to the task, but the issue is important and it is current, so here is my attempt to address the 1% protest movement.

First of all, who are these 1% villains inspiring the protest. Turns out they are not Wall Street Bankers with long black mustaches and diamond cufflinks. According to the IRS it takes $343,927 a year to make the cut. That is a whole lot more than my household income, but really it isn’t that large a number. A lot of highly productive professionals (like medical doctors) and small businessmen who are creating most of this country’s pitiful number of new jobs earn that much. The average salary of this group is bit higher, $960,000. Now we are talking real money, but is it always undeserved?

Yahoo finance reports there are just under 1.4 million household in the top 1%. They earn 17% of the nation’s income and pay 37% of its income tax. For the self employed the total tax burden including the double bite for Social Security is 50.3%. This does not include state taxes, local taxes, or a variety or licensing fees required by various jurisdictions. Really, the facts are not what the protestors would like us to believe.

How about those evil Wall Street bankers? The average salary of the top onepercenters (is that a word?) working in the security industry is $311,000 a year. Good pay to be certain, but not really rich for New York City. If someone earns that salary in Travelers Rest, SC, he is really rich.

Again from Yahoo Finance, in 2005 14% of the top onepercenters worked in the finance industry, executive and managers in other industries made up 31% of the top 1%, medical doctors contributed 15.7% to the top 1%, and lawyers made up 8.4%.

That said, there are some real issues here with serious merit. The same issues that energize the 1% protestors, created the Tea Party. The first is the issue of tax fairness. Let’s look at an example from the oftwominds blog. “The most egregious example of this is hedge fund managers who bought a loophole which enables their $600 million annual income each to be treated as capital gains, a rate of 15%.” Our tax code is littered with exemptions, loopholes, and subsidies that are totally unfair and unmerited. People, like the small businessman paying more than 50% in taxes, are justifiably outraged.

There is an inherent ever changing imbalance in our country between democracy that tends to redistribute wealth and freedom that inherently creates imbalances in incomes. It is the job of our elected officials in this Republic to see that neither part of the equation gets seriously out of whack. However, I fear too many of our representatives are bought and paid for by special interests that range from the Wall Street investment houses to thoroughly corrupt union officials.

The second is a very dangerous socially destabilizing trend in income distribution. As corporate profits increase CEOs should become richer. Unfortunately, they should also share in the pain when their corporations tank. Many of the men that brought the world’s financial system to the brink in 2008 should be in prison. Instead they walked with golden parachutes exceeding $60 million and were allowed to keep their ill gotten gains from CDOs, SIV, Credit Default Swaps, and a host of other essentially fraudulent instruments. No matter the economic condition of Wall Street, the CEOs are claiming an ever larger piece of the pie. In 1980 the average CEO earned 42 times the salary of his average employee. Today he earns 343 times the average workers salary. This is dangerous. Historically, extreme imbalances in wealth distribution leads to civil wars, revolutions, and dirty wars like the one that occurred in Argentina.

The real problem is not that the average CEO is earning $8,048,000 in 2010. The real problem is that the median household income in the United States was stagnant for a decade and now is headed down. Unskilled and semiskilled workers were the first to take the hit, as the great American corporations moved their manufacturing operations offshore. Now the same companies are discovering that computer programmers living in India will accept much lower pay than their American counterparts. Even patents are written by lawyers living in India and X-rays are being read by radiologists in the third world. Maybe we the shareholders of these companies should look into outsourcing our CEOs. Nah, just kidding, but I really believe we should all remember we are Americans and we are all in this together.