Don't Blame the 1%

[Townhallsavoy]

It's time to end the myth that the nation's wealthy are getting rich off the backs of the poor. Instead let's figure out what they're doing right.
By Nina Easton, senior editor-at-large

FORTUNE -- What if I told you that there was a group of hard-driving workaholics who tend to have advanced degrees and bring a level of talent and skill to their jobs that attracts premium pay in the global economy? Scholars have found that this group is more likely than much of the population to raise their children in two-parent homes.

You might think this was a group people would admire, even emulate, right? Not so. For this is the much-maligned 1%, whose media infamy via the Occupy Wall Street protests, followed by President Obama's populist reelection message, is now firmly embedded in the American psyche.

The 1% club stands accused, accurately, of more than doubling its share of the nation's income since 1980. By 2007 it controlled nearly 24% of total income, the second highest in history, after 1929. (In 2009 its share dropped to 17%, suggesting that recessions aren't necessarily kind to the rich.)

Railing about the 1% club has become shorthand for expressing outrage not only over growing income disparity but also about the state of the nation's working class. Wages of men without college diplomas, for example, have dropped by a whopping third over the past three decades.

That's deeply troubling. Socially and politically, there are plenty of reasons to worry about the growing income gap. But rage against the 1% is misplaced. Income is not a zero-sum game: The rich aren't getting wealthier at the expense of the poor. Harvard's Lawrence Katz has calculated that even if all the gains of the top 1% were redistributed to the 99%, household incomes would go up by less than half of what they would if everyone had a college degree. In other words, the financial rewards of higher education are a big contributor to the income gap.

More: Five tax breaks Washington has given the rich

Indeed, researchers say the reasons for the rich getter richer are complex and nuanced. One-percenters are a large and varied lot, consisting of 1.38 million households, with total household incomes starting at $344,000 in 2009. (Nearly all scholars rely on income figures because of the difficulty in obtaining reliable net-worth data.) Yes, finance is well-represented in the 1% club, but there is also an especially high portion of the self-employed, along with a variety of other professions. And while CEO incomes rose astronomically through the 1990s, their incomes have actually declined over the past decade, according to University of Chicago's Steven N. Kaplan.

So what is behind the income gains of the 1%? Let's start with the global and technological changes that pump up the salaries of superstars in a range of professions: Call it the Yo-Yo Ma effect. In 1600 a famous cellist would have reached his career peak by playing for the king. Now Ma can stage concerts all over the world, with commensurate earnings. Apply that same concept to the in-demand skills of star lawyers or bankers or doctors in the 1% club, or of hungry entrepreneurs plying new markets.

Women in high-paying professions are another factor. Researchers from Indiana University and the Treasury Department studied the top 1% of households and found that by 2005 the number of taxpayers (largely men) with working spouses rose to almost 40%, up from 25% in 1979. That spouse tends to be a wealthy professional as well.

Scholars are also taking note of social issues underlying America's income divide. In his new book, Coming Apart, conservative social scientist Charles Murray documents far higher divorce rates and more children living with one parent in working-class communities. That's a trend that has also caught the attention of liberals like Harvard's Robert Putnam, who describes "gaps that didn't exist decades ago but are widening at an alarming rate today" and are reinforced as wealthy parents spend far more time with their children.

It's entertaining to wail about fat cats and the greedy rich. But if we're serious about addressing widening inequality, we should figure out what the 1% is doing right -- and apply some of those ideas to closing the gap.

Nina Easton is currently a fellow at the Harvard Kennedy School's Shorenstein Center.

This story is from the April 30, 2012 issue of Fortune.

http://finance.fortune.cnn.com/2012/04/24/pay-gap-rich-poor/?hpt=hp_c1

[GH2001]

Ive always been in the entrepreneur/banking/finance industry. Ive gotten dirty looks and smart comments merely because I was a "banker". The twits that made the comments had no idea how the system even worked but someone somewhere told them bankers were the enemy so that was that.

And also, I am getting tired of being lumped in with the 99% that Occupy refers to. In fact there are 3 classes, not 2.

1% 'ers  (rich crass butthole, CEO types)
49% 'ers (middle and upper-middle class)
50% 'ers (those who pay no tax and/or have no job) - most occupiers live in this group.

They created this artificial situation where you either had to be a 1%'er or a 99%'er - choose. How about neither.

[Snaggletiger]

I'm in the 14.8%

[Townhallsavoy]

I'm in the 14.8%

Rich bastard!  Give me a job and a raise!

[Snaggletiger]

Rich bastard!  Give me a job and a raise!

To the stock room with you peasant.  And bring me some coffee.

[GarMan]

And also, I am getting tired of being lumped in with the 99% that Occupy refers to. In fact there are 3 classes, not 2.

1% 'ers  (rich crass butthole, CEO types)
49% 'ers (middle and upper-middle class)
50% 'ers (those who pay no tax and/or have no job) - most occupiers live in this group.

They created this artificial situation where you either had to be a 1%'er or a 99%'er - choose. How about neither.

I'd say a lot of folks agree to an extent...  BUT, many in that demonized top 1% are not necessarily wealthy.  They live like most in the top 50% with mortgages that consume most of their take-home pay, and many of those mortgages are upside down typically worse than say a home that's worth less than $500k.  Their scales and standard of living may be slightly different, but they're not astronomically different.  Furthermore, this whole silly concept is based on income.  There are a growing number of individuals with $1+M in assets who earn less than say 50% of all wage earners.  Consider the baby boomer retirees with second homes, investments and other assets valued at $2+M whose only source of reliable income is their sub-$2k per month Social Security check...  Technically, they're living in poverty by government standards, and that's how they'll get reported on the census and other government horseshit stats.  This is nothing other than divisive politics and class envy. 

[GH2001]

I'd say a lot of folks agree to an extent...  BUT, many in that demonized top 1% are not necessarily wealthy.  They live like most in the top 50% with mortgages that consume most of their take-home pay, and many of those mortgages are upside down typically worse than say a home that's worth less than $500k.  Their scales and standard of living may be slightly different, but they're not astronomically different.  Furthermore, this whole silly concept is based on income.  There are a growing number of individuals with $1+M in assets who earn less than say 50% of all wage earners.  Consider the baby boomer retirees with second homes, investments and other assets valued at $2+M whose only source of reliable income is their sub-$2k per month Social Security check...  Technically, they're living in poverty by government standards, and that's how they'll get reported on the census and other government horseshit stats.  This is nothing other than divisive politics and class envy.

I know I am in that middle 49% that seems to get the shaft more than the other 2. The top ones have a ton of tax breaks and use capital gains and "investments" to get a lower tax rate - nothing wrong with that, just saying. The bottom 50% mooch for the most part and pay NO taxes. Yes, we the middle class get fucked. I take offense to the occupy hippies like Chizad polarizing the argument into Group A and Group B. There is a Group C that gets hosed that MOST of us are in.

[GarMan]

I know I am in that middle 49% that seems to get the shaft more than the other 2. The top ones have a ton of tax breaks and use capital gains and "investments" to get a lower tax rate - nothing wrong with that, just saying. The bottom 50% mooch for the most part and pay NO taxes. Yes, we the middle class get fucked. I take offense to the occupy hippies like Chizad polarizing the argument into Group A and Group B. There is a Group C that gets hosed that MOST of us are in.

Well, I'm not trying to disagree with you, but I've done my share of digging on this.  For the most part, it has always been the top income earners who get hosed worse than anyone else.  They pay a disproportionate amount of the total tax bill.  From the latest final stats on the IRS website, in 2009...
- the top 0.1% paid an average of 24.3% effective tax rate and 17.1% of all federal income tax revenues while earning only 7% of all federally reported adjusted gross income
- the top 1% paid an average of 24% and 36.7% of all federal income tax while earning less than 17%
- the top 5% paid an average of 20.5% and 58.7% of all federal income tax while earning 31.7%
- the top 10% paid an average of 18% and 70.5% of all federal income tax while earning 43.2%
- the top 25% paid an average less than 15% and 87.3% of all federal income tax while earning 65.8%
- the top 50% paid an average of 12.5% and 97.8% of all federal income tax while earning 86.5%

I do see that from 2004 through 2008, the top 0.1% paid about 0.5-1% less of an effective rate than the top 1%, but it has always been a good 2-4 points higher than the top 5%.  The overblown hype regarding tax breaks for the wealthy are mostly a myth.

Just sayin'... 

http://www.irs.gov/pub/irs-soi/09in05tr.xls

[Kaos]

The definition is completely skewed due to the way taxes are calculated.

As an LLC or a S-Corp, the amount your company "earned" appears as your personal income.  So while someone like me might fit Obama's definition of whatever, that's certainly not disposable income.  It's money I put back in the company, it's money I use for development, it's money I use to pay salararies etc. 

We've had the discussion with before where he claims that the taxable earnings represent real cash on hand but he's 10000000% wrong.  It's not like that at all.  I wish it were. 

[GH2001]

The definition is completely skewed due to the way taxes are calculated.

As an LLC or a S-Corp, the amount your company "earned" appears as your personal income.  So while someone like me might fit Obama's definition of whatever, that's certainly not disposable income.  It's money I put back in the company, it's money I use for development, it's money I use to pay salararies etc. 

We've had the discussion with before where he claims that the taxable earnings represent real cash on hand but he's 10000000% wrong.  It's not like that at all.  I wish it were.

Gross revenue, AGI, Profit, etc etc.

All these terms mean something to us, but Obama plays semantic tricks on naive idiots in that bottom 50% who don't know any better. Gross revenues = 500,000? You evil rich person! You don't deserve it, Obama said so since you MAKE over 250K. Well, nevermind that isn't AGI or bottom line profit. Facts be damned, let's just have a useful idiot class that is ignorant and get them to make enough noise and opposition.

[Vandy Vol]

As an LLC or a S-Corp, the amount your company "earned" appears as your personal income.  So while someone like me might fit Obama's definition of whatever, that's certainly not disposable income.  It's money I put back in the company, it's money I use for development, it's money I use to pay salararies etc.

We've had the discussion with before where he claims that the taxable earnings represent real cash on hand but he's 10000000% wrong.  It's not like that at all.  I wish it were.

The business's deductible expenses are taken out on the 1065 or 1120-S.  The resulting amount of income after these deductions is then issued to you via a K-1.  So money you've spent on salaries doesn't show up on your return as personal income, nor does it show up on the business's return as taxable earnings, as it was deducted on the business's return prior to the issuance of a K-1.  The same goes for development/research.

With that being said, I didn't say that taxable earnings = cash on hand.  Not every expense can be deducted, but most can.  Nonetheless, they are a lot closer than you suggest with these misleading examples.  The problem is that you use examples like the purchase of a $50,000 server and say that it can't be deducted in one year as a business expense when it can, or that salaries which you've paid to others show up on your personal return as income to you when they don't.

[GarMan]

The business's deductible expenses are taken out on the 1065 or 1120-S.  The resulting amount of income after these deductions is then issued to you via a K-1.  So money you've spent on salaries doesn't show up on your return as personal income, nor does it show up on the business's return as taxable earnings, as it was deducted on the business's return prior to the issuance of a K-1.  The same goes for development/research.

With that being said, I didn't say that taxable earnings = cash on hand.  Not every expense can be deducted, but most can.  Nonetheless, they are a lot closer than you suggest with these misleading examples.  The problem is that you use examples like the purchase of a $50,000 server and say that it can't be deducted in one year as a business expense when it can, or that salaries which you've paid to others show up on your personal return as income to you when they don't.

Yeah, but I'm certain that you understand what he's saying.  After all of the deduction games, he's likely still left wiff a K-1 that adds to his AGI pushing him to the top 1%.  He'll be demonized for all of the evil he's doing by providing jobs and cycling money through the economy, and he'll be rewarded by getting sacked with an excessive tax rate.  In reality, the bulk of those taxable earnings don't benefit him directly.  They're primarily used to float and sustain his company. 

[Vandy Vol]

Yeah, but I'm certain that you understand what he's saying.  After all of the deduction games, he's likely still left wiff a K-1 that adds to his AGI pushing him to the top 1%.  He'll be demonized for all of the evil he's doing by providing jobs and cycling money through the economy, and he'll be rewarded by getting sacked with an excessive tax rate.  In reality, the bulk of those taxable earnings don't benefit him directly.  They're primarily used to float and sustain his company.

Certainly; like I said, not all expenses are deductible.  But most are.  The difference between actual earnings and taxable earnings is (or, at least, should be) a lot smaller than what Kaos is implying with incorrect examples.  Expenses that "float and sustain" your company are typically deductible, and thus don't add to the business's taxable income, nor does it add to the individual owner's taxable income.

If most expenses or losses weren't deductible by businesses, then companies like GE would have paid taxes on their $5 billion domestic profit in 2010.  They didn't pay anything due to a multitude of deductions and credits contained within their 57,000 page return, including deductions for research and development.

Now, none of that addresses the issue of whether gross income, AGI, or taxable income should be used to define the 1%.  Obviously if you use gross income or AGI as the standard, then you're classifying people as being part of the X% because of their "earnings," some of which weren't actually paid to them.  But, for taxation purposes only, your taxable income should be closer to what was profited after expenses than what Kaos is suggesting; salaries paid to employees, for example, are deductible and, as a result, are not included in your taxable income on a 1040.  In fact, it's not even reported on your 1040 as part of your gross income, as it was deducted at the business level on a 1065 or 1120-S.

[Saniflush]

Can I go throw homeless people in the fountain @ Five Points yet?

[Kaos]

The business's deductible expenses are taken out on the 1065 or 1120-S.  The resulting amount of income after these deductions is then issued to you via a K-1.  So money you've spent on salaries doesn't show up on your return as personal income, nor does it show up on the business's return as taxable earnings, as it was deducted on the business's return prior to the issuance of a K-1.  The same goes for development/research.

With that being said, I didn't say that taxable earnings = cash on hand.  Not every expense can be deducted, but most can.  Nonetheless, they are a lot closer than you suggest with these misleading examples.  The problem is that you use examples like the purchase of a $50,000 server and say that it can't be deducted in one year as a business expense when it can, or that salaries which you've paid to others show up on your personal return as income to you when they don't.

Not going to get into this discussion with you again because it's pointless. 

All I'll say is that if it were as simple as you make it out to be there would be no need for accountants and no call for tax attorneys. 

When it comes to the small business owner it's really a shell game.  There's real money (cash on hand) and there's on-paper money (what your K1 says).  In real world application there's not always a direct correlation.  I've only been doing it 12 years and used at least two different accounting firms (one business, one personal so I can keep checks and balances) for that entire time.  I've done it on a cash basis and an accrual basis and changed back and forth looking for the best situation. 

[CCTAU]

All I'll say is that if it were as simple as you make it out to be there would be no need for accountants and no call for tax attorneys. 

This sums it all up.

[Saniflush]

Not going to get into this discussion with you again because it's pointless. 

All I'll say is that if it were as simple as you make it out to be there would be no need for accountants and no call for tax attorneys. 

When it comes to the small business owner it's really a shell game.  There's real money (cash on hand) and there's on-paper money (what your K1 says).  In real world application there's not always a direct correlation.  I've only been doing it 12 years and used at least two different accounting firms (one business, one personal so I can keep checks and balances) for that entire time.  I've done it on a cash basis and an accrual basis and changed back and forth looking for the best situation.

The best solution was to be in business prior to the 70's....Maybe even the 60's.

[Vandy Vol]

All I'll say is that if it were as simple as you make it out to be there would be no need for accountants and no call for tax attorneys.

It's not simple.  That's why a tax attorney is having to correct you when you say that salaries you've paid on behalf of your business to its employees show up on your personal return as earned income.

[Townhallsavoy]

It's not simple.  That's why a tax attorney is having to correct you when you say that salaries you've paid on behalf of your business to its employees show up on your personal return as earned income.

As a teacher, I just click a few things in TurboTax and click "e-file." 

[GH2001]

It's not simple.  That's why a tax attorney is having to correct you when you say that salaries you've paid on behalf of your business to its employees show up on your personal return as earned income.

Maybe its not simple because a bunch of your kind are responsible for the tax code that is in length, the Bible x 10. I personally think it's by design.

The hell with all of your strikethroughs, refer backs and where art thous Old English bullshit. Youz aint a foolin' me!