Make elites compete: Why the 1% earn so much and what to do about it

Another issue is that said narrow group is incredibly skilled in exploiting whichever rules are enforced, buying elected officials from all three branches of US government under the current campaign finance rubric and generally making sure their interests are first.

Folks whom have tax accountants, tax attorneys and investment managers are able to hyperoptimize purposefully-byzantine tax code while grandpa does TurboTax (in the US, take a look at the 1040 (full, non-EZ form) for all the odd, special interest tax deductions which clutter up forms and have the own extra forms (Schedule _)). Complexity is a game to catch the unweary, confuse most people and create an official "elite qualifying miles" gambit to reduce taxes in "certain" situations.

It comes down to whom has the most influence over collection, allocation and redistribution of taxation.

0.0001% of 6 billion = 6000 people.

I would say that 6000 people easily control anywhere between 20% and 50% of the worlds wealth. Especially considering that if you research "How many billionaires are there?" You come up with something like this:

"A total of 1,645 people made the 2014 billionaire list, representing combined wealth of $6.4 trillion."

So taking the top 1000 billionaires, or perhaps even the top 100 or so, and then you have the families who really have enough money to control things. These would be the people that are impossible to get much information on, but who definitely hold a lot of sway over the planet.

I think these families are the ones we should be concerned with. Either them or once again a small proportion of them, numbering anywhere between 5 families and 100 families.

http://www.newyorker.com/magazine/2009/06/01/the-cost-conund...

If your point was that nurse practitioners won't help that siutation a lot, then I agree (although I think nurse practitioners are still a great idea for other reasons). But I believe it's wrong to suggest this is not a real problem.

Similarly, salaries for top college and hospital administrators are routinely equally and exceeding that of your $30M hedge fund manager. Perhaps even worse, they justify this based on the size of the organisations they manage, which are easily inflated by hiring lots of non-teaching, non-clinical administration staff (not to mention mergers, which also give hospitals especially more market power to extract rents). It's all financed by easy money from student loans and from insurance/Medicare that doesn't have a choice.

So I totally disagree that looking at the 1% is unhelpful, because all of the things above are real problems that need to be solved even if you think inequality doesn't matter. Anyone born after about 1980 and anyone who has medical insurance or pays taxes is getting fleeced, and they're not getting better services for their money. Fixing that will make a much bigger difference in most people's lives than confiscating a bit from the hedge fund manager (though of course there's no shortage of screwed up incentives in finance to fix either).

Doctors work in an industry where compensation is strongly influenced by government policy. The government is the largest single payer for healthcare services due to Medicare and Medicaid which makeup roughly 40% of heath care costs in the US. The AMA lobbies the government heavily to ensure favorable rates on procedures paid for by those programs and thus ensures a high income for their members. So in the sense that a lot of their economic prosperity is derived from their political influence they aren't all that different from any other wealthy person who lobbies the government for tax breaks and other economic advantages.

If you make most of your financial returns from capital gains, rather than income, you are in the 1%

And it's not like there are high barriers of entry. Everybody can call local Bloomberg office and arrange for trial terminal subscription (I did it once). Or pay around $75/month for realtime market data feed and test strategies on it. Compare it to, say, becoming a dentist.

There will always be problems when trying to draw these lines.

Of course putting someone who makes $30MM vs $250k is absurd. What about $1MM vs $250k? $300k vs $250k?

There's an inordinate amount of conversation about this subject on HackerNews, which has some irony, since I'm sure the demographics here skew "wealthy". Everyone wants to believe they're in the "99%", but the fact is the vast majority of the population in America, and more so the world, would consider people here the 1%. $250k is more than most people need, in terms of sharing the wealth, even in a household. If there's a populist shift, your doctor may find some empathy for that kind of salary; the guy who coded the latest photo app won't.

"The 1%" is just a simplification for the benefactors of gross income and wealth inequality.

Four years of school, many of residency, maybe specialty, those salaries are to a large degree paying off accumulated debt and opportunity cost.

It would be cruel to try to take even more of that highly delayed income in taxes.

tl;dr, the things this article points out are definitely bad, if only for the immediate justifications given rather than the article's thesis.

Actually that's not true at all. Even if those people are just under/barely millionaires, they're still getting most of the advantages over poor people.

They're probably also not paying rents, in debt as much, and probably had higher educations.

I think sometimes a picture really does say 1,000 words. This short info-graphic video makes is pretty clear how dramatically top heavy wealth distribution in the U.S. is:

https://youtu.be/QPKKQnijnsM

It also does a nice job of comparing the "ideal", to the "perception" to the actual.

This immediately reminded me of Viktor Belenko [1] who flew his MiG-25 to Japan and defected. He wrote (I think, in his autobiography, it could have been an interview) of the amazement that dawned upon him when he entered a Western supermarket for the first time.

edit: found it.

"Once I bought a can which said "dinner." I cooked it with potatoes, onions, and garlic-it was delicious. Next morning my friends ask me, "Viktor, did you buy a cat?" It was a can of chicken-based cat food. But it was delicious! It was better than canned food for people in Russia today. And I did test it. Last year I brought four people from Russia for commercial project, and I set them up. I bought nibble sized human food. I installed a pâté, and it was cat food. I put it on crackers. And they did consume it, and they liked it. So the taste has not changed." [2]

[1] https://en.wikipedia.org/wiki/Viktor_Belenko

[2] http://www.videofact.com/english/defectors2_4en.html

But, getting back to the core, I think all of these capitalism vs communism juxtapositions distract us from looking at our collective goals. That is, we often put ideology in front of the desired effect.

Capitalism has succeeded in being a much, much better allocator of resources than large-scale central planning. I think most of us get that. Allowing capital to flow dynamically has allowed resources to flow to where there is most demand, and it has incentivized people to play the resource allocation game.

As a society, we have generally accepted some inequality in the process, as long as the system has generally benefited most people. Traditionally, in the west, this has been 'progress' - the optimism that one's quality of life and the quality of life of their descendants will get significantly better over time.

In countries that have adopted capitalism, it's been great, as long as per-capita grown rates have been high (say > 4% annually). But, when standards of living start to decrease over time, like they have started to over the last 30-40 years, people lose faith in the system. That, coupled with most economists predicting long-term global growth stagnation, it's time to think about novel new models that achieve social goals.

As hackers, I'm surprised that there has been so much focus in HN comments on dueling ideology. Where are the innovative minds that come up with new systems to replace the old ones?

Do you honestly think that 99.9% of people "do nothing"? This world-view is flawed and self-righteous. Anecdotally, I am from a small, southern USA town (per capita income of ~$22K) where most of the people I know donate their time and money to others on a weekly basis (much more than 0.01% of my town's total work-hour output).

The fact that you needed to include "Im not better than anyone else" seems to be a bit of a Freudian slip...

It starts with us helping each other locally and creating tighter communities of people around us. We are being divided by this very .1% by envy and our own greed.

With the money from higher taxes for the rich you could feed a lot of poor people.

The reality is millennials will have a worse standard of living than their parents. OK, maybe not the worst thing in the world. But what about my kids? Will they be worse off than me? What about my grandkids? There is a reason trends are important (just like global warming). Waiting until Antarctica melts before we do anything about it, is extremely stupid and short-sighted.

Additionally, the same argument you made can be made against the 1% (or 0.1%). Tax the shit out of them, it shouldn't matter since their living standard will still be much higher than every other American. Why should the 99.9% be subjugated to a protestant work ethic, while the 0.1% are encouraged and celebrated for acting as ruthless capitalists?

The top 1% outperform significantly everyone else in every scenario. The app store? Twitch streamers? Youtube videos? Facebook pages? Athletes?

It's a natural phenomenon. If you fight it, you are practically fighting nature. You don't fight earthquakes by trying to stop them. You prepare and help the affected instead.

The elites were closet supporters of fascism until they weren't. Then we had this anomalous period from the end of WW2 until the early 1970s when the Keyensians were dominant and governments pursued full employment economies via fiscal policy. The elites really can't abide sharing with labour, and capitalised on the early 1970s inflation/oil shock to promote their essentially neo-feudalist policies in the guise of neoliberalism/monetarism. The narrative of how all this came to pass is largely forgotten by mainstream economics, but there is an excellent series of posts, if dense at Bill Mitchell's blog[1] that cover this, and is much better than my crude paraphrasing.

The logical end-point for rentiers is feudalism. Without communism as a viable alternate force, I think they are seeing how low that floor can go.

[1] http://bilbo.economicoutlook.net/blog/?p=32776 Part 10, 11 and 12 are particularly relevant

You're correct that democracy will always be captured by money. In a very real sense, our political system isn't democracy. It is capitalism.

The only way to prevent this is to stop trying to enforce so many rules with centralized democracies and move to a decentralized enforcement mechanism instead. Individuals act in their own perceived interests, so if individuals enforced our rules instead, you'd have to pay everyone to look the other way, which is a perfectly acceptable outcome.

So what is a decentralized enforcement mechanism? Trade. When people spend money, they're trading access to everyone's work. You and I give that money its value, and as individuals, we can take that value away from people who break the rules. We can stop accepting money that was traded by people who broke our rules.

You and I have the power to restore democracy by punishing the people who use their wealth to manipulate our democracy.

If anything, democratic governments are able to curtail this power somewhat, though obviously not keep it in check entirely. I think that the US is indeed unique in the levels of power it affords the rich precisely because its central government is weaker than in other Western democracies. The freedom companies like Google have in the US is getting closer to direct, pre-government political power, as opposes to modern, mediated political power.

Who, specifically? Who is taking bribes, in what form, from whom, and to do what? Give names, instances, and evidence. You're making very serious allegations with all of the intellectual rigor of Fox news.

The FICA 'wedge' on the first dollar earned by a minimum wage worker is 15.3%.

How is that fair, that Warren Buffett's secretary pays a higher tax rate than he does?

And furthermore there are all kinds of ways of reducing the 15%, and all kinds of incentives for investment in the form of accelerated depreciation, deductibility of interest etc., and all kinds of easy ways to make labor income a dividend or capital income.

Think of labor income as a return on human capital and the human as deserving of the same tax treatment as the factory or the tools.

This notion that income from capital shouldn't be taxed or should be taxed less than income from labor is rent-seeking of the worst kind.

Can a doctor can say, all human welfare, progress, income depends on health, etc. and I have mobility and can work anywhere in the world, so don't tax me? It's madness. Capital flows to places that have security, infrastructure, public health and education, and the taxes that pay for them.

For most income earners, defining money as income is easy and taxing it is easy. For high income earners, it is not. Is this a revenue, profit, personal income, capital gains, etc? Capital is mobile, you're right. So are cash flows from that capital. A lot of that is for reasons to do with legal structures: jurisdictions, corporate law, etc. It's hard stuff to change, especially if your goal is "raise more tax next year."

This is why the upper middle classes pay so much tax. They're easy to tax.

Anyway, I agree with you to a certain extent. It's hard to tax capital gains, or other incomes that are not "salary from job X." But, I don't think the "improves the lives of those at the bottom" argument holds water at all. So is "Labour" and so is "Natural Resources" or any other economic fundamental.

The IMF found if income share of top 20 percent increases, GDP declines over medium term. Conversely, if bottom 20 percent increases, GDP goes up.

It makes sense - rich people invest their money, which may or may not drive economy. Poor people spend, which absolutely drives economy.

I'm not going to argue for/against capital taxes, but what are your thoughts on those who are in the top x% and avoid high income wages and make money other ways, or the whole Warren Buffet/secretary thing?

This is so true, and yet so many people overlook this point. I was fairly unaware of it myself for many years, but looking back on it, I now realize that when I graduated high-school, I knew essentially nothing about investing, stocks, bonds, even compound interest. I thought (like a lot of other poor people did and probably still do) that most of those things were "for rich people". That is, there's a perception that you have to already be rich (or at least, not poor) to benefit from Wall Street.

In hindsight, and given changes since my youth, that's totally not true. With services like Sharebuilder and/or low-fee online brokerages like e-trade or Schwab, almost anybody who isn't literally dead-broke can invest in the stock market and benefit from the mechanisms of capitalism.

Everybody keeps engaging in this false dichotomy between "Capital" and "Labor" when, in reality, most laborers do own at least limited amounts of capital, and they have the option to invest that and let it grow. But... how many of them know that that is possible, or know how to evaluate investments wisely, or understand why people say "put your money in index funds and leave it there", etc.

Assuming the average Joe Blow who graduates from the public school system receives approximately the same kind of financial education I did (which is to say "almost none") then the percentage of average Americans with that kind of financial knowledge is probably staggeringly low.

All of that said, this article makes an excellent point about how poor people are cut off, by law, from certain classes of investments. So basically, you're being penalized for being poor in the first place!

But it seems that most people would rather avoid substantive discussions about issues of this nature, and instead just run around talking about "Robber Barons" and how evil "the 1%" are, and promoting socialist-like policies.

A down market will show you what kind of losses make that kind of return possible in an up market.

Is it the best solution to that problem? Maybe not... but if you want to change those laws, you need to come up with an alternative solution to the problem.

On what planet making loans has no risk to capital let alone small business loans :)?

Well, and disposable income/assets. If you don't have significant savings, and your income goes to food, housing, and other daily necessities as it does for most people we consider poor, it doesn't really matter if you're a closet Warren Buffet, does it?

Wealth = Access + Capital. Getting in early on the Facebook IPO is going to beat the hell out of saving your pennies, but you can only do that if you're part of a select group and already have money to invest. The same is true for all of the other truly high yield investments. Anyone can make money by saving, but it's trivial compared to what people make from extracting various rents.

So if the 1% or 0.1% or whatever is defined loosely as people with an income of $250,000/year, I don't see how any amount of saving or investing will get me there if I currently make $50,000/year. If I'm a genius investor and I earn 30% or 40% a year, it's still difficult to get up to $250k in total annual income.

What separates the 1% from the 99% is a lifetime of things gone right instead of wrong. Born to the right parents, accepted by the right organizations, in the right place, at the right time. If earning, budgeting, saving and investing were all it took then everyone would be a millionaire. Adding randomness into the system changes the rules, and the expected outcomes.

Best example are drugs like marijuana or even the limits on high fat foods - which research is now showing is not as bad as some other older research thought.

Sure that wasn't Bernie Madoff's fund (it returned around 12% a year)?

Why was Alan Greenspan wrong?

Are you sure you are not mistaking correlation for causation here?

This is very much on purpose. Capital is extremely mobile and not part of a market transaction, while most labor is immobile and constrained as a market transaction.

It is easy to take tax from a labor market transaction, and this tax is borne just as much by the capital employing the labor as by the labor itself. Taking tax from capital appreciation is far more difficult - if you put your capital tax too high, the capital just moves to a different market with better dynamics.

Of course if you go overboard with your labor regulation and tax, then other labor markets are able to out compete your own labor market, and that is even worse.

Basically: you don't have free reign to decide on these labor and capital taxes and regulations. Any policy change you make is going to have consequences. You can't just say "OK, we will just double capital tax! Money for all!" and not face extreme changes in your entire base.

I'm in South Africa and watching this unfold as the socialist government continues to raise capital taxes each year, and now faces enormous foreign capital flight and lack of investment in the economy, destroying GDP growth and pushing the more vulnerable parts of the population out of jobs and into extreme debt and poverty. Believe me, you don't want that in USA just to get rid of some mythical '1% problem' that hurts your sensitivities.

There is a reason that short term capital gains are taxed exactly the same as income.

In the 2015 top tax bracket of 39.6%, capital gains is taxed at 23.8%. That's a 40% discount, which (unsurprisingly) is long term equity capital appreciation minus long term CPI trends.

This discount should be extended to all forms of savings and investment income too (e.g. interest and bonds), but that's another topic.

Law 1: Individuals must digitize their own behavior in prediction-friendly form.

Law 2: Individuals retain the exclusive right to share or sell their information.

Law 3: Sellers or middlemen who connect with buyers must compete openly for all information.

The idea is that as we adhere more and more to these laws (which we don't at all right now), we gradually solve the problems of online advertising. Many other problems too.

Blog post here: https://haxel.ca/three-laws-to-fix-online-advertising.html

I have come to the same conclusion a number of times in various domains. You can propose a solution that might be better regarding some property (more just, more effective etc.) in theory, but the hard problem is creating an incentive to implement the change, because usually the ones profiting from being in the local extrema are the ones holding the keys. And you can't really blame someone acting in their own interests.

And the total lack of desire to apply that hard work and skill to something more productive than applying even more lubrication to a market that is already too fast for it's own good. But please allow me to take the sting off of that attack: over here in advertisement, things are not much different.

About those barrier of entry laws for risky investments, that we seem to both consider the true target of the Brookingns article: they are not about poor people being stupid, they are about poor people being poor. Too poor to not be completely ruined by a failed investment.

"Rich people benefit from barriers of entry" and "Poor people will suffer hard when they are fully exposed to commission-driven investment salespersons pitching them risky stuff" can (and are) both be true at the same time.

And there's abundant evidence to support that conclusion.

Accredited investor requirements are not what keeps people poor. Index funds (which anyone can access) outperform hedge funds.

The rest of the article seems to be mostly distraction based on the uncertainty caused by looking at income where most people instinctly expect a look at accumulated wealth.

Anyway of course people don't want to drag them down just for the sake of it. They want to raise everyone else up. Which requires taxing capital.

Even just among the 99.9%, the world is pretty unfair. Not everyone can be doctors or lawyers or computer programmers. But at least the majority of people have been able to do unskilled work and make a living. But soon, the majority of unskilled will be replaced by machines. And eventually doctors and lawyers will be too. That leaves only capital owners with the majority of the income, and everyone else with nothing.