Who is Rich in America

Who is Rich in America?Bye-Bye, American Pie

Rick Warren asked the presumptive presidential candidates to define rich in America during the Saddleback forum. I like to hear candidates answer a simple question with a simple answer. However, Pastor Rick did not provide enough information to properly answer this question. At the risk of breaking the rule of never answering a question with a question, I think that is exactly what one of the candidates should have done.

In order to define rich in America, Reverend Rick, more information is needed.

invests in a risky venture that makes no business sense and has a miniscule chance of ever succeeding? 1. Are we talking net worth, gross income, adjusted gross income, or taxable income? Sorry to bring in those terms but every American who files a tax return has to report those numbers annually.
2. Where does our rich person live? A hundred grand in small-town Texas where I live is a great deal different than a hundred grand in San Francisco, New York, Chicago, or Phoenix. 3. Does our taxpayer have to make the big bucks every year, or does one year qualify him as rich? I ask this because I know many people who have hit a high-income threshold only once in their lives. Suppose they barely survive for three or four decades with a small grocery, tire shop or farm, and then retire and sell out? Should a larger portion of their retirement security be taken away because they qualified as rich only one year out of forty?4. What about the fellow who makes a half-million as an executive each year, but whoWhat if the losses from the venture take his income down enough to classify his family as poverty-stricken? Is he still rich? If so, how do we get his money? Should he get earned income credit?
5. Conversely, what about the single guy that has an incorporated business that drops a half million or so to the bottom-line each year, but he takes a minimum salary because his lifestyle is austere? Is he still rich or is it just his corporation? When do we get to punish him?6. What about the taxpayer whose salary is a hundred thousand, but whose benefit package is worth at least double that amount? Do we wait until retirement to slap him around for being successful?

Before you say that these are unlikely examples, I should tell you that they are real and not at all uncommon. I could name hundreds more that I encountered in a small town tax practice. I made my living preparing tax returns and as a financial advisor for more years than I care to recall. I list them to show how futile it is to try to distribute income fairly.

Many politicians like to throw around the millionaire term as if it were a description of an evil, greedy person. “Not to worry about our proposals to spend trillions—we’ll get the money by taxing millionaires.” Newsflash for those politicians—a millionaire is someone who has a net worth of a million or more, not necessarily an annual income of a million. A lot of taxpayers make huge sums of money, but have negligible net worth because they spend it like water. Conversely, many never make big bucks but save and invest wisely. What if it took the taxpayer forty years to reach that millionaire pinnacle, and she did it by creating jobs and living conservatively? Should she be punished? I have seen multi-millionaires die without enough cash to pay for funeral expenses. Their non-liquid assets had to be sold at fire-sale prices to pay final expenses and estate taxes. Were they really rich and should we punish them because they were not liquid?

A lot of us seem to be invested in this notion that all people who have succeeded in monetary terms are greedy and selfish—people who have taken more than their fair share of the pie. It seems logical to soak the rich. I recognize that many of them are greedy and corrupt and make more money than they are worth. But they are in the minority. We can’t punish them without punishing the true entrepreneurs that make our country great and continue to create most of the jobs. The market often takes it’s own measure of punishment for the corrupt if the government does not interfere.

Most liberals view the American economic pie as stable in size. With the best of intentions (politicians excepted) they want to equalize the slices and make things fair. When you get a big slice, mine is smaller. That ain’t fair, so you should be forced to give some of your slice to me. Reasonable, fair, and compassionate—right? Maybe, but what if the guy who got the bigger slice worked harder, took more risks, sacrificed to get an education in the school of hard knocks or in college or trade school? Should part of his slice be given to the guy who chooses to be a slacker? What if the rich guy contributed more ingredients and made the pie bigger. Bigger you say? Oh yes, the pie is not a static size. It shrinks and it expands.

Life is not fair, and no matter how hard we try, we cannot equalize people nor legislate fairness and still retain a free enterprise economy that has proven to be the most successful in the world. Who gets to decide, after all, what your slice of the pie will be? Trying to do this usually brings disastrous results and ignores the fact that we are different in our motivations and that lives and tax laws are complex.

Most of us want to succeed. Money, whether we like it or not, is one of the measures of success—not the only one nor even the most important one, but we all must have it. If we punish success, we get less of it. The pie stops growing or even shrinks. I know it is hard to believe, but many of the movers and shakers in our economy will stop making their fair share of the pie.

You say, “How can this be? Either a person makes a lot of money or he doesn’t, right? Greedy capitalists are just not going to start making less money. Even if one does, he might control the size of his slice, but he can’t control the size of the pie. If we tax him more, the government can keep his slice smaller and make our slices bigger.” I say, “He can, he does, he always has, and he will in the future.” If you reduce his slice of the pie through punishing success, he will control the size of the pie and keep everybody’s slice from growing. He doesn’t do it to hurt others; he does it because it is instinctive and it is wise. Said another way, if the government gets too intrusive, everybody’s slice shrinks. Bye, bye, American Pie.

Rich people, however we define them, seldom got that way by being stupid. They generally like to control their own destinies. When we punish their risk-taking and their investments of time and money, they will naturally change their behavior. How? I found that there are two basic types. The first type is like the guy I mentioned above who made the big bucks as an executive but invested in risky ventures that created losses. He did it to avoid paying taxes. Now, I admit that is not the brightest thing to do, but he is far from atypical. I was amazed at the drastic steps that this type of taxpayer will take to avoid having the government take away money they feel is rightfully theirs. They feel that most money given to the government is essentially wasted. Smarter people, the second type, will invest in longer term ventures, waiting for tax rates to go down. They will put off sales and avoid capital gains, delay income, delay transactions, and generally sit on their money and business expansions until the climate is friendlier. They will hire lawyers and CPA’s to avoid taxes. They will set up complex legal documents and investments to shelter their income. Rich liberals in Congress have already done that. That’s why they are not talking about themselves when they say, “Tax the Rich”. Some will move their money, companies and businesses to other countries where success is rewarded, not punished. Result: jobs lost, smaller American pie. Reward the behavior you want more of, don’t punish it. Result: more jobs, booming economy, bigger pie.

Still not convinced? This may increase your doubts, but I have to say it. When tax rates go up, tax revenue has historically gone down. When tax rates go down, tax revenue has historically gone up. Sound implausible? I know you can cherry-pick statistics to support your foregone conclusions, but look it up. And remember what I said about the pie shrinking when you punish success.

So who got the answer right? McCain came closer, even considering that his joke about five million is already starting to be misrepresented by Obama. McCain is right about not classifying people by income levels and redistributing income under some arcane principle of fairness. He is right about not pitting one class against another. It’s our American pie. Let’s bake it together and accept that some slices are going to be bigger than others. And sometimes, it is not fair.

Jim H. Ainsworth—former CPA, CFP, CLU, Registered Investment Advisor, Licensed Securities Principal, was twice named one of the most influential accountants in America by Accounting Today magazine. He is the author of eight books and hundreds of articles. He has also ridden horseback across Texas. He welcomes comments at www.jimainsworth.com