BY PHILIP KOTLER –
A recent news item mentioned that a group of 18 ultra-wealthy Americans including George Soros and Abigail Disney and members of the Pritzker and Gund families published an open letter asking presidential candidates to support a moderate wealth tax of 1 percent. The wealth tax revenue would be used to fund environmental initiatives, fuel economic growth, and improve health care. “America has a moral, ethical and economic responsibility to tax our wealth more.”
The U.S. government has never passed a wealth tax. Most liberals focus on raising the top income tax rate from its present level of 37 percent to some higher level. The top income tax rate had been 70 percent under Reagan and 90 percent under Eisenhower. Republicans have continuously pushed and passed legislation to lower the top rate to now stands at 37 percent.
The latest estimates by Zucman and Saez show that the top 0.1% of U.S. taxpayers —about 170,000 families in a country of 330 million people — control 20% of American wealth. The top 1% control 39% of U.S. wealth, and the bottom 90% have only 26%. The bottom half of Americans combined have a negative net worth.
The case for a wealth tax is strongly argued for by the French economist Thomas Piketty in his monumental study Capital in the Twenty-First Century that highlights income and wealth inequality. Piketty documents the extremes of wealth around the world and argues for a wealth tax. He sees a wealth tax as the path to preventing wealth inequality from growing even more extreme.
A wealth tax has the support of billionaire Warren Buffett who penned an editorial in the New York Times in 2011. “Those of us in the richest 1/10 of the richest 1% should be proud to pay a bit more of our fortune forward to America’s future,” the letter says. “We’ll be fine — taking on this tax is the least we can do to strengthen the country we love.”
More recently, Senator Elizabeth Warren proposed a specific wealth plan. Wealthy families would not be taxed on their first $50 million worth of assets but would pay 2% on assets above the $50 million threshold and 3% on assets over $1 billion. Approximately 75,000 families would be impacted.
Soros and his friends were much less specific, suggesting a 1 percent wealth tax. A 2019 survey published by The Hill found that 74 percent of Americans support the introduction of a wealth tax.
Talk about taxing the wealthiest Americans escalated after President Trump’s tax bill benefitted the top 1% of taxpayers – those making over $730,000 – would receive 20% of the total tax cut, according to the Tax Policy Center.
Is it possible that enough billionaires might acknowledge our lopsided and growing income and wealth inequality and start thinking about how to share economic progress with more of our working population?
How Billionaires have Acted in the Past
We need to understand how billionaires feel about making so much money and how they feel about taxes and those who are less fortunate.
Billionaires face a number of tough questions about how to handle their money. They have a number of options. Should they hide their money into one of the many money hideouts in the Caribbean or elsewhere? Should they hire a first rate team – investor, funds manager, and lawyer – to put the money in places that will earn tons of additional money? Should they avoid all publicity about their wealth or should they make their wealth public and be seen enjoying the good life of mansion-living, partying, and yachting?
How should they handle calls from respectable fundraisers who request major philanthropic gifts for their university, museum, or hospital? Do they want their names on buildings or do they prefer anonymous giving? Should they give just a little philanthropy to save face or should they stand out as among the country’s major philanthropists? If they give, which worthwhile social causes should they support?
Billionaires will be damned if they don’t give, or give too little, or even give too much. In the popular mind, billionaires cannot win. They may be admired my their small circle of friends and acquaintances, but they are lambasted by the media, leftists, tax collectors, and those who are down and out.
Is there an intelligent way that a billionaire, especially a new billionaire, should go about designing his or her lifestyle and his or her public character? The answer is yes. Each billionaire must design his or her public persona. Billionaires should study profiles of other billionaires and model themselves after someone they admire.
Let’s leave out billionaires who prefer to hide their money or just pile in more money and minimize their taxes. These billionaires will be busy supporting political candidates who favor lower income taxes, fewer regulations, and minimal government. They will contribute generously to the political party and candidates who support their lifestyle.
Let’s focus on billionaires who feel some empathy for the billions of less fortunate persons in the world. What are these billionaires’ options? What are the major models of giving to alleviate widespread pain or suffering or to help others realize their dreams?
Let’s look at different historical periods in the U.S. when the number of billionaires suddenly multiplied.
The Gilded Age: 1870s to about 1900s
Several huge fortunes were made during this period with the finding of oil, the growth of the steel industry, the building of railroads and the invention of the automobile. Those with foresight or who were lucky became billionaires: Andrew Carnegie, John D. Rockefeller, Cornelius Vanderbilt, Jay Fisk, Jay Gould, J. P. Morgan, and later Henry Ford. Andrew Carnegie made his money in shipping and railroads; John D. Rockefeller captured the oil industry, Cornelius Vanderbilt built a shipping and railroad empire, and J. P. Morgan owned a third of America’s railroads, and two thirds of America’s steel. The wealth that some of these men accumulated far exceeded the fortunes of today’s richest men. Carnegie’s fortune was estimated in today’s dollars to be more than $350 billion, more than the total wealth of Bill Gates and Jeff Bezos combined.
Most billionaires spent their time building their empires and raking in more money. All of them were clever and some, especially Jay Fisk and Jay Gould, were ruthless and unscrupulous in their dealings. The newspapers affixed the term “Robber Barons” to this whole group. The Robber Barons not only wielded great economic power but great political influence as well. U.S. presidents called on J.P. Morgan twice for money to help save the nation’s economy
As successful businessmen, these billionaires built their mansions, sailed their yachts, and threw grand parties. Many liked to show their wealth. Thorsten Veblen, the University of Chicago economist, described these wealthy people as engaged in “conspicuous consumption.” They would run lavish parties, take lavish trips, have lavish dalliances, all vividly captured in F. Scott Fitzgerald’s The Great Gatsby. Descriptions of the good life were abundantly distributed and promoted by the press, not only to allow the less fortunate to virtually imagine living such a life, but also to motivate workers to work harder on the chance that they would strike gold too.
Most of the “Robber Barons” later in life turned to philanthropy and established foundations to give away their money more systematically. Andrew Carnegie, who had donated very little money during his business climbing days, had a change of heart later in life. He wrote The Gospel of Wealth to encourage wealthy people to give away their money. He built a total of 2,509 Carnegie libraries between 1883 and 1929, 1700 in the U.S. and others in the U.K., Ireland, Canada, Australia and South Africa. He wanted the public and the poor to have access to books so that they could learn and have a chance to build their own lives and fortunes. He gave away $350 billion (in today’s dollars), which was 90% of his wealth. A wave of wealthy people responded to his example by donating large amounts of money. Carnegie lectured: “A man who dies rich, dies disgraced.”
Other billionaires launched well-financed foundations dedicated to different sets of causes. In 1913, John D. Rockefeller and his son endowed and chartered the Rockefeller Foundation to alleviate human suffering worldwide. Among its many activities, the foundation greatly supports medical research and education. In 1936, Edsel and Henry Ford created the Ford Foundation and separated it from the Ford Motor Company. The Ford Foundation evolved into the largest and one of the most influential foundations with global reach and special interests in economic empowerment, education, human rights, democracy, the creative arts, and development of emerging nations.
The Post World War II Period
The post World War II period ushered in another booming period where the U.S. engaged in helping rebuild Europe’s cities and countries and earned a fortune doing this “good deed.” The U.S. passed the Marshall Plan (officially the European Recovery Plan (ERP) in 1948 to aid in the recovery and rehabilitation of 17 western and southern European countries in order to create stable conditions in which democratic institutions could survive against the growing threat of communism.
In the meantime, America spent time getting back to active industrialization and active consumerizing. Large American companies such as Coca Cola, Procter & Gamble, and others used the power of advertising to shape the tastes of not only Americans but their counterparts abroad. A number of new billionaires emerged in the consumption sector. Ray Kroc, a businessman, purchased the franchise hamburger company McDonalds from the McDonalds brothers and proceeded to build McDonalds into a leviathan serving over 69 million customers daily in over 100 countries across 37,855 outlets as of 2018. Many of the early franchise owners became extremely rich in expanding their McDonald units.
Sam Walton made his and his family’s fortune by founding Walmart in 1962 in Bentonville, Arkansas. Walmart grew rapidly into an American multinational retail corporation that operates a chain of hypermarkets, discount department stores, and grocery stores in several parts of the world, with 2,200,000 employees. Four Walton family members are currently in the top 10 on Forbes’ list of the richest Americans. They collectively have more than $100 billion — more wealth than the entire bottom 40% of Americans. They have been criticized as greedy and doing everything they can to not give up a penny. Meanwhile their 2,200,000 employees were paid extreme low wages. However, more recently a shortage of workers forced Walmart to both raise its minimum wage and improve its benefits. Walmart now has a starting wage of $11 per hour. That’s below Target’s $13 an hour and well below the $15 per hour paid by Amazon and Costco.
The finance world has been a second area breeding a new band of billionaires. Much started with the hostile takeover of R.J. Nabisco leading to the expression of “The Barbarians at the Gate.” Corporate raiders such as Carl Icahn, T. Boone Pickens, and Michael Milken aimed to buy shares in underperforming companies and force management to adopt new practices or be ousted and replaced. Initially called “corporate raiders,” today the same people are called “activist investors.”
Venture capital firms (VCs) also arose, their purpose being to gather funds and invest in early-stage companies to exchange for equity, or an ownership stake, in the companies they invest in. VCs look for start-ups with an innovative technology or business model usually in high technology industries, clean technology or biotechnology. The risks are high and failures of specific startups are common. Among the best known VC firms are Accel Partners, Sequoia Capital, and Kleiner Perkins. Many billionaires were spawned in venture capital firms.
Hedge funds describe investment firms that attracted pools of capital from accredited investors or institutional investors and invests in a variety of assets chosen on estimates of good return in relation to risk. The hedge fund is administered by a professional investment management firm, often structured as a limited partnership. Some hedge fund managers receive the standard “2 and 20″, which means 2% of net assets per year plus 20% of profits above a predetermined hurdle rate. Among the best known hedge funds are Bridgewater Associates, AQR Capital Management and Renaissance Technologies.
After the booming billionaires from finance, the next stage of new wealth arrived with the emergence of computers. New wealth flowed into the hands of technical persons such as Bill Gates, Steve Wozniak, William Hewlett, David Packard, Michael Dell, and Steve Jobs. Later, when the Information Age fully arrived, with the Internet, the World Wide Web, iPods and iPads, and search and social media, more billionaires were created included Mark Zuckerberg of Facebook and Larry Page and Sergey Brin of Google.
A few of these billionaires moved into active philanthropy after making their fortune. First and foremost is Bill Gates. As the founder of Microsoft, Gates borrowed and put together a software program that became the standard for running computers. Most of his early career was spent in superbly managing Microsoft’s growth. After marrying Melinda Ann French, Bill Gates turned his attention to how to use his fortune to lift the Common Good. Bill and Linda Gates had a fortune of $86 billion and they co-founded the Bill & Melinda Gates Foundation with the foundation’s goals to reduce extreme poverty, improve education and enhance healthcare. This is the most exemplary example of a Common Good improvement initiative.
Bill Gates had formed a deep friendship with another billionaire, Warren Buffett of Berkshire Hathaway stockpicking fame. Between their rounds of playing bridge together, they got the idea of recruiting other billionaires to think individually about how each would dispose of his or her vast fortune. A billionaire should be stimulated to think about where they might give away half of their wealth to philanthropy within the next ten years. They branded their idea as The Giving Pledge and were soon joined by Ted Turner and others. As of May 2019, the pledge has 204 signatories, either individuals or couples, from 22 countries, who describe their gift plans on the Internet. (www.illuminatiofficial.org/billionaire-giving-pledge). One of the most recent billionaire pledgers is McKenzie Bezos, who is divorcing Jeff Bezos, the world’s richest man, stated that she would donate over half of her $35 billion dollar divorce settlement to the Giving Pledge. Ironically, Jeff Bezos has not joined the Giving Pledge. Actually, five in six American billionaires have not joined the Giving Pledge. Among the non-givers to the Giving Pledge are billionaires Larry Page, Sergey Brin, David and Charles Koch, and Carlos Slim. These holdout billionaires may give a great deal of money to charity but less publicly.
Another major philanthropy giver on the Bill Gates model is Michael R. Bloomberg, former two-term mayor of New York City and developer of the Bloomberg system of stock trading. In 2019, Bloomberg, a signer of the Giving Pledge, published his annual letter on Philanthropy. He starts his letter with this statement:
“I’m an optimist: I always believe that tomorrow will be better than today. But I’m also a realist, and I know that believing and hoping won’t make it so. Doing is what matters…
Of course, philanthropy can’t replace action by the federal government. But it can spur progress from the bottom up – from communities, cities, states, businesses, and nonprofit organizations. Leaders in all of those groups are taking action – and getting things done. Philanthropy can help them do more, faster. And that’s exactly what we will do.”
He describes that his Bloomberg Foundation will generally address the following cause categories: environment, education, public health, government innovation, and American cities. In the year 2019, he and his associates are focusing on six issues: climate and environment, gun violence, opiods, education, local leaders support, and cities. His letter goes into describing the more specific programs in each category.
Other notables following a multi-cause model of major philanthropic gift-giving are Sir Richard Branson, Ted Turner, Marc Benoit, the late Paul G. Allen, Steve Case, Michael Milken, Peter J. Peterson, and George Soros.
Attitudes of Billionaires toward the Progressive Income Tax and a Wealth Tax
Most people, including billionaires, don’t like taxes. Millionaires may especially not like progressive income tax rates. Remember that a wealthy person pays more in tax dollars than a middle income person even if the tax was not progressive. If both had to pay the same tax rate, say a flat tax rate of 30 percent, then the wealthy person who earns $1,000,000 has to pay $300,000 in income tax, and the middle income person who earns $100,000 has to pay $30,000. The wealthy person sees himself as paying 10 times more than the middle class person. He feels that this is unjust. A progressive tax system stings the wealthy person even more. Suppose that the middle-income person still in the 30 percent bracket and paying $30,000 in taxes. The wealthy person in a progressive tax system may be in the 50 percent bracket. That means that the last increment of his earnings is being taxed at 50 percent. He may wonder why he should work for that last increment of income, since the government is taking away half of those earnings.
This explains why many wealthy persons favor a flat tax or even might favor a regressive tax system. We now understand why rich people use their political power to get the top tax rate down from 90 percent under Eisenhower to 70 percent under Reagan all the way down to 37 percent in more recent times.
Most billionaires also hate or dislike the estate tax. They want their hard-earned savings to be past down intact to their current and future heirs. They see themselves as building a dynasty to last forever and confer their heirs with extra luxury and economic and political power. They back every effort to reduce or eliminate estate taxes. They cite stories about businesses that had to close down because these businesses didn’t have enough money to pay their estate taxes without selling their business.
Wealthy persons oppose taxes for another reason. They would like to decide where their money should go. They may see the government as inefficient or corrupt in handling their tax money. They may resent their money getting redistributed to the “lazy” poor or being spent on armaments or fancy government buildings. They see themselves as being highly philanthropic and being burdened by heavy taxes spent on things over which they have no control.
One of the advantages of The Giving Pledge over taxes is that it allows billionaires to decide where they want to put their hard earned money instead of seeing it all taxed away. One interesting innovation in our tax system would be to allow high income individuals to designate in which government budgets they would like different percentages of their tax money to go.
Angel Billionaires: Those Pleading for Higher Taxes
Within the billionaire group, there are angel billionaires. The billionaire George Soros and some of his friends stand in this group. They are upset with the number of billionaires whose top tax rate is only 37 percent. They may want the top income tax rate to go back to 70 or 90 percent. They may want the estate tax rates to be increased. And they want a wealth tax.
Angel billionaires worry about the future of their country, the future of people living in poverty, and the future of our climate and the earth. They have seen how China’s trade and construction policies have lifted more people out of poverty than ever before. This means that countries can actually adopt policies to reduce poverty. Poor people do not need to remain poor, when given more work, more pay, more education and more health. Angel billionaires see how unregulated industry is damaging our atmosphere, melting our glaciers, and flooding our land. They take seriously the scientific opinion that we have only 12 years left before we can stop climate change moving into an irreversible stage.
Currently billionaires such as George Soros, Nick Hanauer, Marc Benioff, and others, all signatories of the Giving Pledge, are busy petitioning and telling their billionaire friends that our nation and other nations are facing an existential and moral crisis and they must do more to share their wealth for the Common Good.
The reaction to this plea for higher taxes by a handful of “liberal” billionaires has been predictable. Already, they are being ridiculed in the conservative media. The Wall Street Journal has published an op-ed that essentially says: “Billionaire, tax thyself!”
Here are some choice quotes from the editors:
Instead of seriously grappling with these objections, the letter tries to sweep readers along in sheer patriotic fervor. The rich “should be proud to pay a bit more,” the authors say. “Taking on this tax is the least we can do to strengthen the country we love.” Well, what’s stopping them? If billionaires see themselves as a threat to “the stability and integrity of our republic,” they could cease being billionaires any day. If retiring student debt is vital, they could put out a call to graduates and start paying off loans. If the climate is a priority, they could fund a green Manhattan Project.
Maybe they’re intent on routing their largesse through the government, since it already does such a bang-up job of setting priorities and spending prudently. Again, though, why wait for legislation? They could start contributing more today. First, they could pledge to forgo all tax write-offs, including on charitable donations and foundations. As a side benefit, this would save them money on accountants.
Second, they could put their money where their convictions are by writing a big annual check—3% of assets each year, going by Elizabeth Warren’s wealth tax—to local, state or federal government. The Treasury accepts “Gifts to the United States” at P.O. Box 1328, Parkersburg, W.Va. Donations usually go to the general budget, but state policies differ, and maybe an exception could be made to let benevolent billionaires specify an earmark in the “memo” line.
If a wealth tax is patriotic, a self-imposed one would be doubly so. “It is not in our interest to advocate for this tax,” the letter says, “if our interests are quite narrowly understood. But the wealth tax is in our interest as Americans.” In that case, billionaire, tax thyself.
This sort of attack from the Wall Street Journal is clearly meant to subvert the real argument the billionaires are making – the fact that our tax code is not serving the people, but rather protecting the wealthy.
So, what’s to be done?
If the billionaires are serious, they will pool one percent of their money on an annual basis, and create a “Drain the Swamp” PAC to fight Citizen’s United. The flywheel of corruption cannot be stopped without removing money from politics.
Ultimately, that is what the Wall Street Journal and its sponsors are afraid of.
It is the only way to restore our Democracy.
FOR REFERENCE: the open letter >>