• Sharebar

To build on a previous posting around a flat tax system for individual income, I wanted to continue the conversation further on how a flat tax may or may not jumpstart economic growth. Further, I wanted to tie this with another on-going topic, the OWS protest against the 1%.

Consider the following facts:
- The top 1% of Americans own 42% of US financial wealth (Average wealth = $14M)
- The next 19% of Americans own 50% of US financial wealth
- Bottom 80% of Americans hold 8% of financial wealth

- The top 1% of Americans earns 21% of income (Average Income = $1.5M)
- The next 19% of Americans earn 40% of income
- Bottom 80% of Americans earned 38% of income

Source: Wealth, Income, Power

The argument for a flat tax system is conceivably:
- Flat tax system is simpler to manage
- Flat tax system encourages economic growth by letting American's keep more of their own money in their pocket and invest in the economy.

The question I have for the monkeys is this:
- If the wealthiest (and conceivably most sophisticated) Americans already have large amounts of available capital, how will a tax cut spur economic growth?
- What alternative to a tax cut will encourage real investments in our economy?

Comments (12)

  • TNA's picture

    I want to see how much cash and short term investments the top 1% have in the bank. Investments and wealth are shitty ways to look at things.

    Wealthy people own businesses, buy assets, invest in stocks and bonds. All of these things provide a benefit for the rest of us. This idea that everyone is sitting on cash like Scrooge McDuck is most likely incorrect.
    http://www.reuters.com/article/2011/08/04/investin...

    $2.3 trillion (am I reading that right) is sitting in MMKT funds. This is dry powder waiting to be used.

  • Flake's picture

    Trickle down economics? Like in "the best part of the US economy trickled down Obama's leg"?

    Under my tutelage, you will grow from boys to men. From men into gladiators. And from gladiators into SWANSONS.

  • mfoste1's picture

    trickle down economics have 1 fatal flaw in the model....it doesnt account for greed

  • txjustin's picture

    +1 Ant. People think the top 1% have billion in cash, when in reality most of it is invested in LT Assets.

  • UFOinsider's picture

    Trickle down economics, literally, "we're peeing on you". Democrats pretend to help, but are just selling umbrellas.

    Get busy living

  • freeloader's picture

    Legitimate points raised. Found the following data around liquid net worth:

    % Net Worth Tied into Business Equity
    Top 1%: 52% total
    Next 19%: 44% total
    Bottom 80%: 4% total

    % Net Worth Tied to Liquid Assets (deposits, MM, financial securities)
    Top 1%: 30% total
    Next 19%: 22% total
    Bottom 80%: 11% total

    Holdings of US investable assets by top 10% of population
    Financial securities: 89%
    Deposits: 57% (20% by top 1%)

    Source: http://www.levyinstitute.org/pubs/wp_589.pdf

    So yes, while the wealthy do have significant amounts of wealth in illiquid assets, the wealthy also holds a significant amount of liquid assets, both as invested securities and deposits. In fact, over half the deposits in the US are held by the top 10%. Given there is $1T in savings bank deposits (see FDIC statistics), the top 1% actually do have a couple billion lying around, to the tune of $200B+.

  • TNA's picture

    Ok, good. Thanks for the clarity.

    So the rich mostly own businesses or have their wealth tied into business (job creation). This fits with the fact that small business is the largest employer of Americans and that most millionaires are small business owners.

    They also have 30% of their wealth sitting on the side line.

    The question should be, WHY? I mean anyone who gets to be in the top 1% knows about maximizing their return. Why aren't they investing more in business or in the market?

    The government needs to focus on this part of the puzzle. Lets reduce unneeded regulation. Lets have a competitive corporate tax structure.

  • freeloader's picture

    I wouldn't quite classify these companies as small businesses. Middle market perhaps.

    Here's an interesting hypothesis. The rich are complacent and have to incentive to move cash on the sidelines into new ventures. Running 1 business is already a full-time (or more) job. Why take on the added risk and burden of starting a new venture? The marginal benefit of a successful new company is much lower for someone already in the top wealth / income brackets.

    Agreed that we need to a way to spur investment in new businesses (!), not the financial markets, to generate economic growth. Investment in financial assets isn't a particularly effective way to spur economic growth, we need investments in tangible / real assets.

    Corporate tax structure is only a barrier for existing businesses, not new ones. Reducing barriers to market is a much more effective policy than tax policy. Provide access to capital, less onerous regulations, eliminating subsidies for large corporations, eliminate legal risks faced by small businesses.

  • International Pymp's picture

    30% liquid on your first 100mm sounds about right to me.... for the top .01% it's gotta get more complicated.

    the thing is for people in the lower half of the 1%, i.e. those worth like 15-40mm, a good portion of value is often tied up in homes, particularly if you life in NYC or another expensive area. 8mm apartment + a 5mm summer home and then you've got 10 million in stocks/cash + another 10mm in equity at your firm... fairly standard.

  • solb22's picture

    To unlock this content for free, please login / register below.

    Sign In with Facebook Sign In with Google

    Connecting helps us build a vibrant community. We'll never share your info without your permission. Sign up with email or if you are already a member, login here Bonus: Also get 6 free financial modeling lessons for free ($200+ value) when you register!
  • rls's picture

    Bene qui latuit, bene vixit- Ovid