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)


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.

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

Masters in Finance HQ - The #1 site for everything related to the MSF degree!


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.


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


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


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

Get busy living


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+.


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.

Masters in Finance HQ - The #1 site for everything related to the MSF degree!


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.


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.


The usual arguement against giving the top 1% more money to spend is that they have a smaller marginal propensity to spend e.g. they will wisely invest or save their money rather than spend the extra money from the tax breaks.

Still in favor of tax breaks, even though I agree with the above statement.


Excuse me for segueing, but there is a deeper issue that needs to be resolved here. Many tax proposal focus inordinate amount of attention and effort on figuring out what any particular person pays in taxes. There is a perverse obsession with the checkbooks of others that has developed (in socioeconomic theory, this is understandable- the economy sucks right now). It is downright worrying. The only reason to be that concerned about the fiscal balance of another person is that you, at some point, want some additional say on how that money is used.

We want to create a tax system that is wealth-agnostic and that does the least damage to economic activity. That invariably means some sort of tax cuts and massive spending cuts. But this 4th grade attitude of examining how much pie each person has and what kind of pie they have and whether we understand how the pie was earned is economically backwards.

Let me make this simple- rich people have more money than poor people. The same percentage amount will result in a higher dollar figure for rich people wealth. So, if you cut everyone's taxes by 10%, the rich guy's "10%" will be a greater dollar amount than the poor guy's "10%" - this is basic mathematics.

The term fairness should imply equal treatment by an objective body- in this case, the government. Leaving the economic damage of the income tax aside, does it make any sense that one person should pay a greater percentage of their income if they are more successful than another? Doesn't that discourage what we should encourage- wealth production? Furthermore, since we are all equal before the police and the law, is it fair one person pays more for services that he will have no additional benefit than his neighbor, who may equally use those services? The way those who want to ignore fairness will answer is usually some form of "he/she can afford it". But that is not answer- fairness is an a priori concept- before any particular variables are entered. Progressive taxation is a patently unfair system, where the burden of government is disproportionately bourn.

And before anyone quotes any Rawls to me, it's dead on arrival.

It's perverse to talk about "giving the top 1% more money to spend" via tax cuts. Give? They earned it to begin with. Letting people keep more they earned is not a gift or a subsidy- it was their money all along. The "income distribution" complaint is sophistry. Income isn't distributed- it is earned. I have yet to see a company where the payscale from entry to mid-management to the upper echelons is entirely inverted.

People say "1% of Americans control 40% of the wealth"- then they pause for effect. My response is largely, "So?" This republic of ours is supposed to be a meritocracy. If a person is 10x more gifted, 10x more driven, 10x more disciplined than the average person, does it not stand to reason he could be 10x wealthier than the average person? What if he is 100x better? 1000x? It used to be that if your last name wasn't noble, that was it; you had lost in the game of life. Now, we all have a chance. Now, it's blasphemy to suggest that some are more talented and more gifted in a modern society, but denying the premise and its logical extension (that some people are better wealth generators than other and thus are more likely to be wealthy) will be destructive long-term.

Some express concern about the wealth disparity itself being a destabilizing force. But, I am not persuaded that is the case. During the period when this disparity is created, people generally were not upset. Why? Because the upper echelons were perceived as porous and open to entry by all. Most recently, the housing bubble- the narrative was "Buy this house, get rich, retire". Everyone thought it was not only possible, but a plausible life outcome- so, rather than complaining about bonuses at Goldman Sachs, they were shopping for houses, trying to increase their fortunes by flipping homes. The housing bubble was, of course, preceded by the NASDAQ/technology bubble which exhibited the same delusion- "Buy this stock- (P/E, assets, business models do not matter), watch it multiply, sell, and retire". When people think they can become rich, they admire the rich.
But now, we are mired in an economic morass- dashed dreams, hopelessness, and suffering plague many. Now, it could not be the error of the average person that he is in the situation he finds himself- he was lied to. "Who lied to us?!" Well, the rich, the haves, the ones who benefited from his insanity- they tricked us- and now we must appropriate their ill-gotten gains: enter stage left "Occupy Wall Street" and curtains.

But this phenomenon teaches an important lesson: the average person does not despise wealth. In fact, he admires it when he believes he can attain it. When it taunts him as a perceived impossibility is when he lashes out. So, wealth inequality is not a problem- whether or not the ranks of the elite are porous is the most important indicator of social stability. When the average man begins to question if it is even possible to get wealthy, then you have a problem.

Economically, I would favor only one tax - and it would be on consumption only. The beauty of an excise tax is that it would be self-limiting. After all, the most sensitive economic classes would be affected most by any tax increases. Imagine the sight- average people clamoring for across the board tax cuts- None of this- "higher for thee, but not for me" nonsense.

Bene qui latuit, bene vixit- Ovid

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