Romney and the Forbes 400
Last week, sandwiched between Monday’s leak of the video in which Mitt Romney dismissed “the 47 percent” and Friday’s release of the Romneys’ 2011 tax returns — showing that they had paid an effective tax rate of 14 percent — Forbes magazine published its annual list of the 400 wealthiest Americans.
There weren’t a lot of surprises on the Forbes 400. Bill Gates, with an estimated net worth of $66 billion, remains the wealthiest man in the country. He is a whopping $20 billion richer than his pal Warren Buffett, who came in at No. 2, according to Forbes. All the usual suspects were there: Michael Bloomberg; George Soros; the Koch brothers; various descendants of Sam Walton, the founder of Wal-Mart; and on and on.
What was illuminating was not so much who was on the list but what they collectively told us about the state of the richest of the rich. Thirty years ago, when Forbes published its first Forbes 400, a net worth of $75 million would get you on the list. Today it takes $1.1 billion. In the last year alone, the cumulative net worth of the wealthiest 400 people, by Forbes’ calculation, rose by $200 billion. That compares with a 4 percent drop in median household income last year, according to the Census Bureau. One would be hard pressed to find a clearer example of how powerfully income inequality has taken root.
Like Romney, Forbes magazine is a little defensive about this — and, like Romney, Forbes has adopted a self-justifying narrative. Luisa Kroll, one of the magazine’s “wealth editors,” nods toward “concerns” about income inequality in her introduction to the list, but she goes on to write that “a deeper analysis instills confidence that the American dream is still very much alive.” In fact, it does nothing of the sort.
The fundamental reason the Romneys pay so little in taxes is that the bulk of their income comes from investments and thus is taxed at the capital gains rate of 15 percent. Although Romney himself isn’t close to being rich enough to join the Forbes 400, his reliance on capital gains is a trait he shares with most of the ultrawealthy. It is the thread that ties together the Forbes 400.
Financiers, who make up a large percentage of the Forbes 400, long ago found ways to convert their compensation to capital gains, for instance. Romney, of course, did the same thing when he was running Bain Capital, a private equity firm. But even those who are not on Wall Street rely on capital gains. A large number of the Forbes 400 — “roughly 40 percent,” according to a group called United for a Fair Economy — inherited their wealth. Many others on the list — people who started companies that they’ve since left — are classified by Forbes as investors.
Even many of the corporate executives on the Forbes 400 are likely paying a lower tax rate. Many of them get minimal cash compensation and rely on stock options for the bulk of their wealth. Or they maneuver to take their companies through a leveraged buyout, which reaps them huge potential capital gains. In 2009, according to recent congressional testimony by Leonard E. Burman, a professor at Syracuse University, the 400 highest-income taxpayers reaped an astounding 16 percent of all capital gains.
All of which would be justifiable if the country got some benefit in return. On “60 Minutes” Sunday night, when Romney was asked about the justification for his low tax rate, he said what most conservatives say, that a low capital gains rate is “the right way to encourage economic growth, to get people to invest, to start businesses, to put people to work.”
This is also what Forbes means when it links its list to “the American dream.” Except that there is no evidence that it’s true. In 1986, when Ronald Reagan was president, the differential between capital gains and ordinary income was eliminated — and the economy soared. The capital gains rate was higher during the Bill Clinton years than in the George W. Bush years, yet the economy did better under Clinton than under Bush.
In the printed copy of his congressional testimony, Burman has a chart that plots the ups and downs of the economy since the 1950s with changes in the capital gains rate. There is no correlation between the two. The idea that a lower capital gains rate spurs economic growth is one of the enduring myths of conservative thought.
The American dream exists not because of the capital gains differential but in spite of it. It is the tax break that most glaringly exists to benefit the wealthy. If you have any doubts about that, all you need to do is read the latest Forbes 400.
Joe Nocera is a columnist for The New York Times.