July 16, 2007
Remember the old sick joke about the spoiled brat who kills his parents and then begs the court for mercy — because he’s an orphan?
The emerging private equity tax debate in Congress is beginning to resemble that old sick joke. We show how in this week’s Too Much.
Also this week: America’s top expert on wealth distribution has just crunched the latest numbers available on who owns what in the United States. What has he found? We have highlights.
Conrad Black, the son of a Canadian businessman who went on to amass the world’s third-largest media empire, appears headed to the slammer — for what amounts to petty 
corporate theft. On Friday, a Chicago jury convicted the 62-year-old Black on three minor counts of mail fraud and obstruction of justice but acquitted him on nine more serious charges that involved looting his company, Hollinger International, of over $80 million. Two years ago, an independent report on that looting, by former SEC Chair Richard Breeden, called Black’s reign at Hollinger a “corporate kleptocracy.” But the jury bought the defense counsel line that Black’s conduct — including a vacation trip to Bora Bora on the company jet — reflected mere standard business operating procedure. The lesson from the verdict? Notes Toronto Globe analyst Derek DeCloet: “There’s still a lot of leeway in America for self-dealing by company executives.“
Christie's, the international high-brow auction house, last week announced a new world record in artwork sales over a six-month span. Over the first half of 2007, Christie’s salesrooms in New York, London, Hong Kong, and 11 other global watering holes for the world’s wealthy sold $6.5 billion worth of art, including 358 pieces with price-tags over $1 million. Christie’s CEO Edward Dolman credits a surge of new buyers — “Wall Street hedge fund managers, guys in the City (of London), and Russian oligarchs, as well as Middle Eastern and Asian businessmen” — for the soaring sales. The new buyers, he says, lean toward modern art like Andy Warhol’s Green Car Crash, a painting sold for $72 million this spring . . .
Summer weekends, all around the world, mean seaside parking jams. But you won’t find many jams like the crush on Nantucket, the exclusive island 30 miles off the Massachusetts coast. America’s super-rich — deep pockets like Wayne Huizenga, the Blockbuster billionaire, and Alamo rental car founder Michael Egan — have lined Nantucket with $20 million homes. The problem: the Nantucket airport doesn’t have enough parking to handle the 250 private jets that drop in every weekend. The jet-set face still another problem in paradise: Beach erosion is toppling mansions that sit atop Nantucket’s glorious bluffs. Wealthy summer residents are now planning to spend $25 million of their own money to pump sand below the bluffs most endangered. Nonwealthy locals are crying foul, on environmental grounds, and charge that the community shouldn't be “sacrificed to protect the summer homes of the affluent few.”
Some parking problems run all-year around. On Manhattan, for instance, parking space shortages have become increasingly severe as parking garages in the city continue to close, 40 in the last nine months alone, with only 23 new garages opening to replace them. But not all Manhattan motorists are panicking. Condo developers are thoughtfully offering a solution: below-grade parking spaces that cost up to $225,000 each. These spaces typically also carry a monthly maintenance fee. Condos make up about half Manhattan’s apartment market. Last year, according to figures released in March, the average Manhattan apartment sold for $1.3 million . . .
Tradition-minded Buddhist monks in Thailand are speaking out against a get-rich craze that they fear is turning their anti-materialist religion into an “amulet-blessing industry.” Thais have spent over $650 million so far this year on plasticine amulets the size of a coffee-cup lid that, once blessed by monks, are supposed to “make their owners ‘Super Rich’ or ‘Rich without Reason.’” The amulets start at about $300, a monthly wage for many Thais. Traditionalist monks are calling the craze “a blatant scam by unscrupulous monks playing upon the superstitions of ordinary people.” The amulets, notes Phra Payom Kalayano, a leading abbot, “have diverted people from the core of Buddha's teaching.” Among those teachings, from the Dhammapada: “Through craving for riches the ignorant man ruins himself as he does others.”
Quote of the Week
“If somehow a proclamation were made that CEO’s could only make a maximum of $300,000 a year, you would not have any shortage of very qualified men and women seeking the jobs.”
James D. Sinegal, CEO of Costco, the discount retailer, New York Times, July 15, 2007.
New Wisdom
on Wealth
Mark Jickling and Donald Marples, Taxation of Hedge Fund and Private Equity Managers, Congressional Research Service, July 6, 2007. A primer that explains how Wall Street financial kingpins skate past the tax rates that apply to the rest of us.
Louis Uchitelle, The Richest of the Rich, Proud of a New Gilded Age, New York Times, July 15, 2007. An ace reporter explores the rationalizations America's super-rich advance for their super good fortune.
America’s go-to scholar on wealth distribution — New York University economist Edward Wolff — has just published his latest analysis on where money sits in the contemporary United States.
His new take on the most current raw wealth data available — from the Federal Reserve Board’s triennial Survey of Consumer Finances — reveals an America ever heavier at the top and ever more squeezed in the middle.
Wolff’s numbers tell a stunning story. Between 1983, the year the Fed started tracking wealth, and 2004, the most recent year with data, America’s top 1 percent saw their average net worth, after adjusting for inflation, jump by over $6 million, or 78 percent.
Over that same period, the bottom 40 percent of America's households saw their average household net worth drop by 59 percent, down to just $2,200.
And in the middle: “a sharp rise in the debt-equity ratio,” the amount of debt held by middle class families compared to their assets.
In 1983, debts equaled 37 percent of the assets of the middle 60 percent of U.S. households. In 2004, the debts of middle class households totaled 62 percent of their assets.
Wolff’s new paper, Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze, breaks “wealth” down into its many different components, everything from residential real estate to stocks and bonds.
Substantial stock holdings, Wolff notes, “have still not penetrated much beyond the reach of the rich and the upper middle class.”
In 2004, America’s richest 1 percent held 36.7 percent of all stock in the United States, including stock owned directly and stock held indirectly through mutual and pension funds.
That top 1 percent total total almost quadrupled the 9.4 percent share of stock held by households in America’s bottom 80 percent.
Should a teacher making $60,000 a year pay taxes at a higher rate than a private equity fund manager who makes $400 million?
That’s the question now before Congress, and those private equity fund managers are taking no chances. They’ve gone on the offensive against legislation, introduced last month, that would hike the tax rate on most private equity earnings from 15 to 35 percent.
And private equity kingpins have plenty of lawmaker allies. Last week, one of those allies termed the proposed tax hike on private equity earnings a direct attack on the basic American pension.
“This is a tax increase not only on those working on Wall Street,” charged Virginia congressman Eric Cantor, “but also on all blue-jean-wearing Americans because of its effect on their retirement funds.”
Many retirement funds, private equity lobbyists note, invest in private equity funds and expect high returns on their investments. Higher taxes on private equity manager earnings, the argument goes, would cut into those returns.
One pension fund official, New Jersey State Investment Council chairman Orin Kramer, last week called that argument “ludicrous.” But the argument might actually be more shameful than ludicrous. Private equity funds today don’t champion pension security. They attack it. That’s how they try to achieve their high returns.
The game works like this: A private equity firm buys control of an “underperforming” company that's publicly traded on the stock market, then takes that company private and presses workers for pension and other givebacks. The givebacks in hand, the company goes back to Wall Street and gets sold at a huge profit.
On their share of that profit, the private equity fund managers who drove the whole process pay just a 15 percent capital gains tax.
How long will this preferential tax treatment last? The Senate Finance Committee last week held hearings on the notion that “carried Interest” — the Wall Street label for the profit share that goes to private equity execs — ought to be treated as ordinary income, no different from the income that goes to any other occupation.
But those hearings revealed no great Senate enthusiasm for bumping up taxes on private equity windfalls, even among Democrats.
Massachusetts Senator John Kerry said he worried about the impact a tax change might have on venture capital, a subset of the private equity industry that specializes in bankrolling new companies. Oregon Senator Ron Wyden said he worried about adding “mumbo-jumbo and complexity to the tax code.”
Why this lukewarm reception for private equity tax reform? Some Democrats, the Wall Street Journal observes, “have close ties to, and receive significant political contributions from, the industries that would be hit by a change to the tax rule.”
And those ties, absent a grassroots push for change, will keep in place a status quo that saves Wall Street investment managers an estimated $4-$6 billion in taxes a year.
“If our government had not grown so incredibly corrupt,” Center for Economic and Policy Research analyst Dean Baker noted last week, “this one would be a no-brainer.”
The good news: An effort to press for private equity tax reform — the Coalition to End the Carried Interest Loophole — will be getting formally underway this week, led by two Washington, D.C.-based advocacy groups, OMB Watch and Citizens for Tax Justice.
Some more good news: Last Friday, Presidential candidate Hillary Clinton announced her support for reform. The three top-tier Democratic candidates — Clinton, Barack Obama, and John Edwards — have all now come out for ending the private equity tax break.
Stat of the Week
Between 1983 and 2004, the number of decamillionaire households in the United States — households worth at least $10 million — increased over twice as fast as the number of mere millionaire households. In 2004, 345,000 households held decamillionaire status, a 418 percent boost over the 1983 total, says a new analysis, calculated in 1995 dollars, by NYU economist Edward Wolff.
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