As noted in yesterday’s posting, income inequality has captured the imagination of our politicians and they now spend a lot of time reminding us that some Americans are way richer than we are. As I wrote back in December, income inequality doesn’t surprise us when we look at tennis players or novelists, but at least some politicians are able to get the public’s attention citing statistics about workers across different fields of endeavor.
Measured in terms of cash it is beyond dispute that Goldman Sachs partners, medical doctors, and public company CEOs have pulled much farther ahead of the average worker than in, for example, 1950 or 1900. But I’m wondering if cash is the right measure.
Due to the rise of universal health care in most developed countries (e.g., 1948 in the U.K.) and public hospitals (mid-1800s) and Medicaid (1960s) in the U.S., the rich and the poor now have pretty much the same health care in most countries (and die within a few years of each other, life expectancy-wise). The rich and the poor have the same access to the Internet and to mobile phones; compare to 50 years ago when an immigrant might have to spend a day’s wages to make a phone call back to the old country. The rich and the poor have the same access to the most popular forms of entertainment, i.e., movies, television shows, and video/tablet games.
If one were therefore to look at health care, entertainment, and communications, one would conclude that America’s income/lifestyle disparity was narrowing.
Middle class people get a lot of enjoyment from dating and sex. How about rich people? The economist or politician will point to a statistic showing that a rich person has 50 times the income of the middle class person and we need to be envious. But could that person with 50 times the income date people whose company is 50 times more enjoyable? Have sex 50 times more frequently? From the stories that I have heard, it is unclear that overall rich people get more out of dating and sex and middle class people. One of the guys in my pilot circle thought that he was having some harmless fun with a carefree 25-year-old. He was able to take her on a couple of trips that wouldn’t have been affordable for a middle class man. But after a few months she presented him with a positive pregnancy test result, an Excel spreadsheet showing the millions of dollars in child support that he’d have to pay over the next 23 years, and a lawyer ready to negotiate the sale of her abortion for $250,000 (plus the cost of the procedure and attorney’s fees). A divorce litigator in Los Angeles that I interviewed told me about a woman who had a brief encounter with a wealthy man in New York City, then flew her pregnant body to California in order to get around a New York law that caps child support at roughly $50,000 tax-free dollars per year. When the baby arrived she sued the guy in California for $1.5 million per year (times 18 years = $27 million) arguing “Why should my child have to look at the Mona Lisa as a picture in a book when I can charter a Gulfstream, fly him to Paris, and hold him up above the crowd to see the real thing?”
Middle class people get a lot of enjoyment from marriage and children. As noted in this posting about Jane Austen, in the old days there were people who married for money but they had to stay married to keep the money and the lifestyle. With the availability of no-fault divorce in all 50 states, as well as a legislative and customary preference for sole custody to one parent in many states, plus the doctrine that a rich defendant should pay a less-rich plaintiff’s legal bills, the rich person becomes a target for a mercenary marriage. While a middle class couple is gaining a deeper mutual understanding and settling into the routine of having children in K-12, the rich person is likely to be defending a divorce lawsuit, facing the loss of his or her parental role (except every other weekend), and paying the legal bills on both sides. These academics found that the probability of being sued for divorce rises linearly with what a plaintiff can expect to collect. One of my high-income friends just finished writing $130,000/year tax-free child support checks to the woman to whom he was married for two years back in the 1990s. “I was supporting my ex-wife, her new husband, and the boyfriends she was cheating on the new husband with. My daughter was in public school and maybe $5,000 per year trickled down to her. Though my ex-wife and her lawyer had insinuated that I was molesting my daughter, as soon as she got the cash she wanted to be out having fun with her friends. She used me as a free babysitter for about half the time. Not a day went by when I wasn’t angry about what my ex-wife got away with, though of course it was all perfectly legal under Massachusetts law.” A middle class person is statistically more likely to be married for love and to stay married. A middle class man is statistically more likely to be able to enjoy the company of his children (wealth/high-income women are sometimes the targets of for-profit marriage but it is difficult in most U.S. states for a father to use litigation to take the children away from a mother).
What if we look at houses and cars? It is indisputable that rich people have more and fancier houses and cars. But on the other hand how much value do they get out of these things? A person with 10 houses can use only 1 house at a time. The economist would point out that this person has 10X what the rest of us have and if he or she acquired two more houses, 12X what we have. Similarly with cars. A rich person has a $1 million stable of exotic cars in which to drive around and impress other rich people. A poor person has a 10-year-old Dodge Caravan worth $3000. So a politician would say that the rich person is 333X better off but it would be just as easy to note that both will get through traffic in LA at the same rate. The rich person cannot drive multiple cars simultaneously. The rich person does not own a car that can hold more friends or family than the poor person’s Dodge Caravan.
In the bad old days, therefore, the rich person had a lifestyle that was not recognizable to an average person of the time. There were servants, doctors when necessary, communications with foreign lands, a box at the opera, a horse or a touring car instead of walking, a spouse from a good family, private tutors for the children, etc. As noted above, the rich person today may get less enjoyment from family life than the middle class person. The people who are paying the new wealth transfer taxes, e.g., the Obamacare taxes that start at $200,000 per year in income, will have a similar medical care experience, similar options for entertainment and communications on most days, and will get around in a similar way, albeit in a much newer and more expensive car.
If we look at statistics we can imagine an investment banker driving around the Hamptons in his Rolls-Royce , while his other 5 houses and 7 cars sit idle. We can see him walking in the door to an adoring wife who “loves him for himself” and four well-scrubbed children. We can imagine that he has hired a string quartet to play Mozart in the dining room during the family dinner. After dinner, nobody in the house reads a Kindle, watches Netflix, or surfs the Web because they have better and different “rich family” things to do with their time. The Harvard Medical School graduate drives out from Manhattan to make a house call the next morning when Little Johnny wakes up with a tummy ache.
But what if this guy doesn’t exist? Why are we putting so much energy as a society into figuring out how to tax these non-existent rich people who are supposedly pulling away from the rest of us in terms of quality of life?