How the top 1% made its money

[MissStepcut]

I will admit, it's not as finance-heavy as I assumed it would be.

http://www.washingtonpost.com/blogs/ezra-klein/post/how-the-top-1-percent-made-its-money-in-two-charts/2011/10/11/gIQAXL4acL_blog.html

 

[D&T]

And I'd like to attach what the top earners in America actually makes per the IRS and how much they pay in taxes.

http://www.irs.gov/taxstats/article/0,,id=102886,00.html

http://www.irs.gov/taxstats/indtaxstats/article/0,,id=133521,00.html#_grp2

 

[MissStepcut]

Thanks, D&T. I didn't post this in the OWS thread because I was looking more at which industries are leading to mega-wealth specifically and not the income disparity issue generally, but it's definitely relevant to the topic of wealth distribution.

 

[MissStepcut]

Looking a little bit closer, I am seeing some validation for my sense that the financial industry is capturing a significant part of America's wealth, from the article:

[W]hen you look at the very richest Americans — the top 0.1 percent of households by income — then business executives and financial professions do take the lion’s share, and they’ve been pulling away from the rest much faster. “We find that executives, managers, supervisors, and financial professionals account for about 60 percent of the top 0.1 percent of income earners in recent years, and can account for 70 percent of the increase in the share of national income going to the top 0.1 percent of the income distribution between 1979 and 2005. . . .”

 

[ksinger]

Looking a little bit closer, I am seeing some validation for my sense that the financial industry is capturing a significant part of America's wealth, from the article:

[W]hen you look at the very richest Americans — the top 0.1 percent of households by income — then business executives and financial professions do take the lion’s share, and they’ve been pulling away from the rest much faster. “We find that executives, managers, supervisors, and financial professionals account for about 60 percent of the top 0.1 percent of income earners in recent years, and can account for 70 percent of the increase in the share of national income going to the top 0.1 percent of the income distribution between 1979 and 2005. . . .”

As I read this, all I could think of was the "financialization of america". So I googled it, and got this piece from Kevin Phillips in 2009. If you haven't read his book "Bad Money", it's worth your time.

excerpt from Phillips' opinion piece...

http://tpmcafe.talkingpointsmemo.com/2009/04/07/the_disaster_stage_of_us_financialization/


Towards this end, my initial emphasis in the new material included in the 2009 edition of Bad Money is on what techniques, practices and leverage the financial sector used between the mid-1980s and 2007 to metastasize early-stage financialization into an economic and governmental coup and, ultimately, a national disaster. Perhaps not surprisingly, I found that the principal building blocks that the sector used to enlarge itself from 10-12% of Gross National Product around 1980 to a mind-boggling 20.6% of Gross Domestic Product in 2004 involved essentially the same combination of credit-mongering, massive sector borrowing, highly leveraged speculation, reckless, greedy pioneering of new experimental vehicles and securities (derivatives and securitization) and mega-trillion-dollar abuse of the mortgage and housing markets that became infamous as hallmarks of the 2007-2009 disaster. During Alan Greenspan's 1987-2006 tenure as Federal Reserve Chairman, financial bubble-blowing became a Washington art and total credit market debt in the U.S. quadrupled from $11 trillion to $46 trillion.

To try to put 20-30 pages into a nutshell, the financial sector hyped consumer demand - from teen-ager credit cards to mortgages for the unqualified - to make credit into one of the nation's biggest industries; nearly $15 trillion was borrowed over two decades to leverage de facto gambling at 20:1 and 30:1 ratios; banks, investment firms, mortgage lenders, insurers et al were all merged together to do almost anything they wanted; exotic securities and instruments that even investment chiefs couldn't understand were marketed by the trillions. To achieve fat financial-sector profits, the housing and mortgage markets might as well have been merged with Las Vegas.

 

[mrscushion]

You may have read Nassim Taleb (author of "Black Swan")'s Op-Ed in the Times today. What do you think? It is clearly a populist op-ed, but I really do see the problem with the ridiculous payments i-bankers (among them many of my friends, who do work very long hours) get in a "good year" with little risk and no skin in the game on the downside.

http://www.nytimes.com/2011/11/08/opinion/end-bonuses-for-bankers.html

What would banking look like if bonuses were eliminated? It would not be too different from what it was like when I was a bank intern in the 1980s, before the wave of deregulation that culminated in the 1999 repeal of the Glass-Steagall Act, the Depression-era law that had separated investment and commercial banking. Before then, bankers and lenders were boring “lifers.” Banking was bland and predictable; the chairman’s income was less than that of today’s junior trader. Investment banks, which paid bonuses and weren’t allowed to lend, were partnerships with skin in the game, not gamblers playing with other people’s money.

Hedge funds, which are loosely regulated, could take on some of the risks that banks would shed under my proposal. While we tend to hear about the successful ones, the great majority fail and their failures rarely make the front page. The principal-agent problem they have isn’t a problem for taxpayers: Typically their investors manage the governance of hedge funds by ensuring that the manager is hurt more than any of his investors in the event of a blowup.

 

[fleur-de-lis]

Great topic, MissStepcut.

I will admit, it's not as finance-heavy as I assumed it would be.

http://www.washingtonpost.com/blogs/ezra-klein/post/how-the-top-1-percent-made-its-money-in-two-charts/2011/10/11/gIQAXL4acL_blog.html

Couple of quick things to keep in mind:

1. The makeup of the top 1% is quite different from the top 0.1%. If there are 300,000,000 people in the US, the first would comprise of three million people-- and there aren't THAT many hedge fund managers. The finance-industry-heavy data you seek would be more easily observable in the 0.1% subgroup.

2. The chart in your first post mentions "income"; as the income taxes on "income" tend to be among the highest by percent, many high-worth individuals can and do structure their money flow in a way to not be measured as "income", and certainly not to them as individuals. Furthermore, much would not be reflected in US Tax Data, as cross-border transactions become a more economically viable solution with the greater resources of being a high-net-worth entity.

(FWIW, I can totally see that you went to law school by this topic!)

 

[0-0-0]

For a further breakdown among the top 1%: http://www.ritholtz.com/blog/2011/10/forget-the-top-1-look-at-the-top-0-1/

Top 1% = $368,238 (20.9% of income)
Top 0.5% = $558,726 (16.8% of income)
Top 0.1% = $1,695,136 (10.3% of income)
Top 0.01% = $9,141,190 (5% of income)

 

[fleur-de-lis]

There's an interesting piece, written by a professor of sociology on a closely related topic and highlights the chasm between the 1% vs. 0.1%, which you might find an interesting read:

http://sociology.ucsc.edu/whorulesamerica/power/investment_manager.html

 

[MissStepcut]

(FWIW, I can totally see that you went to law school by this topic!)

Ugh it's ruined me forever!

But in all seriousness, the more I learn about financial industry regulation and corporate law, the more I want to see significant reform.

It's not about "redistributing the wealth." Some very smart people found some very smart ways to tilt the game in their favor. They've had a good run, but it's time to take a closer look at what the law surrounding financial entities and major corporations.

 

[Dancing Fire]

(FWIW, I can totally see that you went to law school by this topic!)

Ugh it's ruined me forever!

But in all seriousness, the more I learn about financial industry regulation and corporate law, the more I want to see significant reform.

It's not about "redistributing the wealth." Some very smart people found some very smart ways to tilt the game in their favor. They've had a good run, but it's time to take a closer look at what the law surrounding financial entities and major corporations.

i hope so...lets rob more money from the rich so that i'll receive a "Xmas bonus" entitlement check this yr.

 

[MissStepcut]

DF, as tempting as it is, I would appreciate it if we could talk about this without falling back on simplistic thinking.

 

[Dancing Fire]

DF, as tempting as it is, I would appreciate it if we could talk about this without falling back on simplistic thinking.

what is there to talk about? the top 5% already paying most of the taxes in the U.S. and no i'm not in that top 5% bracket...

 

[MissStepcut]

DF, as tempting as it is, I would appreciate it if we could talk about this without falling back on simplistic thinking.

what is there to talk about? the top 5% already paying most of the taxes in the U.S. and no i'm not in that top 5% bracket...

DF, with all due respect, that's non-responsive to the issue of which industries are capturing the majority of the wealth. It just has nothing to do with the trajectory of our economy.

 

[fleur-de-lis]

DF, as tempting as it is, I would appreciate it if we could talk about this without falling back on simplistic thinking.

what is there to talk about? the top 5% already paying most of the taxes in the U.S. and no i'm not in that top 5% bracket...

Are you absolutely sure that the 94th through 98th percentiles aren't paying a higher tax rate than the 99th percentile (or especially 99.9th percentile), DF?

 

[NovemberBride]

Occupation is irrelevant for a lot of people in that top 0.01% (or 0.05%) as their money is inherited wealth and any money they may make from from working is inconsequential to their overall wealth. This is true even among many in finance. I work in finance and a large percentage of the highly paid executives were multimillion or billionaires due to family money before they got their first paycheck. I would also second Fleur's comment that the most wealthy Americans won't show up in the individual taxpayer category (or more correctly, a lot of their wealth will not), because they do not hold their assets in their individual capacity.

 

[MissStepcut]

Occupation is irrelevant for a lot of people in that top 0.01% (or 0.05%) as their money is inherited wealth and any money they may make from from working is inconsequential to their overall wealth. This is true even among many in finance. I work in finance and a large percentage of the highly paid executives were multimillion or billionaires due to family money before they got their first paycheck. I would also second Fleur's comment that the most wealthy Americans won't show up in the individual taxpayer category (or more correctly, a lot of their wealth will not), because they do not hold their assets in their individual capacity.

That's a very good criticism. My title is misleading. It should read, "how the top 1% of earners are making their money."

You remind me too of a bit of finger-pointing that happens among the affluent. When we get to talking about these things, people at the top 10% point to the 1% and say, now that's the REAL rich guy! Then the top 1% points to the trust fund babies and say, hey, I have to work, I don't have REAL money like that guy!

 

[TristanC]

I believe the super rich report taxes differently than the corporate employees, as stated above.

This actually could help explain why corporate employees seem to show up disproportionately in the highest contributing tax bracket. Many companies have assisted income filing systems, and income declarations, and executive salaries are transparent, so taxes from their main jobs would be as well. This would be across all industries due to legislation I believe. We see the same things happening here.

Wealth derived from personal holdings, family holdings, capital gains etc are reported differently. In totality, I would imagine that the financial sector accounts for a slightly larger share than is being represented via IRS numbers.

 

[TristanC]

You remind me too of a bit of finger-pointing that happens among the affluent. When we get to talking about these things, people at the top 10% point to the 1% and say, now that's the REAL rich guy! Then the top 1% points to the trust fund babies and say, hey, I have to work, I don't have REAL money like that guy!

This always happens.

I think it is ideal to compare upwards in an aspirational manner, and downwards when you want to be philanthropic. Sadly a lot of people in the lower incomes have no means to advance upwards once they hit their middle years, so they compare downwards in a bid to find more contentment. I see nothing wrong with that.

My thoughts are that the top 1% do not actually represent the rich. They are comfortable, and should be financially competent/content. But at $150K/annum, that isn't yet in the "rich" bracket. Not in the way that we see the rich as having unattainable superwealth kind of access to spending.

Being in the top 1% early in life is an enabler though - savvy investing, real estate, leveraging (a solid job and a continuous pay stream allows very heavy financial leveraging via home loans, leveraged capital on partial mortgages, contra trading etc) is a huge wealth enabler. You need either a wealth pot, or a means of accessing a leveraged capital sum in order to constantly advance your wealth plan.

If a 1%er marries another 1%er, and dual income happens, that helps a lot too.

 

[MissStepcut]

Well, I think that $150k is megasuperrich... in rural Iowa. It's barely treading water in NYC. That's the problem with trying to make classifications in the United States: we're so very diverse, economically.

 

[iheartscience]

Well, I think that $150k is megasuperrich... in rural Iowa. It's barely treading water in NYC. That's the problem with trying to make classifications in the United States: we're so very diverse, economically.

Um my friends living in NYC who make probably a third of that would beg to differ! It's not *that* expensive to live in NYC, depending on where and how you live.

 

[Dancing Fire]

DF, as tempting as it is, I would appreciate it if we could talk about this without falling back on simplistic thinking.

what is there to talk about? the top 5% already paying most of the taxes in the U.S. and no i'm not in that top 5% bracket...

Are you absolutely sure that the 94th through 98th percentiles aren't paying a higher tax rate than the 99th percentile (or especially 99.9th percentile), DF?

i'm...

 

[MissStepcut]

Well, I think that $150k is megasuperrich... in rural Iowa. It's barely treading water in NYC. That's the problem with trying to make classifications in the United States: we're so very diverse, economically.

Um my friends living in NYC who make probably a third of that would beg to differ! It's not *that* expensive to live in NYC, depending on where and how you live.

and my friends making $160k there would be nodding vehemently! Perspectives are a funny thing.

 

[iheartscience]

Well, I think that $150k is megasuperrich... in rural Iowa. It's barely treading water in NYC. That's the problem with trying to make classifications in the United States: we're so very diverse, economically.

Um my friends living in NYC who make probably a third of that would beg to differ! It's not *that* expensive to live in NYC, depending on where and how you live.

and my friends making $160k there would be nodding vehemently! Perspectives are a funny thing.

Right, but saying things like "$150k is barely treading water in NYC" is exactly what causes the 99% to roll their eyes! I remember having plenty of money to pay my bills and buy whatever I wanted when my husband and I made less than half as much money as we do now. The more you have, the more you spend!

 

[MissStepcut]

Well, all the people I know in NYC are either law students or lawyers, so let's look at the lawyers, since they have "grown up" jobs and expenses.

Start with $13,000ish. To keep that six figure job, they have to work 80+ hour weeks, so long commutes would not be very sustainable. That means easily $3k rents. For that shiny law degree from a school prestigious enough to land a $160k job, that's a $2500/mo loan payment (for 10 years). Deduct city and state taxes (ETA and federal, collectively) at around $4k/month. Deduct medical insurance, retirement savings, transportation, professional clothing, incidentals... Starts to look like "treading water" to me. Or at the very least, "not rich."

 

[iheartscience]

Well, all the people I know in NYC are either law students or lawyers, so let's look at the lawyers, since they have "grown up" jobs and expenses.

Start with $13,000ish. To keep that six figure job, they have to work 80+ hour weeks, so long commutes would not be very sustainable. That means easily $3k rents. For that shiny law degree from a school prestigious enough to land a $160k job, that's a $2500/mo loan payment (for 10 years). Deduct city and state taxes at around $4k/month. Deduct medical insurance, retirement savings, transportation, professional clothing, incidentals... Starts to look like "treading water" to me. Or at the very least, "not rich."

Most of my friends in NYC work in fashion and art, so their salaries are lower, and their living expenses correspond to their salaries. But for the record, I don't think $150k/year is rich, in NYC or elsewhere!

 

[MissStepcut]

I think it's "rich" a lot of places, especially in rural America. That is to say, you can easily afford the best of everything in your community, and have significant financial flexibility. Where I grew up in the rural midwest, a nice house in the "downtown" still only costs $15-30k (that's not a typo, that really is only 1 zero).

 

[iheartscience]

I think it's "rich" a lot of places, especially in rural America. That is to say, you can easily afford the best of everything in your community, and have significant financial flexibility. Where I grew up in the rural midwest, a nice house in the "downtown" still only costs $15-30k (that's not a typo, that really is only 1 zero).

Wowie kazowie! Yeah I grew up on the East Coast in or near major cities, so houses are obviously pricier than that!

 

[MissStepcut]

Well then you can see why I think $150k is rich somewhere! hehe.

This the thing I find the most frustrating in the media coverage of income disparity. $50k where I grew up is quite well-off, and $10k/yr is pretty manageable. It's not particularly helpful to speak in raw salaries when you're talking about a country as diverse as the U.S.

 

[TristanC]

Yes, however it is impossible to displace income to rural areas. Because $$$ is far more difficult to make in regions where housing is $15K. Otherwise demand and ability to purchase would ramp up prices scary fast.

Hence it is truly a function of what your income buys you. Where I am at, US$100K/annum is decent, but it isn't a great deal. Given that a basic toyota camry in today's terms costs US$100k, you can easily see why. An apartment is upwards of $900K for 2+1 bedrooms, and the government has a subsidised housing scheme for 80% of the population. And that 80% doesn't earn peanuts. We are talking about subsidised homes in high rise apartments that cost $450K to purchase. Bankers and Lawyers frequently start off owning one of these places too before progressing. So... money is weird.

I believe to be in the realms of the rich, you have to be sufficiently wealthy in a given community to be beyond such tedious considerations. Just having a better address and driving a better car doesn't necessarily cut it as rich.

For e.g. given that car import tariffs are through the roof - Lamborghini Aventadors cost US$1.2million a piece here in my country brand new. With a population of 5 million, there are already deposits prelaunch for 70 units of them. More than for China (At this present moment), which has a population measured in billions. Income disparity? Yes please. There is even one of the 5 Bugatti Veyron supersports in the whole world residing in Singapore - costing an undisclosed sum after tariffs... and it isn't even road legal in this country. So someone bought it as a lawn ornament essentially.

I would venture that the top 0.1% and above would start to feel rich, and the top 0.01% truly ARE rich.

We all have different measurements. But at the end of the day. If we have a home, the ability to eat 3 meals a day consistently without going hungry, the ability to raise a family... then we are in line with a very large number of people in the world at a wide range of income levels. They may drive newer cars, live in nicer places or have nicer furniture, but their lives are not significantly materially different.