Is The Game Fixed?
A third of the Forbes 50 were born billionaires. Does that mean the game is fixed?
ObWi’s Doctor Science takes a look at the Forbes 400 list of “The Richest People in America,” constructs a table of their family backgrounds, and comes up with some not shocking findings about the top 50:
- 16 out of the 50 (32%) grew up in great wealth: they were basically born on home plate.
- another 11 were what I’d call solidly upper class — not Great Big Trust Fund Rich, but *extremely* comfortable. Altogether, around half of the people on the list were in the top few percent of the population from birth.
- 12 or 13 (depending on how you count Michael Bloomberg’s family) are from the upper-middle class. Notably, most of them made their fortunes in the Computer/Internet sector — not surprising for people who were basically brought up as technocrats.
- 4 are from middle-class families, 2 from the lower-middle class, and only one — Harold Hamm — is definitely from the lower class.
From this, DS concludes:
Speaking as someone from the “upper-middle tech” class, only those last 7 (or 8) people were really “self-made”, everybody else started with enough cultural capital or just plain capital to not really be on a level playing field with the rest of the population. The Forbes list does *not* show the triumph of free-market competition, it shows that, as Forbes itself has admitted, Want to get rich quick? Have a fabulously wealthy family.
Now, DS’ social classes are defined based on looking at parents’ occupations and making an educated guess as to how easily they could afford to pay for an Ivy League education. So, the rankings might be skewed upward a bit. But even if we take half of the upper-middle class and define them as middle class, we’d still have only 13 of 50 coming from middle class or below.
It’s simply undeniable that family wealth and what DS terms “cultural capital” are huge advantages. Conor Friedersdorf wrote several good pieces on this a while back, starting with one titled “Flaws in the Meritocracy.”
I was tremendously blessed relative to 99.9 percent of people in the planet and the vast majority of my fellow Americans.
In hindsight, however, there is all sorts of knowledge that I lacked compared to many of the people I’ve met who grew up in a household with Ivy League educated parents, or attended a fancy East Coast prep school, or had a parent who worked in academia, or a network of close family friends spanning the elite of every profession. It never occurred to me that I should study for the PSAT because it affected who would get National Merit Scholarships, or that an aspiring writer would do well to consider Princeton in order to study under John McPhee, or Harvard or Yale because they’re feeder schools for prestigious publications. I took the SAT once without any prep classes, applied only to schools in California, never knew about a lot of the fellowships some folks applied for upon graduating from college, and felt all the while that I was relatively well-informed.
Please don’t mistake this for complaining. I’m tremendously lucky. I chose between Berkeley and Pomona College, got a good education, probably started a rung lower in professional journalism than I would’ve had I gone east earlier, but likely benefited from the experience. Still, if I had a kid entering high school right now, I could help them game the college admissions system and hasten advancement in the meritocratic elite far more adroitly than my parents could help me — and orders of magnitude more than most families can help their kids. What I take away from my own story is this: If an upper middle class kid from Orange County, CA is removed enough from the northeast rat race to perceive slight but meaningful information disadvantages in hindsight, what’s a lower middle class kid from Reno or a first generation college applicant from Topeka to do?
DS notes that, in addition to being born to wealthy, educated professionals — or, better yet, to parents who inherited a few billion dollars — it helps to be Jewish and marry a well-educated woman. Which reinforces the point: Connections, status, and ”cultural capital” are enormously helpful.
All that said, I’d stop well short of this:
This game isn’t completely fixed — that’s how you get the suckers to keep playing and betting — but it’s *mostly* fixed. A huge portion of the wealth — and thus the power — in America is concentrated in the hands of people who did nothing to earn it. If that’s not aristocracy, what do you call it?
Just because its next to impossible to jump from poverty to the Forbes 50 in one generation doesn’t mean the system is somehow broken. It just shows that, if someone gives you a billion dollars in your 20s, you’re likely to still be filthy, stinking rich later in life. Four of the top 9 are Walmart heirs. The Mars candy heirs are in a three way tie for 26th. It’ll take a generation or two to go through that kind of money unless the children and grandchildren of those who built those businesses can keep up the success of the founders.
My wife and I both started in the lower-middle class, are first-generation college, and had to choose where we went to school with cost as a heavy consideration. And, even if money had been no object, we’d have lacked the social knowledge to make informed choices. Through a combination of hard work and luck, we’ve managed to work ourselves into the upper-middle class and our daughter should be in the position Conor was in growing up. Maybe a bit better, since we’re in the Washington, DC corridor and have access to the knowledge of some marvelously bright high achievers.
Would we have been more successful if, instead of going to regional colleges and getting middle class jobs we’d inherited a candy fortune? Hell yes, we would. But we’re talking three people our of us 307 million Americans. It’s a ludicrous comparison. And, by DS’s own calculations, only a third of the Forbes 50 got there solely through inheritance. Surely, Bill Gates and Paul Allen get some credit for building Microsoft, even if they had parents who could afford to send them to great schools?
This is relevant to the battle over estate taxes. In all the discussion, I’ve never seen mention of the reason for the these taxes in the first place, which was to break up the family dynasties. There was a very conscious effort to tax inherited wealth at extreme rates because the rich could influence so much, buy politicians to pass laws that help them preserve and increase their family fortunes, collude with each other to keep the “right” people in charge of the schools, businesses, etc. The dividing line was drawn between those who had actually created the wealth and those who were simply given it.
Think of Paris Hilton’s brother (I don’t know if she really has a brother), a guy with all the vacuousness and party predilection of Paris but without having a film career. And think of an employee at the Hilton business, loyal and hardworking who spent their career helping to build that empire. When Hilton dies he leaves, say a billion dollars to the idiot son, and a hundred thousand to the loyal employee. The employee is taxed at a significant rate on that money, but Paris’ idiot brother gets his share tax free.
Steve Forbes is my favorite grinch in American politics. A guy who has done nothing to earn a dime in his entire life but has spent all his spare time campaigning to reduce the tax rate on rich guys like him, then pats himself on the back for being involved in civic life. If he was honest with himself he would know that all that is required to protect his daddy’s money is frequent and comparatively small political donations, funding the proper conservative think tanks and ensuring Senate staffers know they have a nice job waiting for them if they play nice.
I’m of mixed minds on estate taxes. The Paris Hilton case is the most obvious for why it’s a good idea. But, on the other hand, I think Jerry Jones ought to be able to leave the Dallas Cowboys to his son Stephen and his daughter Charlotte. Ditto the Maras, the Rooneys, the Steinbrenners, etc. And those franchises are worth something on the order of a billion dollars.
So, how do we devise a system that simultaneously limits a permanent aristocratic class yet leaves intact even very successful family businesses?
I’ve come to the mind, since taxes are used for social engineering, that the estate tax should be two tiered. if the estate is in liquid assets, cash, bonds, stocks, etc., then it is taxed immediately. But estates that are businesses, franchises and other operating concerns, in which the heirs are active managers or even custodians but involved in the day to day operations, then the estate tax should be pro-rated so that if the heirs maintain active involvement for say 10 years, the tax disappears.
Interesting that there is no mention of the over-reaching regulation of business that has moved starting most enterprises beyond the capabilities of those of modest means. And made the knowledge barrier very high for those without friends and family in business already. Many of today’s successful family businesses started very near the way the little girl with the lemonade stand started but to day the tax man, the regulator shows up before the doors open for their tribute. Starting a successful business is the way from rags to riches in one generation but outside the internet, you need a lot of cash to pay off the government before you can get started these days.
Take the McKee Baking company, makers of the Little Debbie snack cakes, that was started by selling snack cake from the trunk of his car. I believe that is a felony today.
There are two kinds of mobility questions here. One is opportunity, and one is power.
Yeah, we want graduates of our educational system to have opportunity. But we know their shot at great power is much lower, and the shot the born-rich have is much higher.
(Put another way, at $250K income it is about opportunity, at $1B net worth it is about power.)
“It’s a ludicrous comparison.So,……. how do we devise a system that simultaneously limits a permanent aristocratic class yet leaves intact even very successful family businesses?”
This is obviously a very narrow sample but it’s not totally without significance in pointing up declining social mobility in the US. Amongst advanced OECD countries we perform relatively badly. The major factor in the US that determines whether you end up in the upper middle class and very rich (for shorthand roughly the top 3-4% of income earners) is having parents that belonged to the upper middle class and very rich. Also the notion that the relatively modest estate taxes we have in this country are going to destroy “family businesses” is total nonsense. Perhaps Jim you could provide us with a list of such businesses so destroyed. Quite apart from the modest level of the tax in the first place most family businesses/fortunes are protected by a plethora of legal strategies aimed at avoidance of tax liability. The family fortune is much more likely to be destroyed by incompetent or dissolute heirs.
***** So, how do we devise a system that simultaneously limits a permanent aristocratic class yet leaves intact even very successful family businesses? *****
You can do that now, all it takes is a little forethought and planning. But your question misses one important point. What the estate tax does is tax unrealized capitol gains at death. what is so freaking immoral about that? What you are essentially asking is for a system of permanent capitol gains shelter as long as assets are handed down from family member to family member. I’m not getting why that is a moral imperative. It’s a nice aesthetic but not much more. The sale of an asset with the overly generous capitol gains and the added benefit of estate tax rates will insure that the heirs are taken care of, but frankly with the proper planning the business can remain in tact.
The only problem comes up in very very large businesses where the owner dies unexpectedly before the succession plan can be put into place. We’re not talking about the shop on the corner, or even the chain of stereo stores that a guy built from nothing. In the case of sport franchises we are talking about entities that billionaires bought and now your treating them as if they are treasured family businesses with great sentimental value ( you might have a very small argument WRT to Rooney, but how many of those are there … really).
What is it about capitol gains with you guys anyway? Some kind of fetish? Why is it that money made from money (or from the combined efforts of an organization you build) is so special when compared to money made from individual effort? Me? I would simply make all income … income, taxable at the sames rate and lower those overall rates from everyone.
I know … but then investment would go down (horror) Well no, it would for some … but others would have extra to invest and would, problem solved (don’t thank me … no really)
JKB says:
Wednesday, September 29, 2010 at 09:05
“I believe that is a felony today.”
Buying food off a truck is a felony? Better start rounding up all those street vendors I see everywhere. And I need to report to the police or the FDA that woman who two weeks ago sold me a cherry pie off the back her truck at our Saturday street market. What’s the govt doing allowing these criminal food sales?
“We’re talking about three people out of 307 million…”
And that’s really the problem here. As more and more of the nation’s wealth is shifted to the top tenth of a percent, much of the political power goes with it. We’ve got vast grassroots Tea Party organizations that turn out to be entirely funded by three billionaires. We’ve got tax codes that punish the middle class to protect the super-rich, and we’ve got an entire TV network that uses its founders billions to pretend it’s on the side of the little guy while suckering them into voting for politicians whose only interest is in servicing billionaires.
Is the game rigged? If you have to ask, you’re already blinded by right-wing ideology…
@JKB,
re: your idea that tax relief should be tied to active ownership is right up there with me, as it would prevent a lot of economic gridlock. Not just estate taxes, but other aspect of ownership would work better if active maintenance of operations, property etc. were considered.
It hurts to cash out a business, but if the game is to start life even, play hard, and count winnings at the end, then it’s fair. Think about it in terms of creative destruction and the opportunities for the next generation.
What are the chances of some kid who wants to start a new pro team James?
But it’s not a game, it’s life. A major goal most of us have is to build a better life for our children. And why should a man’s life’s work accrue to the state rather than his kids?
About the same as the kid who wants to start a new airline or a new car company. Lots of people who started with little are actually owners of major sports franchises. Hell, Jerry Jones started with next to nothing.
“So, how do we devise a system that simultaneously limits a permanent aristocratic class yet leaves intact even very successful family businesses?”
Even with high death tax rates, they should still leave their heirs with a large, probably a majority stake in the business. If the kids are capable business people, as good as Dad or Mom, they should be able to turn that stake into a majority position again.
“But it’s not a game, it’s life. A major goal most of us have is to build a better life for our children. And why should a man’s life’s work accrue to the state rather than his kids?”
Dead people cannot own stuff. Their stuff now goes to their heirs. he better question is why, when we tax income, we exempt this one special class of income, which only benefits the wealthy. If you dont want the state to get any, take it out in cash and burn it. If your kids want it, then let them pay tax on it.
Steve
Advancement is a multi-generational project. The problem with the analysis is that by only looking at these people and their parents, you’re essentially looking at the last five moves of a chess game and concluding that one side one not because of any skill at chess, but because they at the point where you began looking they had a better board position. It ignores everything that led up to the board being in that position.
In my own case, you only have to go back four generations to find pretty much my whole family was farmers. Each generation since then has been another rung or two up the social ladder, til you get to me, an upper middle class engineer. There’s probably people who were my great-great-grandfather’s neighbors whose great-great-grandchildren are still working on that farm. I probably have many more oppurtunities than they did, and it may not be individually fair that I benefited from the work of my ancestors in a way they didn’t benefit from theirs. But does the fact those three generations had a profound effect mean that the game is rigged?
I’d argue they show the exact opposite.
Hold on and think about this, because it strikes at the very roots of American freedom.
Should 2 kids, born anywhere, have equal opportunity?
Remember, I’m not talking about pinko egalitarianism here, where everyone ends the same, I’m just talking old time American egalitarianism where people start (somewhat) the same.
This idea that wealth should role over is in direct conflict with the idea that everyone has an equal chance.
doh, “roll over”
(For that reason I’d rather see lighter income taxes for everyone, and higher death taxes (not afraid to use that phrase) for everyone as well.)
Sorry, one more thing. Once we move past survival, and basic financial stability, and move to status competition, isn’t it certainly a game?
I know a guy who’d made $50M in an IPO, but went of to do it again to prove it to his millionaire friends that it wasn’t just luck. He was at $2B when I knew him.
James Joyner says:
Wednesday, September 29, 2010 at 12:29
“And why should a man’s life’s work accrue to the state rather than his kids?”
The premise you’re answering Jim is fanciful and you’re answering it with an equally fanciful reply. Over in the real world rates don’t even cut in until your taxable estate is worth over 2 million and even then they are fairly modest on estates worth around 10 million. Notionally rates start to climb thereafter but there are a host of waivers for family farms and suchlike and as you well know anyone with an estate of several millions has a host of fairly simple tax avoidance options. Assuming you have substantial equity in these blogs and they are worth something are you seriously saying you haven’t done some tax planning? When it comes to the real big ones lawyers construct immensely complex protective systems. I challenge you to give me a list of businesses that have been destroyed or taken out of family hands because of tax liabilities. There isn’t the remotest chance of the Steinbrenners losing control of the yankees or of the Kochs, Lauders or Bass’ losing control of their business empires. And you know it!
Oh,
The car/airline analogies are aren’t perfect because they aren’t protected monopolies in the same way as US sports. I said “start a new team” because that’s a lot harder. Yes, rich guys can buy teams, in that meta-level sport amongst millionaires.
Airlines do start and stop, car companies are harder, in part because so many (so much overproduction) is subsidized around the world by governments.
People do that all the time. Whole new leagues start every few years.
But you’re talking about an existing system that has mechanisms for avoiding taxes, not a theoretical system that would strip the Hilton kids of their money. That’s what I’m responding to.
The sub-debate on the table here is whether the scions of the rich should be forced to start at zero.
When was that ever the ideal? The notion was that we'd be treated as equals by our government, not our economy. Our Founding Fathers were aristocrats, after all. Heck, we had our first dynasty with the John Adams/John Quincy Adams presidencies.
As always, Jefferson surprises me:
http://goliath.ecnext.com/coms2/gi_0199-1584527/America-s-lost-egalitarian-tradition.html
It seems Tom was close to pinko-egalitarian.
Ah, it continues:
How … current.
Although, I’d note, Adams did nothing to take away his son’s ability to start on 3rd base.
So we have established a long tradition for American concerns about “enormous inequality” and that “The balance of power in a society, accompanies the balance of property [then in] in land.”?
“But you’re talking about an existing system that has mechanisms for avoiding taxes, not a theoretical system that would strip the Hilton kids of their money. That’s what I’m responding to.”
Er that’s exactly what I said Jim. But it’s totally fanciful construct that has no relation whatsoever to the real world where the the family fortunes and businesses of everyone from the modestly wealthy (you and me) to the super rich are largely secured for their heirs. The entire point about the relative immobility of this list of billionaires is exactly that…fheir relative immobility. The inescapable reality in America today is that by far your best chance of becoming a multi millionaire or billionaire is to be born to one.
I’ll definitely attest to what Connor was talking about in terms of ignorance. I grew up lower-middle-class in a middle-class to upper-middle-class neighborhood, and there was a ton of stuff that, in hindsight, I should have done in high school to better prepare for college. I didn’t even know that I was supposed to take the PSAT and ACT until I started over-hearing from other students that they were taking it – my mom was totally ignorant – so I ended up taking it later than I probably should have.
From James:
“But you’re talking about an existing system that has mechanisms for avoiding taxes, not a theoretical system that would strip the Hilton kids of their money. That’s what I’m responding to.”
Since I’m the one who bought up the (possibly non-existent) Hilton brother, I just want to make clear(er) that in my personal opinion, taxing inheritance as normal income is fair, but treating is as some kind of sacred trust that must go to the children untouched is not fair.
However, what prompted my comment was that the reason we had inheritance taxes in the first place never seems to come up in the discussion. (I admit I buried the lede on that one.) It seems an unfortunate reality of human nature that once a problem is solved, later generations say “well we don’t have that problem anymore so we don’t need the solution either”. Once the solution mechanisms have been stripped away, the problem returns.
One thought on what Jefferson and Adams actually did:
One of the things they are talking about there was the need to divide land for the poor. We did that here with our various homesteading laws. Other countries did not. I read a book recently, which did some comparative economics between Argentina and America. Apparently the two started much more equal than I thought. But, they took the other path. They cut their wilderness into large estates for the wealthy. Apparently this stymied innovation and investment in ways that carry forward to today.
We might be making similar mistakes today with our non-real (intellectual) property laws and etc. We might be dividing too much for the rich, letting them keep it for generations, and blocking innovation and useful investment.
“I didn’t even know that I was supposed to take the PSAT and ACT until I started over-hearing from other students that they were taking it – ”
Interesting insight. Upper middle class (and probably most middle class) parents are completely fixated on these tests. In the case of upper middle class parents it goes further because they know that vocational or vocationally oriented masters are pretty well essential.
At first blush it would seem that the majority of the posters here favor the collective power of the state over indivdual liberties, but upon closer examination it appears to be deeper than that. It appears that the belief trends more to the Idea that the value of the individual is insignificant or even a laughable myth, and that humanity only exists as a collective notion.
This would explain the common rejection by the left of Christianity, since it’s God is the God of individual responsibility.
This is relevant here because, one side sees the prosperity of the indivdual as the prosperity of the nation,and the other sees prosperity of the individual as mere theft of that which belongs to the collective.
As the latter idea gains ground, it shifts the pardigm, and possibly heralds the death of human compassion.
Without the right to property , citizens are reduced to the status of subjects , charity becomes a state responsibility,and every subject becomes a ward of the state,without the need for personal effort or liberty.
john personna said:
“We might be making similar mistakes today with our non-real (intellectual) property laws and etc. We might be dividing too much for the rich, letting them keep it for generations, and blocking innovation and useful investment.”
Very interesting. As someone whose work involves patents extensively, I absolutely believe the US Patent office is acting opposite to what the founders intended. Rather than promote innovation for the common good, it stifles innovation and makes it difficult for a non-corporate entity to protect or enforce protection of intellectual property..
“This would explain the common rejection by the left of Christianity, since it’s God is the God of individual responsibility.”
Not sure that really works. The supposedly Christian right is pretty quick to outlaw drugs and prostitution, both of which would seem to fall almost completely in the realm of individual responsibility (ie its up to the individual to decide if they want to take drugs or not, or visit a prostitute or not).
The left and the right are united in saying the government has the right to limit the behavior of citizens; they just disagree on what things should be limited.