Have the Super Rich Seceded?

Mike Lofgren, a former Republican congressional staffer, has a fascinating essay in The American Conservative about what he calls the psychological and financial secession of the super rich from America (and other nations, for that matter). With offshore bank accounts and armies of tax attorneys, he argues, they have effectively removed themselves from the polity while still remaining largely in control of the levers of policy.

In both world wars, even a Harvard man or a New York socialite might know the weight of an army pack. Now the military is for suckers from the laboring classes whose subprime mortgages you just sliced into CDOs and sold to gullible investors in order to buy your second Bentley or rustle up the cash to get Rod Stewart to perform at your birthday party. The sentiment among the super-rich towards the rest of America is often one of contempt rather than noblesse.

Stephen Schwarzman, the hedge fund billionaire CEO of the Blackstone Group who hired Rod Stewart for his $5-million birthday party, believes it is the rabble who are socially irresponsible. Speaking about low-income citizens who pay no income tax, he says: “You have to have skin in the game. I’m not saying how much people should do. But we should all be part of the system.”

But millions of Americans who do not pay federal income taxes do pay federal payroll taxes. These taxes are regressive, and the dirty little secret is that over the last several decades they have made up a greater and greater share of federal revenues. In 1950, payroll and other federal retirement contributions constituted 10.9 percent of all federal revenues. By 2007, the last “normal” economic year before federal revenues began falling, they made up 33.9 percent. By contrast, corporate income taxes were 26.4 percent of federal revenues in 1950. By 2007 they had fallen to 14.4 percent. So who has skin in the game?

While there is plenty to criticize the incumbent president for, notably his broadening and deepening of President George W. Bush’s extra-constitutional surveillance state, under President Obama the overall federal tax burden has not been raised, it has been lowered. Approximately half the deficit impact of the stimulus bill was the result of tax-cut provisions. The temporary payroll-tax cut and other miscellaneous tax-cut provisions make up the rest of the cuts we have seen in the last three and a half years. Yet for the president’s heresy of advocating that billionaires who receive the bulk of their income from capital gains should pay taxes at the same rate as the rest of us, Schwarzman said this about Obama: “It’s a war. It’s like when Hitler invaded Poland in 1939.” For a hedge-fund billionaire to defend his extraordinary tax privileges vis-à-vis the rest of the citizenry in such a manner shows an extraordinary capacity to be out-of-touch. He lives in a world apart, psychologically as well as in the flesh.

Schwarzman benefits from the so-called “carried interest rule” loophole: financial sharks typically take their compensation in the form of capital gains rather than salaries, thus knocking down their income-tax rate from 35 percent to 15 percent. But that’s not the only way Mr. Skin-in-the-Game benefits: the 6.2 percent Social Security tax and the 1.45 percent Medicare tax apply only to wages and salaries, not capital gains distributions. Accordingly, Schwarzman is stiffing the system in two ways: not only is his income-tax rate less than half the top marginal rate, he is shorting the Social Security system that others of his billionaire colleagues like Pete Peterson say is unsustainable and needs to be cut.

This lack of skin in the game may explain why Romney has been so coy about releasing his income-tax returns. It would make sense for someone with $264 million in net worth to joke that he is “unemployed”—as if he were some jobless sheet metal worker in Youngstown—if he were really saying in code that his income stream is not a salary subject to payroll deduction. His effective rate for federal taxes, at 14 percent, is lower than that of many a wage slave…

The super-rich have seceded from America even as their grip on its control mechanisms has tightened.

There’s a lot more in this very long essay, all of it very much worth reading.

16 comments on this post.
  1. Reginald Selkirk:

    This lack of skin in the game may explain why Romney has been so coy about releasing his income-tax returns…

    Yet another speculation about why Romney won’t release his taxes. I presume Romney has done a calculation, and concluded that this constant trickle of blood is better than what would happen if he did release. So I have to think; yeah, it must be awfully, awfully bad.

  2. brucecoppola:

    Some months ago The Atlantic did a similar piece with much the same thesis. Unfortunately their Website does not play well with the IE6 browser we’re saddled with here in the office or I’d look it up and include a link.

  3. Raging Bee:

    That’s what libertarianism has always amounted to, folks: a new global feudal order where the rich have all the power — by a new doctrine of “divine right” — and none of the obligations, secure in their gated communities while the rest of us scrape and squabble for whatever trickles down.

  4. dogmeat:

    But I am unaware of a well-developed theory from that time about how the super-rich and the corporations they run would secede from the nation state.

    This part is interesting. I’ve read a few things over the years that have suggested this, don’t know if any of it qualifies as a well-developed theory. Overall though, this is the foundational concept of almost all Cyber-punk/Shadowrun style fiction and games. Ultra national corporations that buy and sell governments with their pocket change, privatizing everything they can and establishing themselves above the law.

    Back when I played those games in college, I generally thought that the premise was amusing, but unlikely. Today, I’m not so sure, or perhaps not so naive.

  5. reverendrodney:

    Our masters live elsewhere but control our resources and lives. That’s called Colonization.

    No wonder D’Souza (and his parrot, Gingrich) are against Obama: he is anti-colonial.

  6. stuartsmith:

    The rich have always been international. Nation-states are primarily a device to keep the poor divided, to create artificial conflicts of interest between groups that are natural allies, so that the united overclass formed by the ultra rich can run everything without facing significant opposition, and blame the consequences of their decisions on dirty foreigners.

  7. Raging Bee:

    The rich have always been international.

    No they haven’t. Once upon a time, money and other assets weren’t nearly as mobile as they are now; so even the richest people had to stick to one country or economic trade-zone, and had to do their part to defend that zone and keep it stable, otherwise the foundations of their wealth would be destroyed. Today, wealth exists in so many abstract and mutable forms that it can be moved and stored anywhere, anytime, at a monent’s notice, so no one in the 1% has any obligation to do anything decent for anyhone else anywhere.

  8. baal:

    Thanks for the link.

    Rather than focus on the “skin in the game”, it’d be nice if the elite (super rich) would consider their “share of the pie”. Worse, the US (and world) econ is not short on piles of wealth – investment capital. What’s needed is more small folks having resources to buy stuff (like food, transportation & health care…quality of life stuff).

  9. Michael Heath:

    Mike Lofgren writes:

    Approximately half the deficit impact of the stimulus bill was the result of tax-cut provisions.

    That’s an incredibly important yet ignored point. The tax cut was about 37% of the total stimulus package when measuring the stimulus by the sum of amount invested, expended, and the tax cuts offered, about $837 billion IIRC though that got adjusted after implementation by a minor amount.

    The stimulative impact of those tax cuts performed poorly relative to the more stimulative elements like saving state worker jobs and extending unemployment insurance. The most stimulative elements realized a growth/spend factor of about 1.8 while the tax cuts IIRC were about .97; which were about what economic experts like Mark Zandi predicted. So those tax cuts not only didn’t grow the economy as much as factors favored by non-conservatives, but also disproportionately contributed to the increase in the deficit by the stimulus.

    The stimulus purposefully increased the deficit though in hopes of reversing economic contraction in a way where the debt created by such was lower relative to the growth generated. IOW, you’d rather than have debt of say, $1 trillion where the income taxed is a function of a $15 trillion economy rather than not increase the debt but end up with an economy which is both $12 trillion and less employment and therefore a long-term drain on federal resources for food stamps, unemployment insurance, and other non-discretionary claims against the U.S. Treasury that kick-in during bad times.

    The lesson we should learn from this is that when we approach or are in the down part of the economic cycle where we risk both economic contraction and deflation; we not only need to size the stimulus to an optimal amount, but do so by maximizing the amount of each element in the stimulus by which ones have the highest stimulative impacts, at least until you either reach diseconomies of scale for a particular element. Instead the GOP has been very successful misinforming the public on what worked in the stimulus and what didn’t work, and even worse, that stimuluses even work. Which they do course, as validated once again with this stimulus.

  10. kermit.:

    raging bee: “The rich have always been international.”
    No they haven’t. Once upon a time, money and other assets weren’t nearly as mobile as they are now; so even the richest people had to stick to one country or economic trade-zone, and had to do their part to defend that zone and keep it stable, otherwise the foundations of their wealth would be destroyed. Today, wealth exists in so many abstract and mutable forms that it can be moved and stored anywhere, anytime, at a monent’s notice, so no one in the 1% has any obligation to do anything decent for anyhone else anywhere.

    True. And it is no longer possible to steal the gold of the rich by using a sword at the right time and a heavy bag to carry it in.

    But if the effects of global warming and other unsustainable practices combine with a continuing global collapse, what happens then? They need an intact infrastructure to maintain their power. When the electricity goes out and does not come back on, what do all those ones and zeros in their bank files mean? Their wealth will be reduced to the mansion they are living in, and it’s gold (cash, jewels, furniture, etc.). And it will be protected by working class security, who may have their own wealth problems – perhaps hungry kids at home. It won’t escape the private cops that they are the ones holding the rifles.

    The uberrich are all playing a game of prisoner’s dilemma, and they are losing. But the rest of us lose too, and go hungry first. It gives me little pleasure (but still a little) to know that they will inevitably follow us, if we lose it all.

  11. d cwilson:

    A while back there was a series of reports about millionaires who were renouncing their US citizenship and moving to Caribbean Islands where their tax burden was essentially zero. The Romney/Ryan plan effectively creates the same conditions here, for the benefit of the trust fund babies who still like living in their gated communities here in the USA.

    Sometimes I think we’re going to have to go the way of Snow Crash before people realize what’s going on.

  12. typecaster:

    Sometimes I think we’re going to have to go the way of Snow Crash before people realize what’s going on.

    It’s been a while since I read it, but I’m not sure the people in Snow Crash really realized what was going on – they just adapted as best they could to the circumstances as they happened. Still, you have to love a novel where the main character is named Hiro Protagonist.

    And it opens with the best pizza-delivery scene in American literature. Ok, it may be the only pizza-delivery scene in American literature, but still….

  13. Raging Bee:

    But if the effects of global warming and other unsustainable practices combine with a continuing global collapse, what happens then?

    The rich will upgrade their gated communities to domed fortified arcologies. Then they’ll wait for the 99% to die along with most of the natural biosphere; energy consumption will decrease with the population, the biosphere will recover, and the children of the 1% will fan out and retake the newly vacant land.

  14. lpetrich:

    kermit in #10:

    But if the effects of global warming and other unsustainable practices combine with a continuing global collapse, what happens then? They need an intact infrastructure to maintain their power. When the electricity goes out and does not come back on, what do all those ones and zeros in their bank files mean?

    They’ll have their own electricity generators, I’m sure.

  15. Craig Pennington:

    When the electricity goes out and does not come back on, what do all those ones and zeros in their bank files mean?

    They’ll have their own electricity generators, I’m sure.

    No need — they have a device to tap ambient static electricity in their secret Colorado town which will convert those ones and zeroes directly into gold coins.

  16. Arse Metaphysika – Reweaving The Human State In To A Game Ecology « Khannea Suntzu's Quixotic Nymious Torrent:

    [...] own will own enough to perpetuate their standard of living through automated means. They will have seceded from human(e) society at large, and they may very well be evolving to become posthuman themselves, [...]

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