We Are the Super Rich
UPDATE: Lots of people showing up from the quite bad New York Times article about this, which Jonathan Chait has already dealt with, and leaving comments that don't add to the conversation. So note that (i) I will prune comments that I think add to misinformation, and (ii) please think about what Professor Xxxx Xxxxxxxxx is saying.
For my part, I marvel at nine things I am still struck by--and marvel at--nine things about University of Chicago Law Professor Xxxx Xxxxxxxxx:
Xxxxxxxxx's eagerness to engage in class war against those richer than he is: his anger at the "super rich [who] don’t pay taxes... hide in the Cayman Islands or use fancy investment vehicles to shelter their income..." who include his own more senior colleagues at the University of Chicago Law and Business Schools.
Xxxxxxxxx's eagerness to engage in culture war against Barack Obama: "I’m the president’s neighbor in Chicago, but we’ve never met. I wish we could, because I would introduce him to my family and our lifestyle, one he believes is capable of financing the vast expansion of government he is planning.... [L]ike many Americans, we are just getting by despite seeming to be rich. We aren’t.... [T]he president plans on raising my taxes. After all, we can afford it, and the world we are now living in has that familiar Marxian tone of those who need take and those who can afford it pay..."
Xxxxxxxxx's ignorance about American government policy. He talks about "the vast expansion of government [Barack Obama] is planning..." But if you look at the laws that Barack Obama has lobbied for and gotten Congress to pass, in the long run they don't expand but shrink the government relative to what it would otherwise be. Quantitatively, the biggest legislative initiative by Obama so far has been very large long-run cuts in Medicare spending. Henderson is either so ignorant that he does not know this, or so mendacious that he doesn't want his readers to know this. I bet on ignorance.
Xxxxxxxxx's lack of standing to complain about the fact that taxes are going up. He was a big supporter of George W. Bush, whose two major initiatives were to expand federal spending via his wars of choice and the unfunded Medicare Part D. As the late Milton Friedman liked to say, to spend is to tax: once you spend you must then tax, and you can tax smart or you can tax stupid, but tax you must. Once again, I don't know whether Henderson knows that to spend is to tax and is simply mendacious in trying to keep his readers from thinking about the consequences of the Bush policies he supported, or whether he is so ignorant that he doesn't know that to spend in the past. Here I bet on mendacity.
Xxxxxxxxx as an unreliable narrator. On the one hand, he says that his income exceeds the $250K/year threshold "but not by that much"; on the other hand, he says that his taxes will go up "significantly" and that his current annual tax bill is "nearly $100K". Those are grossly inconsistent. If his household income is near $250K/year, his taxes are not now $100K/year and they will not go up significantly. If his taxes are now $100K a year and will go up significantly if the about-to-expire lower top marginal rate is not reenacted, then his income is way more than $250K/year.
Xxxxxxxxx's insistence that the things he spends money on--a 4700 sq ft house in Hyde Park with a lawn big enough to need a gardener, private schools, house cleaners, etc.--aren't things that only rich people buy.
Xxxxxxxxx's insistence that he is "just getting by" with a household income that I compute (if his claims about the taxes he pays are accurate) at about nine times American median household income.
Xxxxxxxxx's insistence that he "can't afford" to pay higher taxes--even though he has no problem with raising taxes on those richer than him, and had no problem supporting a president (Bush) whose policies created the necessity for general tax increases because, after all, to spend is to tax.
I genuinely do not understand why Xxxxxxxxx has his job.
Let me explain that last at greater length.
J.W. Verret wrote:
Todd Henderson will be missed: I am saddened that our co-blogger Xxxx Xxxxxxxxx is putting up his blogging hat. He leaves us with an academic reputation that is unsurpassed, unfortunately I can’t say that the reputation of everyone involved has held up very well in light of the very personal nature of attacks.... I do think, however, that this is a good opportunity to focus the world on the wide range of scholarly work from Professor Henderson.... Here are a few papers of his on ssrn worth reading (this certainly won’t be the last time we link to his work at TOTM):
In "Insider Trading and CEO Pay," Prof. Xxxxxxxxx examines the effectiveness of insider trading as a compensation device using a study of 10b5-1 trading plans. His findings are in line with Henry Manne’s original thesis from nearly 40 years ago that insider trading didn’t diminish firm market value on net and may serve a useful purpose as an executive compensation device to motivate managers to maximize the value of the firm...
To which my first reaction is simply: Huh?!
And my second reaction is: No! No! No! Ten-thousand times no! That is simply wrong.
Giving firm managers the freedom to use information they privately have as a result of their jobs to decide when to buy and sell shares of stock does not motivate managers to manage the firm in the interest of shareholders.
If managers free to engage in insider trading know that the next piece of news to be released will cause the stock price to rise, they will buy. If they know that the next piece of news to be released will cause the stock price to fall, they will sell and then buy back later. They don't care whether the news is good or bad--either way they will profit, and either way they will profit equally.
What the ability to engage in insider trading does is that it gives managers an incentive to make the price of the stock vary--they don't care which way. Thus it cannot "serve a useful purpose as an executive compensation device" and cannot "motivate managers to maximize the value of the firm" to shareholders.
Insider trading makes executives' portfolios' long not the company but long the volatility of the company. And shareholders don't want executives making decisions that make the value of companies they own more volatile: stock market investments are risky enough as it is without giving executives reasons to boost the volatility pot.
This claim that freedom to engage in insider trading aligns executives' interests with those of shareholders is so basically wrong, so obviously erroneous, so simply stupid that--well, words fail me.
So here is the original post:
Enough people have linked to this that it is a significant loss for the conversation to delete it, so I am reposting it here from Google's webcache:
We are the Super Rich « Truth on the Market: Posted on September 15, 2010
The rhetoric in Washington about taxes is about millionaires and the super rich, but the relevant dividing line between millionaires and the middle class is pegged at family income of $250,000. (I’m not a math professor, but last time I checked $250,000 is less than $1 million.) That makes me super rich and subject to a big tax hike if the president has his way.
I’m the president’s neighbor in Chicago, but we’ve never met. I wish we could, because I would introduce him to my family and our lifestyle, one he believes is capable of financing the vast expansion of government he is planning. A quick look at our family budget, which I will happily share with the White House, will show him that like many Americans, we are just getting by despite seeming to be rich. We aren’t.
I, like the president before me, am a law professor at the University of Chicago Law School, and my wife, like the first lady before her, works at the University of Chicago Hospitals, where she is a doctor who treats children with cancer. Our combined income exceeds the $250,000 threshold for the super rich (but not by that much), and the president plans on raising my taxes. After all, we can afford it, and the world we are now living in has that familiar Marxian tone of those who need take and those who can afford it pay. The problem is, we can’t afford it. Here is why.
The biggest expense for us is financing government. Last year, my wife and I paid nearly $100,000 in federal and state taxes, not even including sales and other taxes. This amount is so high because we can’t afford fancy accountants and lawyers to help us evade taxes and we are penalized by the tax code because we choose to be married and we both work outside the home. (If my wife and I divorced or were never married, the government would write us a check for tens of thousands of dollars. Talk about perverse incentives.)
Our next biggest expense, like most people, is our mortgage. Homes near our work in Chicago aren’t cheap and we do not have friends who were willing to help us finance the deal. We chose to invest in the University community and renovate and old property, but we did so at an inopportune time.
We pay about $15,000 in property taxes, about half of which goes to fund public education in Chicago. Since we care the education of our three children, this means we also have to pay to send them to private school. My wife has school loans of nearly $250,000 and I do too, although becoming a lawyer is significantly cheaper. We try to invest in our retirement by putting some money in the stock market, something that these days sounds like a patriotic act. Our account isn’t worth much, and is worth a lot less than it used to be.
Like most working Americans, insurance, doctors’ bills, utilities, two cars, daycare, groceries, gasoline, cell phones, and cable TV (no movie channels) round out our monthly expenses. We also have someone who cuts our grass, cleans our house, and watches our new baby so we can both work outside the home. At the end of all this, we have less than a few hundred dollars per month of discretionary income. We occasionally eat out but with a baby sitter, these nights take a toll on our budget. Life in America is wonderful, but expensive.
If our taxes rise significantly, as they seem likely to, we can cut back on some things. The (legal) immigrant from Mexico who owns the lawn service we employ will suffer, as will the (legal) immigrant from Poland who cleans our house a few times a month. We can cancel our cell phones and some cable channels, as well as take our daughter from her art class at the community art center, but these are only a few hundred dollars per month in total. But more importantly, what is the theory under which collecting this money in taxes and deciding in Washington how to spend it is superior to our decisions? Ask the entrepreneurs we employ and the new arrivals they employ in turn whether they prefer to work for us or get a government handout.
If these cuts don’t work, we will sell our house – into an already spiraling market of declining asset values – and our cars, assuming someone will buy them. The irony here, of course, is that the government is working to save both of these industries despite the impact that increasing taxes will have.
The problem with the president’s plan is that the super rich don’t pay taxes – they hide in the Cayman Islands or use fancy investment vehicles to shelter their income. We aren’t rich enough to afford this – I use Turbo Tax. But we are rich enough to be hurt by the president’s plan. The next time the president comes home to Chicago, he has a standing invitation to come to my house (two blocks from his) and judge for himself whether the Xxxxxxxxxs are as rich as he thinks.