Reading time: 12 – 20 minutes

If we are to believe the old adage that, ‘people vote their pocketbooks’, why are so many of the Super-Rich ardent supporters of the Democratic Party?

For the last four generations, since the reign of Franklin Roosevelt, himself born to wealth and luxury, the Democratic Party has sung the mantra, ‘Tax the Rich’!

Why do the liberal Super-Rich seem to act in a way that is so contrary to their selfish interests and economic well-being?

Franklin Roosevelt with his mother and father in 1899. A rich kid with progressive ideas.

There must be something that we’re missing.

Here I show how capital flow analysis of the Federal Reserve flow of funds accounts provides an answer to this apparent conundrum.

Non-economic motivation

About half of registered Democrats are ’social liberals’ and would vote with their party, even to their economic disadvantage. They may be compared to the Christmas Day Underwear Bomber, who although from a rich Nigerian family was willing to blow himself up for his cause.

Some views of 'social liberals' in 2005 from the Pew Research Center.

Social liberals are passionately in favor of abortion and universal health care. The reasons for their views are not so much based on economics, but rather on their religion, sexual preferences, the views of their parents, friends, work colleagues, and neighbors, race, and other sociological factors.

The Super-Rich include social liberals who generally would deny any economic motivation for their views.

Nevertheless, there are selfish economic reasons for the Super-Rich to favor the progressive income tax — whether or not acknowledged.

The Super-Rich and the rest of us

Let’s start by defining the Super-Rich as the upper 1% of the US population in terms of household assets.

No one knows for sure the breakdown of household assets by income classes. There are many studies on this topic — all, in some respect flawed. However, this research, when taken together and viewed through squinting eyes, gives a rough approximation that is useful for the purpose of answering the question, “Why are many of the Super-Rich Liberals?”  For a summary of some of these various studies, see the tutorial on “Rich and Poor” at the Center for Capital Flow Analysis.

By adjusting data on the assets of the household sector in the flow of funds report for Q3 2009, with the distribution of household assets provided in the “Rich and Poor” study (mainly data from the late 1990s), mentioned above,  we can arrive at a rough approximation of the asset distribution of the Super-Rich and the rest of the US population:

This table shows, first of all, what we all already know — that there is a tremendous disparity in the distribution of wealth in the United States.

The average American has about 2% of the wealth of the Super-Rich, who, in turn, have more than 100 times the average household wealth of the lower 50% of the population.

Obviously, in a democracy, where property is no longer a qualification for voting, this presents a clear and ever-present danger to the Super-Rich — given the pervasive human trait of envy.

When it comes to the Super-Rich, the average American has no chance of ever ‘keeping up with the Joneses’.

Income taxes: playing on envy

Karl Marx, himself a desperately poor man, advocated distributing the wealth, “from each according to his ability, to each according to his needs.”

The US top income tax rate, showing radical increases by FDR prolonging the Great Depression, and tax cuts under Ronald Reagan, bringing a generation of prosperity.

Marx and Engels in the Communist Manifesto demanded in their ten point program, “A heavy progressive or graduated income tax”.

They also called for the abolition of all property in land and the abolition of all rights of inheritance.

The 16th amendment to the US Constitution, ratified in 1913, allowed Congress to impose a Federal progressive income tax, without apportioning it among the states.

In the early 20th century, the cause of labor unions and communist doctrine were popular in the lower classes and in academia.

By the time of the Great Depression, many felt that capitalism had failed.  Radical governments had already taken over in Germany and Italy. Franklin Roosevelt, a progressive, appealed to the envy of the masses and raised the top income tax bracket on the rich to 87%.

Learning to love the tax

With a US population of 305 million in 2009, the average annual income of the Super-Rich person (man, woman, or child) that make up 1% of this population, is on the order of $667,000.  ($2 trillion divided by 3 million).  With the US average household size of 2.6 people, this comes down to an average Super-Rich household income of $1.7 million.

Super-Rich portrayed as crushing the poor. Typical anti-capitalist propaganda of the early 20th century. c. 1913

This raises questions as to why Barack Obama would consider people with household incomes of only $250,000 as truly rich — fair targets for higher income taxes.

Does he know that people like Democratic Senator Kerry will hardly be bothered by a marginal increase in their income tax, while millions of small business people will be forced to reduce the hiring of new employees?

Millions of Americans in the ‘not so rich’ class have household incomes in the range of $250,000.  A family with two college educated wage-earners may earn this, or more.  Even families with two wage earners in the public sector can earn this much.

However, the true measure of wealth is not annual income, but the value of family assets.

In other words, how long could you get by if you had no income at all.  For many of the Super-Rich, the answer is ‘years’ or ‘the rest of my life and the lives of my children and grandchildren’.

For many of the less favored general population, the answer  is ‘three months’, or even ‘one or two weeks’.

The Super-Rich rely less on income

The distinguishing feature of the Super-Rich is not their household income, but rather the total value of their wealth — the current value of their financial and tangible assets.

As the above table shows, income is not a true measure of wealth at all.

The Rich visiting the Poor, Paris, 1844. Today, in the US, the Poor are much better off; and so are the Rich.

In practice, the Super-Rich found that the income tax was not so bad after all, especially if the top bracket was kept under 40% and the politicians kept their hands off their assets.

Some of the Super-Rich, embarrassed by their wealth, feel that paying high taxes is ‘only fair’ and that they are ‘doing their part’.

Others feel that the income tax is a violation of their rights and argued for alternate, less discriminatory forms of taxation.

Some hardly pay attention, assuming that income taxes are just part of life.

And a few understand that graduated income taxes are not progressive at all, but actually keep the less fortunate in their place while defusing their envy.

Keep your hand off my assets!

What the Super-Rich fear more than anything is a tax on their assets.

Imagine if Barack Obama proposed tomorrow to impose a tax of 80% on all household financial assets in excess of $1 million. The chances are that the next day, Democratic Senators John Kerry, Herb Kohl, John J. Rockefeller, Dianne Feinstein,  and other prominent Democrats like Teresa Heinz Kerry, Jon Corzine, and Al Gore, would be crying out the next day for his impeachment.

Senator Kerry campaigning. Would he still be a liberal if the masses demanded 97% of his assets?

Super-Rich liberals often see the income tax as a sop to keep public envy under control and, like buying indulgences from the church, a way to protect ninety percent of their assets from the envious mob.

They know that millions of  poor or middle class American, who don’t think about it for long, won’t realize that income is not wealth (wealth is wealth!), and will by taken in by the ‘tax the fat cats’ rhetoric of the Democratic Party, giving them their votes (and, with the votes, the power to protect the Super-Rich where it really counts).

Liberal hypocrisy

The Super-Rich are immune from many of the evils imposed (or soon to be imposed) by the Democratic Party on average Americans — as long as there is no confiscatory taxation of their assets (as Marx and Engels would have wished).

Here are just a few examples of how the Super-Rich are not like most of the population and are exempt from the disadvantages of Big Government:

• No union-dominated public schools: The Super-Rich send their kids to exclusive private schools, where administrators can hire the best teachers and fire the incompetent.
• No government-controlled health care: The  Super-Rich don’t have to worry about health insurance or whether some Washington bureaucrat is going to decide whether they live or die. They can simply reach into their pockets and buy the best health care available on earth.
• Avoiding the inconvenience of public transportation: The Super-Rich do not need to put up with full-body scans, confiscation of their nail clippers, long lines, or emergency airport shut-downs when a unionized TSA screener fails to do his or her job. Instead, they can just go to the general aviation section of the airport, skip lines and screening, and fly directly to where they want to go.

If the envious hoi polloi can be thrown a bone of ‘tax the income of the rich’ to distract them from the real danger — a tax on their wealth — why not do it?

Keeping the ‘Great Unwashed’ in their places

Once you get past the subsistence level, ‘rich and poor’ is relative.  The wealthy have always been able to boss around the less wealthy — or at least enough of them to get what they want done.

Colonial dining in British India, 1895. See here, boy! Give another pull on that punkah

If Mr. Silva has $100 million and Mr. Jones has only $300,000, Mr. Silva may be able to get Mr. Jones to dance to his tune.   If Mr. Silva’s assets shrink to to $10,000,000, while Mr. Jones’ wealth falls to $30,000, Mr. Silva will still have the same leverage over Mr. Jones.

The nice thing about the income tax, from the point of view of the Super-Rich that want to improve their relative wealth, is that their ratio of income to wealth is far less than that of most of the American population.

A 30% income tax on a poor man that wins $100,000 in the lottery may consume 30% of his wealth, while a 50% income tax on the same winnings of a member of the Super-Rich class may take away only the smallest fraction of his net worth.

This regressive effect of the so-called ‘progressive income tax’ serves to keep the Super-Rich in their position of dominance in the social hierarchy.

This is another reason why wealthy democrats don’t ‘feel the pain’ of an incremental tax increase on their incomes.

When unemployment is advantageous

If you are fortunate enough to be in the Super-Rich class, an uptick in unemployment can work to your advantage.  After all, maid service and chauffeurs will be less expensive, there will be less crowds in the stores, and the waiters at the best restaurants will bow and scrape just a little deeper.

It is generally recognized that most new employment in the United States is created by the small business sector, most of whom are not Super-Rich — at least ‘rich’ as defined by Mr. Obama’s limit of $250,000 on household income.

If Obama wants to tax the prime creators of employment, what’s so bad about that?  Less jobs available means lower wages one has to pay for servants.  Riots in the streets are no problem — we’ll just fly over them in our private helicopters.

So this is another advantage of the ‘progressive income tax’ to the Super-Rich.

Inflation and revolution

Of course, Super-Rich liberals who support the Democratic Party are dancing with the devil.

Throughout history, the Super-Rich have discovered, time and again, that they themselves are in danger of being consumed by a populist demagogue that they helped to raise to power.

The mad multi-trillion dollar spending spree of the Obama administration now seems likely to bring on inflation, perhaps even hyper-inflation.

The assets of the Super-Rich are made up, to a large degree, of debt instruments, which in hyper-inflation become worthless. Since a major portion of the wealth of most of the American population consists of tangible assets — often residential real estate supported by mortgages — and since the major portion of the wealth of the Super-Rich consists of financial assets, hyperinflation could result in a great leveling of American society.

It should be noted that it will be extremely difficult for the Super-Rich to protect their wealth should hyper-inflation hit. To whom could they possibly sell $20.9 trillion dollars in financial assets, when everyone knows that inflation is imminent?

On other hand, Obama’s policy of increasing taxes on small businesses (although he denies that this is what he is doing), while increasing the fiscal deficit to hire employees in the public sector — seems likely to lead to extreme discontent, even revolt, among those who look for employment in the private sector.

So, it would seem that the Super-Rich who support ‘progressive’ ideas of the Democratic Party, whether out of sincere conviction or cynical self-interest, are really not ‘voting with their pocketbooks’ after all.

What do you think?