The reign of the rich trickles down on us all

And that's why tax breaks for the wealthy are a hedge for us all.
Crosscut archive image.
And that's why tax breaks for the wealthy are a hedge for us all.

I keep trying to explain economics to my wife. Yesterday she asked why partners at hedge funds and private equity firms shouldn't be taxed like the rest of us. Steve: Lower tax rates for private-equity and hedge-fund partners benefit all Americans. Judith: Says who? S: Says Henry Kravis, the billionaire founder of a private equity firm. J: Just how do tax breaks for private equity partners benefit all of us? S: Kravis says the tax breaks create jobs. J: So when a private equity firm buys a company they hire more people. S: No. In fact, the first thing they do is lay off a bunch of people. J: So how do they create jobs? S: Steven Schwartzman, another billionaire private equity partner, spent $15 million on his 60th birthday party. J: So? S: Think of all the jobs this creates for event planners, caterers, and celebrity chefs. J: That makes up for all the people they fire? S: You have to add in all the jobs they create in industries such as interior design, art consulting, and yacht construction. J: I read that the top 25 people in the industry earned $10 billion last year. That is an average of $400 million each. Is it fair to tax them at 15 percent when people making 99.98 percent less pay 35 percent? S: It's not a matter of fairness. It is a matter of incentives. Without a low tax rate these partners have little incentive to work. Why earn $400 million if, like everyone else, you have to give a third of it to the government? J: Doesn't the average worker need the same incentive? S: Not at all. The average worker already has great incentives, regardless of tax rate – if she does not work, she starves. But these hedge fund people are rich enough to retire. We need to provide extra tax incentives to keep them working. J: The New York Times reported that in connection with selling their stock to the public, the partners of Blackstone, Steven Schwartzman's firm, will "get back about $200 million more in taxes than they paid initially." Is this fair? S: Consider all the work they create for tax lawyers and accountants who have to set up $3.7 billion of goodwill, transfer it to a blocker corporation, amortize the goodwill over 15 years, and then deduct it from partner's earnings. Calling for higher taxes on such people is class warfare! J: Why wasn't it class warfare when Bush reduced their taxes? S: Because we need to reward them for taking risk. J: Do private equity and hedge fund partners risk their own money? S: Are you joking? These are smart people. They risk other people's money. J: Why do they need additional tax incentives to risk other people's money? S: Because they are risking their reputations. If they don't take home $340 million after tax, they might not be asked to join art museum boards. Curators would gush over Mr. Fund's "magnificent eye." J: Do hedge fund art buyers have magnificent eyes? S: No. They have magnificent wallets. But it would be unseemly at the museum's annual gala (this year's theme: "Homage to the Monied") for a curator to slaver, "Many people have a superb eye. What distinguishes Mr. Fund is his superb wallet. He will pay big bucks for any trendy work." J: Why should we care if Mr. Fund receives praise for his superb eye? S: Because it helps the economy. Suppose Mr. Hedge Fund sits on the Board of the Museum of Post-Contemporary Art. The curator advises him to buy some drek for $10 million. Then when MOPCA gives the artist a one-man show, the value of the Mr. Fund's artwork triples. The economy grows by $20 million. And no one pays any tax. J: But how does that benefit anyone other than the curator and Mr. Fund? S: You don't understand the economic theory of "trickle down." Trickle down is why George Bush was confident that we would all be better off if the rich paid less tax. J: So now the rich pay less tax. What has happened? S: The top 1 percent of the country is much better off; the bottom 90 percent is only slightly worse off, so Bush was right. J: How so? S: Everything is in place for "trickle down" to work. The rich have more money to trickle and there a lot more people below to get trickled on. It takes time for trickle down to work its magic. J: How long does it take? S: In France, the Bourbons tried it from 1589 until 1789. Two centuries wasn't quite long enough.


Please support independent local news for all.

We rely on donations from readers like you to sustain Crosscut's in-depth reporting on issues critical to the PNW.


About the Authors & Contributors