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Mar 2013: We should think better of the wealthy

Mike Nichols Mike Nichols

Here’s a little test: You’re out one night with some friends who have just filed their tax returns. One of them drinks too much brandy (this is Wisconsin, after all) and lets it slip that he and his wife had combined incomes of over $200,000 last year. Your first thought is:

A) Those knuckleheads made $200,000?

B) Those knuckleheads made $200,000, and I bought the last two rounds?

C) Wow. Good for them. I wish I knew how to make anywhere near that kind of cash.

D) Lucky stiffs. Most of it was probably from some big trust fund they inherited from their parents.

If you answered D, you’re not only susceptible to the “class warfare” arguments that many politicians on the left have reverted to, you’re likely wrong.

Nine out of 10 affluent Americans became wealthy without inheritances, according to surveys by the U.S. Trust Corp. Looked at another way, if you confiscated every dollar of inherited money from the top 5% of Americans based on wealth, it would barely put a dent in their fortunes. Their share of the wealth would be reduced by only 7%, according to a 2006 National Center for Policy Analysis study that found the link between inheritances and wealth to be “very tenuous.”

The same study concluded that there is still a surprising amount of mobility – both up and down the economic ladder – in America. Lots of rich kids end up a whole lot poorer over time. More than half of kids of parents in the bottom half of the wealth distribution, meanwhile, will be in the upper half when they retire.

Statistics, of course, are easily manipulated, as the reporting on Gov. Scott Walker’s recent tax proposal proves. In fact, I’m tempted to quote Mark Twain’s famous adage about “lies, damned lies and statistics,” except that attributing the quote of unknown origin to Twain would actually be a lie in and of itself.

Here, instead, are some facts straight from the Legislative Fiscal Bureau. Under Walker’s plan, joint filers with an adjusted gross income of between $25,000 and $30,000 would get the largest percentage reduction in net liability in 2014, almost 4%, while joint filers with incomes of over $300,000 would get a reduction of only six-tenths of a percent.

It is true that the 4% savings for low earners translates into an average of only $11, while the six-tenths of a percent savings for high earners would translate into an average of $303, but that just goes to show how much more high earners currently pay. At any rate (or I guess I should say “at all rates”), the average savings for married joint filers with a tax reduction would be $122 – not enough to make anyone wealthy.

If you answered C up above and, like me, are wondering how the wealthy do get that way, take heart (or umbrage, if you are a class warrior) in the fact that a fair number of Wisconsinites have discovered the path.

Approximately 6% of Wisconsinites filing joint tax returns have, like your friends drinking brandy, adjusted gross incomes of over $200,000. Approximately 31% of joint filers have adjusted gross incomes of over $100,000.

Yes, there are some lucky stiffs out there. But far and away the biggest determinant of wealth, according to the National Center for Policy Analysis study entitled “Wealth, Inheritance and the Estate Tax,” is whether you have acquired a skill through education or entrepreneurship or hard work.

Who you marry also makes a big difference, and the fact is that people with similar levels of acquired skills usually pair off – compounding their economic advantage. Finally, it doesn’t hurt to have some innate ability or parents who instilled a work ethic in you.

The truth is that your friends with high incomes and wealth probably aren’t knuckleheads – unless, of course, they really are letting you buy all the rounds.