'Class warfare' could stick wealthy with higher taxes

Class warfare is likely to be a major theme of the 2012 election, with bottom-line consequences for financial advisers' affluent clients.
JAN 18, 2012
Class warfare is likely to be a major theme of the 2012 election, with bottom-line consequences for financial advisers' affluent clients. In a speech two weeks ago in Osawatomie, Kan., President Barack Obama echoed the anti-big-business spirit of Theodore Roosevelt, who more than a century ago delivered an address in the same same small town prior to his last run for the presidency. Mr. Obama spoke less of specific issues and economic policies, and more of the inequality and lack of fairness in American society. “This isn't just a political debate,” he said. “This is the defining issue of our time. This is a make-or-break moment for the middle class and all those who are trying to get into the middle class.” “The president has drawn a line in the sand,” said Hank Smith, chief investment officer at the Haverford Trust Co. If the tenor of presidential politics takes on an “us versus them” tone next year, affluent Americans are likely to feel vilified, regardless of how they earn their income and have amassed their wealth. “The wealthy feel there's a target on their back,” said Andy Friedman, principal of the Washington Update website and an expert on tax issues. “How could they not, with what the president is doing and saying?” “He would like to turn the contest into class warfare,” said Michael Szenberg, an economics professor at Pace University. “It could be an important source of support for him.” Statistics can provide the ammunition. The wealthiest 1% of the population has an average annual income of $1.2 million, with $350,000 being the threshold to join the top tier. The 1% cutoff in terms of net worth is $9 million, said Ed Wolff, a professor of economics at New York University who specializes in wealth distribution. The top 1%, according to Mr. Wolff's research, accounted for 34.6% of the total net worth in the country in 2007. The next 19% held 50.5%, leaving the bottom 80% of the population with 15% of the wealth. That's down from 18.7% in 1983. In terms of the more liquid metric of financial wealth — net worth minus the value of one's home — the share held by the top 1% was 42.7%, while the bottom 80% had 7%. “Concentration is higher in Switzerland, but wealth is highly concentrated in the U.S,” Mr. Wolff said. “There's no doubt that income and wealth disparity has increased in the last couple of decades and that tax rates on the affluent have gone down,” Mr. Friedman said. “But did the one cause the other?” Technology, demographics and the increasing integration of international economies have contributed to the concentration and inequality of wealth, but against the backdrop of more than $15 trillion in public debt, the reasons for the current state of affairs may be moot. To be sure, the election will be about blaming the other side for the nation's fiscal mess, but eventually, elected officials will have to figure out a way to pay the IOUs. Inevitably, of course, the bulk of the tab will be borne by upper-middle-class and affluent Americans, because that is where the money is.

FAIR SHARE

But many of the affluent think they already pay more than their fair share of taxes. According to the Tax Policy Center, households with more than $1 million in annual income pay taxes at a rate of 29%, while households making between $50,000 and $75,000 pay an average rate of about 15%. The wealthiest 1% of households earned 15.6% of the nation's income and paid 35.5% of all income taxes. The top 10% earned 39.1% of the income and paid 74.1% of the taxes. For their part, financial advisers are planning on higher taxes. Barring a massive filibuster-proof landslide by the Republicans in November, the Bush tax cuts will expire at the end of next year, and all Americans will be paying higher taxes. What can the wealthy do to offset the coming rise in federal tax rates? One option is to minimize state tax liabilities. Residents of New York and New Jersey pay some of the highest state taxes in the country, and many are heading to Pennsylvania to lighten the load. “Monroe County in the northeast corner is the fastest-growing county in Pennsylvania because of people fleeing the high taxes in New York and New Jersey,” Mr. Smith said. But other advisers and their clients seem resigned to higher taxes. “Any plan that's going to work has to involve both reduced spending and increased taxes,” said Lewis J. Altfest, whose firm, Altfest Personal Wealth Management, advises wealthy clients. “Many of our clients are resigned to the idea that their taxes are going up.” Added a wirehouse financial adviser in the Midwest who asked not to be identified: “I'm probably part of the 1%, and some of my clients are, as well. I'm a registered Republican, but I'm OK with paying more taxes as long as the money goes towards fixing our problems. People want to know that we're not just kicking the can down the road anymore.” Mr. Wolff thinks that it is in the best interests of affluent Americans to take a hit on taxes if it improves the economy. “The rich will ultimately suffer if the inequality continues to increase,” he said. “There will be political unrest, and it will destroy the markets if the middle class can't consume goods and services.” Given the choices available to policymakers, Republicans may have to revisit their pledge not to raise taxes. “The Republicans' no-new-tax pledge is starting to look silly,” Mr. Friedman said. “Imagine the debates next year when Obama asks Romney whether he's willing to raise taxes on people making more than $250,000? Or $1 million? Or $10 million?” Mr. Friedman said. “It's clearly where he'll go with this,” Mr. Friedman said. Then again, Mr. Obama's gambit could backfire. Mr. Roosevelt, who tried to turn the country against big business, lost his last bid for the presidency. [email protected]

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