How the Rich Got Rich • Hacker News Board

Re: How the Rich Got Rich

#11

Post by rayiner » Sat, Jul 07, 2012, 2:39 PM UTC

The huge amount that comes from capital gains got me thinking... why is the return on capital, versus say the return on labor, so high? Our society is awash with capital. We apparently have more of it than we know what to do with (see, e.g., the real estate bubble, the tech bubble). If the capital markets were efficient, shouldn't supply and demand equilibrate things to drive down the price of capital?

I think the structure of the capital markets, VC's and funds and the like, are still holding back efficiency by limiting the market of sellers. Things like Kickstarter that "democratize" the capital markets may also play a huge role in making them more efficient.

Re: How the Rich Got Rich

#12

Post by leot » Sat, Jul 07, 2012, 2:45 PM UTC

DanielBMarkham wrote: post #4

FrancescoRizzi wrote: post #3

when we see these reports/analysis it seems the answer is always the same: Capital Gain. However, I think this whole line of inquiry is mis-titled: these reports always tell us how the rich people are making now their income. Which, I feel, is not a good hint as to how you can become rich. For the greater public, the question of "how the rich people went from 0 to $1B" might more interesting than "how the rich people…

I had the same exact reaction, but looking at the article again, it clearly says A total of over 3,800 taxpayers have made the top 400 since 1992, but only 27% appear more than once, and only 2% appear 10 or more times. That means these are not people who are necessarily rich and are raking in the money. These are most likely people who have a company, have stock options, and are cashing out. Most of them never come…

There are ~400 Americans with > $1 billion in wealth, and 200 with >$2 billion. $77 million in return on $1 billion is 7.7%. On $2 billion it's a mere 3.85%.

Combined with the fact that only 27% appear more than once in the IRS's list, and the fact that people tend to stay billionaires for a long time, this suggests that once people get to this level of wealth they turn down the aggressiveness of their investing and become risk averse.

For if every billionaire earned a healthy return on their capital, the top 400 earners would stay roughly the same from year to year, and correspond closely to America's top wealthiest.

Furthermore, America would be generating a lot more wealth than it currently does.

Re: How the Rich Got Rich

#13

Post by DanielBMarkham » Sat, Jul 07, 2012, 2:49 PM UTC

leot wrote: post #12

DanielBMarkham wrote: post #4

Earlier quoted context omitted.

I had the same exact reaction, but looking at the article again, it clearly says A total of over 3,800 taxpayers have made the top 400 since 1992, but only 27% appear more than once, and only 2% appear 10 or more times. That means these are not people who are necessarily rich and are raking in the money. These are most likely people who have a company, have stock options, and are cashing out. Most of them never come…

There are ~400 Americans with > $1 billion in wealth, and 200 with >$2 billion. $77 million in return on $1 billion is 7.7%. On $2 billion it's a mere 3.85%. Combined with the fact that only 27% appear more than once in the IRS's list, and the fact that people tend to stay billionaires for a long time, this suggests that once people get to this level of wealth they turn down the aggressiveness of their investing and…

You're mixing wealth and income.

Re: How the Rich Got Rich

#14

Post by flibble » Sat, Jul 07, 2012, 2:52 PM UTC

No no no. If capital gains tax is less than income tax, then of course the IRS stats show most income comes via capital gains.

Re: How the Rich Got Rich

#15

Post by wallflower » Sat, Jul 07, 2012, 2:55 PM UTC

I remember reading some article about how a private banker had a ultra-high net worth family who wanted to name their latest blind trust, 1066 - as in 1066 - the year in which their family acquired most of their wealth.

Re: How the Rich Got Rich

#16

Post by pmjordan » Sat, Jul 07, 2012, 2:58 PM UTC

rayiner wrote: post #11

The huge amount that comes from capital gains got me thinking... why is the return on capital, versus say the return on labor, so high? Our society is awash with capital. We apparently have more of it than we know what to do with (see, e.g., the real estate bubble, the tech bubble). If the capital markets were efficient, shouldn't supply and demand equilibrate things to drive down the price of capital? I think the st…

why is the return on capital, versus say the return on labor, so high?

Because labour, by and large, isn't particularly mobile, whereas capital is highly mobile, despite governments' best efforts. It's simply cheaper to enforce labour taxation than capital gains taxation.

A second reason is stability: in a recession, employment drops by a few percent, whereas consumption (sales taxes) typically drops much more sharply, and capital gains even more so.

Re: How the Rich Got Rich

#17

Post by cynicalkane » Sat, Jul 07, 2012, 3:01 PM UTC

rayiner wrote: post #11

The huge amount that comes from capital gains got me thinking... why is the return on capital, versus say the return on labor, so high? Our society is awash with capital. We apparently have more of it than we know what to do with (see, e.g., the real estate bubble, the tech bubble). If the capital markets were efficient, shouldn't supply and demand equilibrate things to drive down the price of capital? I think the st…

Two things:

1) Buying capital is much, much riskier than earning wages. If we suppose people who are good at being capitalists are also approximately as good at earning money, the economic equilibrium will tend toward capital being then much more profitable. Us being "awash" in capital is a red herring; in your garden variety market equilibrium model it's the incentives that matter. The returns are exponential, which just makes things more unequal when your actors are risk-averse.

2) The current tax treatment of capital gains rewards what I call "super-capitalists", people who get one tax-sheltered blob of capital and grow it and grow it. It's a compromise between the need to tax income and the need to not tax capital, but the downside is you get all these Mitt Romneys that only pay 15% taxes.

#2 is why there's bipartisan support among economists for progressive consumption taxes, not income taxes, but you don't hear much about it since it's currently in the "pipe dream" category of economic policy.

Re: How the Rich Got Rich

#18

Post by SatvikBeri » Sat, Jul 07, 2012, 3:02 PM UTC

fromdoon wrote: post #10

antidaily wrote: post #5

Their parents mostly.

Hmm .. it would be really interesting to check out, how many of today's billionaires inherited most or part of their wealth and how many made it big starting from modest backgrounds. Any pointers folks?

For millionaires (defined as people with >$1MM of capital goods that can be easily reinvested), Capgemini claims that "only 16% of high net-worth individuals inherited their stash"[1]. I'm not sure what the precise definitions are since it's not defined in the article.

The Millionaire Next Door claims that 80% of millionaires in the USA are the first generation in their family to be rich.[2]

I also did my own research looking at (non-Forbes) biographies of the top 10 richest people in the world according to Forbes in 2009. 3 out of 10 came from millionaire or richer families (Eike Batista, Bernard Arnault, Stefan Persson).

If you trust Forbes, you can simply go through their website[3], it classifies each billionaire's wealth as self-made, inherited, or inherited + grown.

[1]: http://www.economist.com/node/17929057

[2]: http://www.investopedia.com/financial-edge/0810/7-Millionair...

[3]: http://www.forbes.com/lists/2010/10/billionaires-2010_Carlos...

Re: How the Rich Got Rich

#19

Post by bluekeybox » Sat, Jul 07, 2012, 3:07 PM UTC

rayiner wrote: post #11

The huge amount that comes from capital gains got me thinking... why is the return on capital, versus say the return on labor, so high? Our society is awash with capital. We apparently have more of it than we know what to do with (see, e.g., the real estate bubble, the tech bubble). If the capital markets were efficient, shouldn't supply and demand equilibrate things to drive down the price of capital? I think the st…

It could have something to do with what we mean by "value". Apparently Marx derived his thinking from an assumption that value of something is more or less proportional to the amount of labor put into producing it [1]. What he missed is that if you're putting labor into making something nobody wants (the classic example being toothless combs for bald men), you are not only failing to producing any value, you're arguably reducing the overall wealth present in the market. The labor theory is no longer a part of mainstream economics, replaced by marginal theory [2], but I suppose many people still imagine value of things as equal to the labor put into them.

[1] http://en.wikipedia.org/wiki/Labor_theory_of_value

[2] http://en.wikipedia.org/wiki/Marginalism

Re: How the Rich Got Rich

#20

Post by lifeisstillgood » Sat, Jul 07, 2012, 3:10 PM UTC

cynicalkane wrote: post #17

rayiner wrote: post #11

The huge amount that comes from capital gains got me thinking... why is the return on capital, versus say the return on labor, so high? Our society is awash with capital. We apparently have more of it than we know what to do with (see, e.g., the real estate bubble, the tech bubble). If the capital markets were efficient, shouldn't supply and demand equilibrate things to drive down the price of capital? I think the st…

Two things: 1) Buying capital is much, much riskier than earning wages. If we suppose people who are good at being capitalists are also approximately as good at earning money, the economic equilibrium will tend toward capital being then much more profitable. Us being "awash" in capital is a red herring; in your garden variety market equilibrium model it's the incentives that matter. The returns are exponential, which…

Sorry - progressive consumption tax - the more you spend the greater the % of sales tax? So buying a toy boat hits me for 8% but a 200ft yacht gets 80% added on.

Surely, that will really really encourage tax jurisdiction shopping

I still prefer focusing taxation on companies - if you want to base yourself in cayman islands that great. You just can never ever do business in any of these western countries...