By: Shahmeer Ahmad, Comm '20
Robert Smith took the stage at Morehouse College’s 135th graduation ceremony to make his commencement speech. Since graduating from both Cornell and Columbia, he completed stints at Kraft General Foods and Goldman Sachs until eventually founding Vista Equity Partners in 2000. Under Smith’s leadership, Vista Equity Partners never lost money on a controlling investment, a remarkable accomplishment in the risky venture capital and private equity industry. Vista’s reputation as a successful venture capital firm catapulted this Denver-born middle-class child to a Silicon Valley billionaire. With a net worth of approximately $5 billion in 2019, Smith had become the wealthiest African American, surpassing the likes of Oprah Winfrey and Michael Jordan. As Smith addressed Morehouse College’s Class of 2019, he made a promise that would change hundreds of lives. Smiles sparked, and applause erupted from the crowd when Smith promised to donate $34 million to repay the outstanding student loan debt carried by all members of the graduating class.
This philanthropic donation was blazoned to the rest of the world as an exemplification of what is possible when wealthy people give back. However, the unfurling of this charitable act led to a jarring and cynical realization: have we become a society that relies on the philanthropic actions of the wealthy in place of public policy? Has society come to rely on the benevolent actions of the wealthy in place of effective public policy? Should any one individual be allowed to accumulate such wealth that they can determine the financial position of the broader population?
Many argue that allowing individuals to accumulate an excessive amount of wealth has harmful societal impacts and that measures must be implemented to restore income parity.
A Centuries-Old Warning
In the 18th century, Adam Smith formally introduced the capitalist system to the world. Supporting this system was the hypothesis that all members in society would seek to maximize their benefit, and thus the invisible hand – some ineffable presence – would ensure economic success and stability. In the 19th century, a man by the name of Karl Marx largely agreed with Adam Smith that members of a capitalist society would maximize their own benefit. However, their philosophical bifurcation existed where Marx argued that this selfishness would be capitalism’s Achilles Heel.
Nonetheless, the conservative ideologies of Smith starkly contrasted Marx’s socialist perspective, and countries began to pick and choose sides based on these two systems. Eventually, international conflict in the form of war and proxy wars arose as each side attempted to spread their economic beliefs. The ideological battle raged on for the better part of the 20th century, but the right-wing ideology enjoyed a sustained advantage through its proven ability to provide a higher-output economy. Finally, the right-wing countries were formally deemed victorious after the collapse of Soviet Russia before the turn of the 21st century. Although much of the world is now embracing capitalism, Marx’s warnings regarding the flaws of capitalism ring more real today than ever before.
Marx stipulated that capitalism creates two types of people in the form of employers and labourers. Again, following the logic of each member in a capitalistic society pursuing their own interests, employers would attempt to maximize their profits, and labourers would try to maximize their wages. At this extreme, these two things are mutually exclusive. Labourers maximizing their wages would eat into their employer’s profits, and employers minimizing their labourer’s wages would increase profits but reduce the welfare of the employees. Thus, an eternal struggle is born between the two groups of people in society. However, Marx hypothesized that eventually, the employers would garner and consolidate enough power and resources that they would be able to exploit labourers. At this point, the labourers would be paid so little that they would no longer be able to afford the products that employers create, and thus the capitalistic system would implode from the absence of demand.
Today, wealth inequality has become a growing concern and has been described as the defining issue of our time. The most recent statistic outlines that 62 people have the same amount of wealth as the poorer half of the earth’s population. With the current state of public policy, it seems increasingly likely that Marx’s warning isn’t a warning at all, but rather a fait accompli. Billionaires (employers) are supplanting national governments and frequently exerting influence on the majority (labourers). At a deeper level, this implies that ceteris paribus, citizens will no longer look to governments for help but rather capricious billionaires with their agendas.
As it stands today, this is the billionaires' world… we’re just living in it.
How Did We Get Here?
As capitalism has matured and countless new inventions have come about, the number of billionaires has grown at a rapid pace. Not accounting for inflation, the number of billionaires in the world in the late 1980s was estimated to be 140, representing a 1500% increase to the roughly 2200 alive today. Their combined wealth is so inconceivable that if global billionaires decided to form their own country, they would be the ninth most affluent nation on earth. Despite this growth, billionaires such as Smith have been the subject of much criticism. Billionaires are the by-product of the growing concern of wealth inequality around the world.
To understand what separates billionaires from the rest, the two methods of income must be followed: labour and capital. Labour consists of actions that are carried out for another individual or entity with a promise of payment. Capital, on the other hand, is ownership of an asset or assets that can generate (or lose) money. As individuals climb the rungs of economic success, they make a higher proportion of their income from investments (capital) in place of labour.
Michael Jordan’s career earnings serve as a clear illustration of this principle. Through his prodigious basketball career, Jordan made $90 million. Then, how is Jordan a billionaire? The bulk of his worth was earned through royalties from Nike’s Jordan Brand and his ownership stake in an NBA team – this shift from labour to capital allowed him to transcend into the elusive billionaire club. Successful capital investment has the potential for outsized returns. If you look at any billionaire, be it Buffet, Bezos, or Gates, they have all made their claim to fame through successful investments.
Although the potential to earn more clearly lies in capital over labour, tax also plays a significant factor. For the first time in U.S. history, labour tax exceeded capital tax as a result of President Trump’s tax reform in 2017. Intuitively, this demonstrates that the broader population pays more tax than their billionaire counterparts as capital is predominately utilized by the uber-wealthy. Interestingly, Warren Buffet is famously known for publicly mentioning that he faces a lower tax rate than his secretary.
Tax & Public Policy: A Billionaire Breeding Ground
Problem I - Globalization & Tax Evasion
Through the establishment of global organizations, increased foreign relations, and the internet, the world is becoming more of a single nation and less of 195 individual ones. Although globalization had made the world more connected from a cultural standpoint, it had widened the gap between the haves and the have-nots as the rich became wealthier. In the 1980s, many corporations did not rest on their laurels in the face of globalization, and manufacturing was quickly transferred from western countries to developing nations. By taking advantage of lower wages and less developed regulations and labour policies, companies were able to lower their costs and maximize their profits. Consequentially, stock prices soared, which significantly boosted the net worth of the wealthy who had capital in the form of shares in these companies that embraced globalization.
In addition to utilizing cheap labour, globalization also allowed corporations to engage in non-value add activities such as financial tax maneuvering. Corporations set up subsidiaries in tax havens – countries or states with little to no taxes – to avoid paying tax in their home country. Perhaps the most notorious example of this is Ugland House, a building in the Cayman Islands. Dubbed as the "greatest tax scandal in the world" by former president Barack Obama, Ugland House is a five-story building that houses close to 20,000 companies, roughly half of which are based in the United States. Essentially, companies register an office in Ugland House, usually with no employees, and transfer money to their Cayman Island subsidiary to take advantage of the zero percent corporate tax rate. By engaging in this activity, corporations effectively avoid paying tax in their home countries and keep a higher percentage of profits, increasing their share prices and the net worth of the wealthy shareholders.
In recent times, evading tax has not been limited to corporations. The wealthy, usually the same people who already own shares of these tax-skirting companies, have also begun to circumvent taxes themselves. By parking their money in tax havens such as the Cayman Islands, Luxembourg, the Cook Islands, and more, the wealthy have effectively hidden their money from the public. In 2016, files of the world’s fourth-largest offshore law firm, Mossack Fonseca, were leaked to the public. Lauded as the world’s most significant leak to date, all 11.5 million documents and 2.6 terabytes of information released in the Panama Papers incident gave the world a glimpse into how the rich exploit tax havens to evade taxes and hide their wealth. The leak featured files that belonged to political figureheads, athletes, and celebrities, including the likes of Vladimir Putin, Lionel Messi, and Simon Cowell, respectively. With the recently increased popularization of offshore accounts through globalization, governments are now faced with the daunting task of locating large sums of money hidden by their citizens across the world in order to receive the appropriate level of tax.
Why This Matters: Governments & Taxes
Governments use taxes to fund projects that improve the country and well-being of its citizens. However, as alluded to earlier, governments are not receiving an adequate level of tax revenue due to: 1) flawed policies that tax labour higher than capital, and 2) schemes organized by the wealthy and their associates to evade taxes. With limited money, governments have their hands tied, now welcoming funding from the private sector and individuals, a worrying trend that shows no signs of slowing. For example, Michael Dell, founder of Dell Computers, donated roughly $25 million to build a new teaching hospital in Austin, Texas. Although a generous donation, many would argue that the government should fund the infrastructure of that nature – if they were given the taxes that they are rightfully owed. A hospital is a hospital regardless of who funds it. Still, the issue here lies within the principle: have we, as a society, become more reliant on unaccountable wealthy individuals than our own governments for the improvement of our own lives?
Although we are certainly beneficiaries of the philanthropic actions of the wealthy, there is a notable risk in moving our trust from governments to capricious individuals who are subject to their own agenda. The general population is applauding the wealthy for taking power from governments, the very institution established to protect citizens through skirting taxes and using their personal finances to fund projects in which they have a controlling interest.
Why This Matters: Inefficient Allocation of Capital
The second issue of placing our trust into billionaires is that we must often accept ineffective and undesirable outcomes. Jeff Bezos’ $10 billion donation to combat climate change serves as a clear example. A noble action indeed, the Amazon CEO pledged 8% of his net worth to combat climate change, yet with no specific plan outlined. However, the donation does little more than mask the two underlying problems associated with Amazon: pollution and exploitation. One of the largest companies in the world, Amazon has proven to be one of the most prolific polluters in the United States. For context, its 44.4 million metric ton carbon footprint eclipses its trillion-dollar company peer set in Apple, Alphabet, and Microsoft, other shipping companies such as FedEx, and even several European countries such as Norway. As such, it would be much more effective for Mr. Bezos to take a proactive position than a reactionary one by implementing measures that prevent Amazon from emitting such a large carbon footprint in the first place. As it stands, Mr. Bezos is receiving praise for donating a small portion of his net worth to only partially offset the emissions emitted from his own company rather than stopping it from the source. The second issue revolves around exploitation as Amazon is infamous for overworking and underpaying its employees. Minimum wage earners at Amazon have consistently lamented about their salaries resulting in the company becoming a target from notable figures such as Bernie Sanders. As a society, the donation forces us to make an unpleasant choice – should the capital be allocated towards climate change or towards making sure that our peers are paid more so that they are no longer exploited? Which option do we value more?
In comparison, with $10 billion, The U.S. government could set legislation in motion that would require Amazon to emit fewer fossil fuels and pay its workers a living wage. However, with missing tax revenues, governments are forced to cede to billionaires as funding actions such as these are expensive.
Problem II - Flawed Legislation
In the past, public scrutiny often prevented the uber-wealthy in supporting selfish causes, thus creating a delicate power balance between the wealthy and the rest. However, the power of the public has deteriorated in recent times as a result of legislation such as 501(c)(4). A policy in the United States, 501(c)(4) allows wealthy individuals to donate money towards any social cause of their choosing with the option of remaining anonymous. At its worst, this will enable billionaires to contribute to causes that support their agendas without having to deal with public scrutiny. Without the power to hold individuals accountable, the general population is subject to exploitation by the wealthy.
It is also important to note that donations through a 501(c)(4) are tax-deductible. In its purest form, 501(c)(4) allows billionaires to foot the money they owe the government and instead use it for causes that benefit them. Unsurprisingly, many view the 501(c)(4) legislation as a caricature of the wealthy’s ability to undermine the government and further their causes.
A Case Study: Dark Money Fuels A Nation's Opioid Crisis for Profits
Most people are aware of the Sackler family within the realm of fine arts. The multi-billion-dollar family was applauded for its consistent and generous contributions towards fine arts, resulting in various museums and centers adopting the Sackler name. Today, however, the Sackler family has been under intense media scrutiny for secretly fueling and sustaining the opioid crisis in the United States.
In the 1980s, the number of prescriptions for opioids began to increase as (flawed) studies revealed the many benefits of the substance in dealing with chronic pain. The opportunity to profit from this trend incentivized pharmaceutical companies to enter this space and invest in R&D. In the 1990s, the Sackler family-owned company, Purdue Pharma, introduced OxyContin, and prescriptions surged. Behind closed doors, the Sackler family invested heavily in lobbying politicians, sponsored continuing medical education courses, funded professional and patient organizations, and sent representatives to entice doctors to prescribe OxyContin. The purpose of these actions was to communicate the alleged efficacy and safety of prescription opioids. In the public domain, however, the Sackler family openly donated to charitable causes related to fine arts, which served as a smokescreen to distract the general public from Purdue Pharma’s unethical behaviour.
With the popularization of OxyContin, the United States found itself embroiled in an opioid crisis that devastated communities and killed an estimated 10 million Americans. In 2007, a strong sense of resentment reared its head towards Purdue Pharma when the company admitted that they were aware of the addictive properties of OxyContin. All in all, the opioid crisis cost the United States roughly $500 billion while generating sales of $35 billion for Purdue Pharma. Unsurprisingly, OxyContin was responsible for amassing the vast majority of the Sackler family’s $13 billion net worth.
Although an extreme case, the Sackler example showcases the potential destruction that can be thrust upon society when billionaires pursue their own agenda without being bound by the law. With billionaires becoming richer through tax loopholes and having platforms such as 501(c)(4) to exert influence, similar cases are likely to reoccur.
How Far Has Wealth Inequality Progressed?
Unfortunately, the level of wealth in the world is impossible to measure. As described earlier, the use of offshore and private accounts by the wealthy is undoubtedly one reason as to why this is the case. The second reason is linked to the difficulty in valuing individual assets. The simplicity of valuing public assets can be showcased through the ownership of shares. For example, one can login into any financial software, find the share price of a company, and multiply it by the number of shares owned by a single person or group to calculate the value of the ownership position. However, private assets, as it suggests in the name, do not explicitly have a value. Instead, the value assigned to them is usually what the owner states it is, leading to gross inaccuracies that allow the owner to depress or inflate their actual worth on a whim. The significance of the lack of transparency shrouding private assets is supported by the fact that the top 0.001% hold roughly half their wealth in individual assets.
For these reasons, lists such as Forbes 400, which outlines the wealthiest people in the world, cannot be relied upon as fact. With tax havens being exploited and the growing popularity of private assets, the world truly does not know how much wealth exists. It is certainly possible that the wealthy are even richer than they claim, meaning that the wealth inequality gap could be more extensive than previously thought.
A New Way Forward
Although the wealth inequality gap is widening by the day, concrete steps can be taken to reverse it through tax reform and adjustments in public policy. Tax changes must be made to revert to the past in which capital was taxed higher than labour. Implicitly, this change will collect a higher proportion of tax from the wealthy and less from the rest. Next, influential governments must pressure governments of tax havens to implement stricter monetary regulations on foreign bank accounts. Ideally, acts of legislation such as these will prevent wealthy individuals and corporations from discreetly sending their money abroad and force them to pay their share of taxes. Furthermore, changes in public policy must be made to restore the power balance between general citizens and their wealthy counterparts. For example, legislation such as 501(c)(4) should be altered to prohibit anonymous donations and to reduce or eliminate the current tax benefit.
The above are high-level solutions that are incredibly difficult to implement. Ridding the influence of the wealthy on lawmakers, asking various national governments to work together, and changing decades-old monetary policies are all lofty goals. Although Marx’s fait accompli is unfolding before our eyes, some paths can be taken to lessen wealth inequality. However, these changes all begin with our generation: will we accept the decision to undertake the steps required to restore power to ourselves and governments?