During the first 13 years of my career, I was engaged in private law practice with one of the largest law firms in Atlanta. One of my former clients loved the term “OPM,” which was short for Other People’s Money. My client loved to start a new business, invest as little as possible to get it going, and then seek outside investors to provide the capital needed for the success of the business. He would, of course, retain a large stake in the business and would do very well if it were successful, all without having very much at risk. The strategy was to make money by using OPM. It’s not a unique strategy, and it has worked for many people.
Later in my career, I served as an executive officer and general counsel of a company controlled by Kohlberg Kravis Roberts & Co. (“KKR”). This is the same KKR that inspired the book Barbarians At the Gate. KKR knows something about OPM, but it also is a strong believer in “skin in the game.” KKR wants the members of its management teams to have skin in the game. When I was being recruited, I was told I would have the “opportunity”—which I understood to mean the obligation—to buy shares in the company for which I would be working on the same terms as KKR. To give me even more “skin in the game,” if I purchased $X worth of stock, I would get stock options covering one share for each share purchased, if I purchased $XX worth of stock, I would get two stock options for each share purchased, and if I purchased $XXX worth of stock, I would get three stock options for each share purchased. KKR wanted me to have as much skin in the game as I could stomach. If the company had been successful, I would have done very well. Unfortunately, the company went into bankruptcy, and KKR lost its entire investment, as did all of the members of the management team, including me, who had skin in the game. In this case, “skin in the game” meant sharing the pain. Despite my personal loss, I think KKR had the right approach.
The problem with our country today is that too many people are relying on OPM for their livelihood and not enough people have skin in the game. This problem is rapidly getting worse. In fact, President Barak Obama campaigned on the promise of increasing the number of people relying on OPM and decreasing the number of people who have skin in the game. It’s easy for a politician to get elected when he tells voters that, if he is elected, the majority of people will benefit from OPM and won’t have to worry about having skin in the game.
President Obama and the Democrats in Congress would like for you to believe the wealthiest Americans are not paying their fair share of taxes and should pay more. They would like for you to believe the tax cuts implemented under President Bush benefitted only the wealthiest Americans. In fact, the wealthiest Americans did benefit from the tax cuts because they were already paying most of the taxes, but the wealthiest Americans also ended up paying a higher share of the overall tax burden because taxes were also reduced or eliminated for lower income citizens. Let’s take a look at the statistics. In 2006, the last year for which statistics are available, the top 1% of taxpayers paid 39.89% of all personal federal income taxes, which represented an increase from 33.71% in 2002. The bottom 50% of all taxpayers paid only 2.99% of all personal federal income taxes in 2006, which represented a decrease from 3.5% in 2002. If you are interested in more statistics, click on the link below, where you will find that the top 5% paid 60.14% and the top 10% paid 70.79% of all personal federal income taxes in 2006:
http://www.ntu.org/main/page.php?PageID=6
President Obama is now proposing massive new spending programs that will substantially increase the size and power of the federal government as well as the size of the federal deficit. At the same time, he is promising that 98% of Americans will receive tax cuts and only the wealthiest 2% will see tax increases. In other words, 98% of Americans will have less skin in the game because they will be benefitting from OPM.
If you believe President Obama can pull off this miracle, I have a bridge in Brooklyn I would like to sell you. As The Wall Street Journal noted in an editorial on February 26, 2009, “Even the most basic inspection of the IRS income tax statistics shows that raising taxes on the salaries, dividends and capital gains of those making more than $250,000 can’t possibly raise enough revenue to fund Mr. Obama’s new spending ambitions.” David Brooks, a columnist for The New York Times, put it this way: “Obama enthusiastically perpetuates the myth that the American people can have everything they want without a dose of shared sacrifice. They can have health care, education reform, even a cure for cancer, and 98 percent of them need pay nothing. The burdens of progress will be borne by the rich while everyone else can enjoy their tax cuts and go shopping.”
As for the rich, they clearly should pay their fair share, but how much is fair? We already have a highly progressive tax system. The top marginal rate for federal income taxes is currently 35%. Obama proposes to raise the top rate to 39.6%, plus he proposes to limit certain currently available tax deductions, such as mortgage interest and charitable contributions, with the effect that the top federal income tax rate would be approximately 42%. In addition, he wants to raise the capital gains and dividend tax rates. All of this, of course, would be on top of state income taxes with rates as high as 8% to 10% in some states, and on top of all of the many other taxes imposed on all individuals, including Social Security taxes, Medicare taxes, sales taxes, real estate taxes, gasoline taxes, personal property taxes, school taxes, and vehicle registration taxes. Don’t forget all of the taxes imposed on businesses, which get passed along to consumers as part of the cost of the goods and services provided by the businesses. These taxes include the corporate income tax, accounts receivable taxes, building permit taxes, unemployment taxes, worker’s compensation taxes, inventory taxes, sales taxes, franchise taxes, and many more.
The bottom line is that all of us, especially the wealthiest Americans, already have a heavy tax burden on our shoulders. For the wealthiest American, the federal, state and local governments combined will soon take more than half of every dollar they earn. These folks, in effect, will be government employees. If they choose to continue working, they will be working for the government more than they will be working for themselves. If they are able to save a little bit from the amount the government allows them to keep from their own earnings, then the government will reward them when they die by confiscating approximately half of their savings above the ever-changing exemption amount.
In addition to increasing taxes on the wealthiest Americans, Obama also is proposing to increase government payments to people who do not pay any federal income taxes. These payments are called refundable tax credits, but they are nothing more than giving OPM to people who do not pay income taxes. During his campaign for President, Obama said he wanted to “spread the wealth around.” Give him credit for following through on his promise.
Dr. Walter E. Williams, an economics professor, columnist, and author, recently wrote, "Two-thirds of the federal budget consists of taking property from one American and giving it to another. Were a private person to do the same thing, we'd call it theft. When government does it, we euphemistically call it income redistribution, but that's exactly what thieves do -- redistribute income. Income redistribution not only betrays the founders' vision, it's a sin in the eyes of God. ... No human should be coerced by the state to bear the medical expense, or any other expense, for his fellow man. In other words, the forcible use of one person to serve the purposes of another is morally offensive. ... One of the wonderful things about free markets is that the path to greater wealth comes not from looting, plundering and enslaving one's fellow man, as it has throughout most of human history, but by serving and pleasing him."
The path we are following in this country cannot be sustained. Sooner or later, the wealthy will be poor, and the poor will still be poor. Sooner or later, some of the wealthiest Americans will decide it is no longer worth their time, effort and risk to keep working hard and making investments. Sooner or later, the theme of Ayn Rand’s novel, Atlas Shrugged, will be play out in real life. In the novel, which I read many years ago, the most productive members of society went on strike and quit working in protest against the government’s confiscation of their earnings. The government removed their incentives to work and invest, so they simply quit working and investing.
There is a quote circulating on the internet that is attributed to former British Prime Minister Margaret Thatcher. I don’t know whether Margaret Thatcher actually said these words, but the words contain a lot of wisdom: “The problem with socialism is that you eventually run out of other people's money......”
In closing, let me be very clear about my own beliefs. I believe wealthy individuals—and others to the extent they can—should freely and voluntarily help those in need. In fact, I believe all of us have a moral obligation to help those who need help, especially those who are willing to help themselves. But I do not think it is the role of government to take money from someone who has earned it and give it to someone who has not. The government should not allow its citizens to become dependent upon OPM. We are treading on dangerous waters when politicians promise to use the force of government to “spread the wealth around.” The economic prosperity that our country has enjoyed will no longer exist if the majority of voters have no skin in the game and are relying on OPM for their livelihood.
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