What Rich People Fear Most

Original Link: http://www.forbes.com/sites/kenrapoza/2012/04/17/what-rich-people-fear-most/

Once again, Washington has shown just who they work for. On matters of the economy, it is a handful of favorite industries like banking and insurance. On fiscal and monetary matters, it is the ubiquitous one percenters who rule the roost.

On Monday, the U.S. Senate blocked the proposed Buffett rule that would set a minimum 30% federal tax rate for millionaires in a 51 to 45 vote that fell like a stone, and far off the target of 60 votes needed to tax the wealthy. Washington fears the rich. But the rich, they fear something else.
Few Americans know what it is like to have one million dollars a year to their name. Whether it comes in the form of a salary, a lottery windfall, or investment income, a million dollars is luxury living at its best. After taxes, it’s $600,000 a year in high tax cities like Manhattan, or $50,000 a month. That’s more than the annual median income of the typical American household, which is around $46,000, according to the U.S. Census Bureau.

With $50,000 a month, you could rent out a $6,050 a month 1,100 square foot apartment at Trump Place on Riverside Blvd. You could send your teen to York Prep for a cool $3100 a month, or around $37,100 a year, and you’d still have $40,850 left over. You could send two kids there, and still have $37,750 to play with. You could invest $30,000 a month, or around $360,000 a year, and still have over $7,000 a month to pay your utility bills, insurance and eat. And that’s based on New York City, where the cost of living is designed for the wealthy. A million will go even further in Los Angeles and further yet in Buffet’s Omaha. The only thing you cannot do with a million a year, is live like you were bringing in a hundred million a year.

Yet, despite all of this luxury that a million dollars a year provides, Washington is afraid to tax the wealthy, even those who say they can afford to pay more. Of course, more taxes means the wealthy will have less money to invest in the market, and that is bad for the financial services industry. President Obama put the Buffett rule in his platform on April 7, making it known to all that he wanted a vote on this and soon. By April 14, the Standard & Poor’s 500 index experienced its biggest weekly decline all year.

That the policy makers fear their campaign donors might not be anything new, but Monday’s vote is a bit revealing. The Buffet rule is probably dead, unless Obama is re-elected and the Democrats increase their numbers in the Senate. A Gallup poll last week said a solid 60% of Americans approved of the tax on millionaires, but that doesn’t matter because that 60% is probably not made up of political donors and don’t have personal private wealth managers. What is more telling than the rejected Buffet rule, however, is a report this month by luxury real estate firm Knight Frank and Citi Private Bank that confirms that what the rich fear most…is you.

That’s right, political unrest, growing social inequality and a fear that governments will finally bend to the wishes of the 99ers is the top concern of the rich.

Wall Street is well aware of this fact.

“People are angry because they see that their living standards are coming down while the rich have done quite well. They are not going to stand for this quietly,” said Rudolph Riad Youness, Head of International Investments and a partner at Artio Global Investors on Madison Avenue.

See: Buffet Rule Could Combat Income Inequality, White House Says–The Washington Post
Obama Proposes $3 Trillion Deficit Plan–The National Journal

The U.S. currently ranks on the bottom for income inequality among rich nations. It is roughly on par with Mexico, Argentina and, worse…China, according to the U.N. Gini co-efficient index seen here.
The rich in America are rising in numbers and getting their way. Call it “democracy for the few”. By many accounts, they live in an Earthly greenzone, sometimes above the law, almost always above financial crises. Although thousands of wealthy individuals lost their jobs when Bear Stearns and Lehman Brothers folded in 2008, and hundreds saw their retirement accounts evaporate due to an abundance of good-times Ponzi schemes, on balance, in the eye of the global economic storm when plutonomy seemed under threat as asset values plummeted, the response to the financial crisis did more to revive the value of investments held by the wealthy than improve the position of the wider population, says Liam Bailey, head of residential research at Knight Frank in London.

Economic turbulence failed to curb the rise in the number of ultra-wealthy individuals in 2011, according to Knight and Citi’s The Wealth Report 2012. And like the inscription on the James Farley Post Office building in New York: “neither snow, nor rain, nor heat, nor gloom of night” will stop them from getting even richer. Their wealth is forecast to rise in the decades to come. The forecasted increase of U.S. millionaires between 2011 and 2016 calls for 23% more centa-millionaires alone, that’s people worth more than $100 million.

Tina Fordham, a global political analyst at Citi, said in the report that the dissatisfaction with income inequality already being manifested in the Occupy Wall Street demonstrations will gain momentum, and that there could be a long term recalibration between governments, businesses and society as a result. “It could take a decade or longer for the new normal to emerge,” she says.

Class disparity was one of the main topics at the recent World Economic Forum in Davos. It topped government concerns about the environment and was in line with the financial crisis, which has exacerbated income disparity in the developed countries while rapid growth in China has created boom towns on the coast, with an old Third World aesthetic still reigning in central and western China.

Willem Buiter, a senior economist at Citi and a former member of the Bank of England’s Monetary Policy Committee, warned in the report that political backlash against the rich and the institutions that support them could strengthen around the world. This is the new normal many investment bank economists are concerned about. Not because they are worried about protests from Chicago to New York, or even worried about inequality. Their concerns are more in tune with their clients, who see governments — even autocratic ones — ultimately bending to popular pressure. In short, they fear the non-rich.

“Governments may use more taxation instruments and globally there may be a further attack on tax havens. Recent governmental and intergovernmental activity in these areas is not a passing phase,” said Buiter. “It’s going to be a tougher playing field for the rich.”

Not if Washington can help it. “Let me tell you something about the rich,” F. Scott Fitzgerald wrote in his 1926 short story The Rich Boy. “They are different from you and me.”