Friday, May 11

$350 Champagne - Private Industry steps in to do what Govt. doesn't: Redistribute Wealth

Steve Leuthold, a money manager out of Minneapolis, told his clients last month that he was appalled by something he had read in The New York Times.

He pointed to an article about “bottle hosts” at chic nightclubs in New York, whose job was to spot, and give the best tables to, the people willing to spend the most money on drinks. “One club had a table minimum of two bottles of liquor or Champagne at $350 per bottle,” Mr. Leuthold wrote. “But this is a minimum.” He noted that one brand of Champagne fetched $1,600 a bottle, and that the average liquor bill for a table at one club was about $3,500, with some tables bringing in $12,000 or more.

“Maybe I am too Norwegian (or too Midwest), but I find this reprehensible,” he wrote. “How about you?”

Mr. Leuthold is an old friend of mine, and I am surprised he does not understand and applaud the economic function of such things. It is a classic example of private enterprise stepping in to fill a void left when the government no longer fills a role it once did.

That role is income redistribution.

Half a century ago, when Dwight D. Eisenhower was in the White House, personal income tax rates ranged up to 91 percent on income of more than $400,000. The rate for those who made more than $100,000 a year was 75 percent.

Adjusted for inflation, that would be equivalent to around $3 million now for the 91 percent rate, and $730,000 for the 75 percent rate. The current top rate is 35 percent.

There are plenty of other ways that the tax code is now more friendly to the wealthy than it was. In 1957, long-term capital gains faced a 25 percent tax. Now the rate is 15 percent. Dividends were taxed at ordinary income tax rates, but are now taxed at 15 percent. The estate tax is on its way to being repealed in 2010, although for just one year. Hedge fund barons who make hundreds of millions a year arrange to keep the money offshore, delaying for years the need to pay any taxes at all on the money. The high tax rates of long ago were often avoided through tax shelters, but they reflected a certain egalitarian spirit, which itself was a reaction to the excesses of the very wealthy “robber barons” of the late 19th century.

“Surely we can afford to make a distinction between the people whose only capital is their mental and physical energy and the people whose income is derived from investments,” wrote Andrew Mellon, the Treasury secretary in the 1920s. He thought it was “beyond question” that taxes should be higher on investment income than on income earned from labor.

Those days are gone, and it may be that they cannot come back, even if the political will arrives to bring them back. Capital is too mobile, and companies and individuals can shift income overseas much easier than they could in Mellon’s day.

But whether or not the government can redistribute the money, the private economy will try to do it. The wealthy are persuaded that they simply must be in hedge funds and private equity funds — and should pay a fee to a bank for getting them into such funds. That is on top of the high fees charged by the funds themselves. The investments may or may not do well, but those collecting the fees are sure to prosper.

Then there are the growth areas of the economy — and I don’t mean semiconductors. Last year at the World Economic Forum in Davos, Switzerland, officials suggested there was great opportunity for personal trainers, people who can keep the rich looking fit and thin. This week, The Wall Street Journal reported that membership in the Institute for Divorce Financial Analysts is rising at a rate of 25 percent a year. Such analysts claim to be able to help sort out divorce fights for the wealthy.

In that context, outrageously priced drinks at fancy clubs can be seen as simply taking money from those with too much of it, and passing it on to others.

Those who get it may not be the most deserving, but that was also true when the government was handing out the money. And such clubs at least are more honest than the penny-stock frauds that often aim at people who have made a lot of money without really understanding much about it.

Thirty years ago this month, Peter F. Drucker, the great writer on management, bemoaned the fact that a few chief executives were collecting millions. Attention given such pay, he wrote then, obscured “the achievement of U.S. business in this century: the steady narrowing of the income gap between the ‘boss man’ and the ‘working man.’ ”

That trend reversed, and in this century the boss makes more than ever. The government does not tax it away, so others seek ways to get some of the wealth.