The one percent are going to have a starring role in this year's elections.
Mitt Romney, the likely Republican nominee for president, is one of the richest men in America, with annual income of about $21 million and a net worth of at least $200 million.
President Obama belongs to the 1 percent too, though he's not nearly as rich as Romney. Obama has earned about $7 million over the last two years, mostly from book royalties.
In addition to the personal wealth of the candidates, the whole issue of wealth is becoming a dominant theme of the campaign. Obama's agenda for a second term revolves around giving the middle class a "fair shot" and asking the wealthy to do their "fair share"—otherwise known as paying more taxes. Obama also wants to give more ordinary people the skills to build their own fortunes, and start shrinking the huge gap between the rich and the rest.
Romney has inadvertently fueled the fairness debate by releasing his income statements for 2010 and 2011, which show that his tax rate is a mere 14.6 percent. That's considerably lower than the rate paid by many middle-class taxpayers, since most of Romney's income is from investments, which are taxed at a lower rate than many people's wages. Warren Buffett says that's the "wrong policy," and many voters seem likely to agree.
With many families still struggling and Washington spending about $1 trillion more than it takes in each year, a huge revamp of Washington's tax and spending policies is likely after the next president is sworn in. The rich probably will end up paying more. But some key misperceptions of the rich and their role in the economy are already muddling the whole debate, which will only intensify in coming months. Here are three myths about the rich:
They're fleecing the little guy. Obama's "fair share" characterization implies that there's a fixed pot of money in the economy that gets split up between the wealthy and everybody else. If that were true, then if the rich were getting richer, they'd be taking money from everybody else in a zero-sum transfer of wealth from the bottom to the top. So the way to fix that would to be transfer wealth in the other direction, by raising taxes on the wealthy, for example, and using the proceeds to fund tax cuts or other benefits for the middle class.
But the economy isn't a zero-sum game. Most of the time, the economy creates new wealth, through economic growth and productivity improvements. When the amount of wealth grows by more than the overall population, living standards rise. That's what happened in the U.S. economy for much of the past 60 years.
There are two problems now. One is that the economy is growing too slowly and not creating enough new wealth. The other is a huge mismatch between the outdated skills that many workers have and the modern skills that generate high pay in the global economy. The people capturing a larger share of wealth today are usually the ones who have skills that are in high demand. It's popular to rail against bankers and financiers, for instance, but financial expertise has become a capability that's vital to most companies in a complex and intensely competitive economy. High earners today also tend to be in a position to benefit from globalization, perhaps because they work for a multinational corporation or have substantial investments in big companies. That gives them a stake in places like China and India, where wealth is being created much more rapidly than it is in the United States.
The way to address these two problems is to retool the U.S. workforce so that more people are able to contribute to economic growth, and thereby benefit from it. Drawing more business to the United States and enhancing trade would help, too. Obama and Romney have both proposed measures meant to accomplish that, but these are daunting challenges that will take years of work. That makes the rich a convenient target for those seeking faster remediation of income inequality.
They're causing America's decline. It's a legitimate problem when the pay of CEOs is rising far faster than the pay of ordinary workers, which is the case at many companies. It's also true that the tax cuts for the wealthy enacted in 2001 and 2003 haven't generated the "trickle-down" effects that supporters claimed they would, such as increased economic activity and new jobs.
But America has much deeper problems that account for the stagnant pay, fading opportunity, and falling living standards that many Americans are experiencing. Our education system is weak, even though America is still one of the richest nations in the world. American consumers are addicted to spending, loath to save, and saddled with debt. Far too many people rely on the government for part or all of their livelihood. And too many workers assume they're entitled to good pay and easy work, even if they do nothing to enhance their own value as the economy changes.
The rich aren't necessarily helping the economy by putting their money in Swiss bank accounts, or buying Gucci loafers from Italy or Lexus sedans from Japan. But the habits of the rich have a relatively light impact on the economy compared with fundamental flaws that are holding back millions. It's foolish to scapegoat the wealthy for problems that are rooted in Washington—or on Main Street.
They're idle and overprivileged. The idle rich, living off trusts and inheritances, have been a fixture in America for decades. Yet it's an inaccurate stereotype, because many of the nation's top earners work punishing hours and take risks that would terrify a typical worker content to put in his 40 hours and sleep soundly every night.
Mitt Romney, for instance, is generally right when he says he earned his lavish fortune. Romney clearly started out with some advantages, including a wealthy father and a Harvard education. But he built on that by running a highly profitable business for 15 years and managing high-pressure deals that often left him drenched in sweat, beneath his pinstripe suit. "All his life, Romney has been a worker and a grinder," New York Times columnist David Brooks wrote recently. "He built a business. He's persevered year after year, amid defeat after defeat, to build a political career."
A lot of people work hard, of course, and pick themselves up after demoralizing setbacks. Most don't earn the outsized reward for their efforts that Romney did. But Romney's is a classic American story, and it serves a purpose that's as valid as ever: motivating others to strive for the kind of success Romney achieved.
It might be harder to get ahead than it was a few years ago, but it's still possible to get rich in America, no matter where you start. Entrepreneurs still launch companies like Groupon and Facebook that employ thousands and create wealth for many. It often takes years of 70-hour workweeks before a breakthrough happens, plus the anxiety of knowing that it might all be for naught. So while asking the rich to contribute more, we might also want to extol the virtues that made them rich in the first place. And let more people in on their secrets.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success , to be published in May. Follow him on Twitter: @rickjnewman