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The Myth of the Job Creators

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Jim O’Neill (see the review of his book The Growth Map by Bill Hayes [2011]), chairman of Goldman Sachs Asset Management, theorizes that developed countries have entered a second Gilded Age, while emerging markets are simultaneously living through their first. Equally perceptive is his observation that the middle class of the developed nations is squeezed between the representatives of the Gilded Age—their own robber barons, and the “intelligent proletariat” workers of the emerging markets who compete with them for jobs but who have a much lower cost of living.

We are made to believe that this scenario is a necessary outcome of a modern capitalist society. Adam Smith’s notion of the capitalist—the entrepreneur investing (i.e., risking) his own money by organizing production and hiring workers—is all but forgotten, however applicable it was to eighteenth- and nineteenth-century England. In the England of the 1700s, most if not all people in the upper income brackets were noble landowners, bankers, merchants, and industrialists, in about that order; we can be fairly certain that the upper classes did not include journalists, dancers, and actors. For example, Nell Gwynne—famous actress, mistress of King Charles II, and a mother of his children—received an annual pension of 1,500 pounds, which was supposed to make her retirement comfortable but was well below of an income typical of a great lord.


Two analyses (Piketty and Saez 2007; Kopczuk, Saez, and Song 2010) of IRS tax data paint a very sad picture of the current income distribution in America. In 2008, the top 10% earned a higher proportion of the nation’s total income than in every year since the Great Depression. To those who would propound the theory of the education gap—namely, that higher demand for educated professionals created the income gap—I would say that the share of the nation’s income enjoyed by the top 0.1% increased three-fold or four-fold since 1950-60s, while the share held by the top 10% increased only by about half. In other words, the difference between the top 10% of earners, the lower rungs of which are filled by educated professionals, and the remaining 90% did increase, but about half of this disparity can be attributed to the growth of the incomes in the top 1%.

An objective portrait of the top 1% of earners who are considered “rich”—it would be more accurate to speak of the top 0.1%—is hard to obtain. Academic sociology usually concentrates on the 10% or 5% bracket, which is indicative of nothing special in our new Gilded Age. Furthermore, there are serious classification problems. For instance, would you put Mel Gibson and Tom Cruise in the celebrity category or the nonfinancial-executive (i.e., producers) category? Deliberate cover-ups through offshore tax havens and the like compound the difficulties. Yet, since categorization is necessary, I present the following tables. (I extracted data from the references at the end of this article, and recast and rounded them off for clarity. Refer to the original publications for exact figures.)

Table 1. Composition of the Top 1% of Earners (over $370,000 in 2008) by Occupation.
(For the data sources consult references below.)

Source of Income The Economist
(Jan. 23, 2012)
Paul Krugman in NYT Tendency for 1979-2005
1.    Executives of nonfinancial enterprises 30%
2.    Medical-industrial complex 15%
3.    Financiers 18% 18%
4.    Lawyers and real estate moguls 12% 12% ~
5.    Celebrities, socialites, media, and entertainment 25–30% 25–30% ~

Table 2. Composition of the Top 0.1% of Earners (over $1.7 million of Taxable Income in 2008) by Occupation.

Source of Income Proportion
1.    Executives of nonfinancials 27%
2.    Nonexecutive board members of nonfinancials 14%
3.    Entrepreneurs 4%
4.    Financiers 20%
5.    Celebrities and socialites 10%
6.    Lawyers and real estate moguls 13%
7.    Advertisement and nonprofits 3%
8.    Others Less than 10%

How much employment depends on these categories? Taken together, lawyers, real estate moguls, celebrities, and socialites—whose numbers and influence in America, many would argue, are already too large—have little direct influence on employment. Even if they have to let some employees go due to higher taxes, this can result in a net benefit for society in that fewer staff members will suffer at the hands of abusive bosses (Naomi Campbell is a famous example). Some of their former workers will even find gainful employment elsewhere. “Others” include lobbyists and political fundraisers, another group hardly contributing to public welfare.

Private equity tycoons also employ very few: administrative assistants, a few lawyers and accountants, and domestic help including nannies glorified by The Nanny Diaries. Unlike family business owners of the early Industrial Age, they risk other people’s money, not their own. Their money comes in the form of fees and carried interest.

From a cursory examination of major companies’ websites, I find that a significant proportion—maybe 20% to 40%—of nonexecutive board members and executives of nonfinancials fall into distinct subcategories: family members of top managers or original founders, former politicians, government officials and generals, Congressional staffers, lobbyists, and representatives of financial firms, frequently the major creditors. They reached the top positions not because of their business acumen, but because they already belonged to a select group with shortcuts to Washington, DC, or the state capitals. It is hard to imagine that a retired Pentagon general would resign his cushy board seat with a major government contractor in protest of slightly increased taxation; if he did, he would be immediately replaced by a less fastidious general.

In Japanese, the word amakudari, or “descent from heaven,” refers to a practice in which retired senior civil servants go on to manage companies they once regulated. As to how well this group looks out for the interests of other shareholders, we only have to consider the testimony of Alan Greenspan—that trusted disciple of Ayn Rand—before the House Committee on Oversight and Government Reform: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief” (quoted in Andrews 2008).

The only rich and superrich people who substantially influence employment decisions are executives of nonfinancial corporations not falling into the above categories, and entrepreneurs. Despite claims of the popular media, they do not make up a significant portion of the top earners: they constitute less than 30%, and probably around 18% (see Table 2), of the top tax bracket. This includes a disproportionate share of owners of casinos, tabloid media, adult entertainment, social networking sites, and other businesses—businesses that are inevitable in modern Western countries but that are a detriment to society in many cases and that hardly need a tax stimulus to survive. Only 4% of the top 1% are entrepreneurs in their own right—i.e., the celebrated “job creators.” We must conclude that very few occupants of the top tax brackets influence employment decisions outside of their own households and staffs.


This climate of the second Gilded Age is counterproductive in many other respects. As Tom and Daisy did in The Great Gatsby, the ultra-rich tend to retire into their “vast carelessness” (Fitzgerald ([1925] 1991, 139). When the connection between wealth and productive economy becomes this obscure, media observers tend to forget that the existence of modern society becomes more and more dependent on science and technology. Yet, an average engineering graduate earns in constant terms about as much today as 40 years ago.

We often hear the argument that the wealthy are already heavily overtaxed. Conventional reasoning says that the top tax brackets pay a disproportionate share of taxes—for instance, the top 5% of taxpayers pay more taxes than the bottom 95%, and the top 1% pay 37% of income taxes despite earning 16% to 17% of the taxable income (Logan 2011).

Table 3. Shares of the Top 1% of Earners (Excluding Capital Gains) in the Ownership of Assets.

Asset Proportion
Stocks and mutual funds 49%
Other financial securities 61%
Trusts  39%
Business equity 62%
Non-home real estate 28%
Average net worth 35%

Looking at Table 3, we can make two observations: first, that in every investable asset class, the share of the top 1% exceeds by 2.5 to 3 times their share in taxable income, and second, that the proportion of income tax that the top 1% supplies is roughly equal to their average share of net worth. The same studies show that the bottom income brackets have an incommensurate fraction of their net worth concentrated in the equity of their primary homes—which prudent financial planners exclude for obvious reasons—and that home values have lately experienced volatility and a sharp downturn. We can safely conclude that the net worth of the top 1% far exceeds their share in income.

The question of cumulative tax contributions is frequently (and demagogically) replaced by the question of tax rates. Because of the incomparably better opportunities of tax planning (or evasion, if you ask some), modestly progressive US tax rates result in a highly regressive distribution of net worth—i.e., wealthy people own assets equaling several times their share in total income. To have a distribution of net worth roughly proportional to the distribution of income—what I would call a true income neutrality of taxation—one has to have highly progressive tax rates, such as Germany’s, for instance.

With highly regressive payroll taxes and many loopholes, people at the top can readily find ways to avoid taxes (business entertainment clauses, mortgages on multiple homes, trusts, tax havens, etc.). In other words, the rich and the very rich contribute more in taxes than the poor and the middle class, yet are much better off than average folks not only in comparison but also in proportion to their own incomes.


Without delving into the issue of equality or fairness, I will say that a nation that allows its rich and superrich to easily evade taxes (consider Steve Forbes’s famous challenge to Warren Buffett to send a check to the Treasury if he, Buffett, personally felt undertaxed [see Morgan 2011]) cannot keep its finances in order. Previous periods of outsize accumulation of wealth by the upper classes—the Roman Empire, France’s Ancien Régime, and our Gilded Age, to name a few—ended in cataclysm of global proportions. I wish that the rich would have the good sense to repair their relationship to the rest of society before the whole social edifice unravels.

In the Ancien Régime society, for instance, the nobility and clergy were not taxed; the third estate—the bourgeoisie, laborers, and peasants—carried the burden of taxation. This may have had some justification, as it was said that “the gentry pays its taxes in blood.” In the absence of an organized civil service, the aristocracy performed the functions of military command, police, diplomatic service, and civil administration at their own expense. For some particularly conscientious nobles, this meant the ruination of their families. Most of the “clerical” functions (e.g., record keeping and public education) in an almost totally illiterate society (that included many nobles) were performed by the clergy. By the eighteenth century this, of course, was an anachronism. In The Old Regime and the Revolution, Alexis de Tocqueville (1856, 113) wrote, “[W]hen the tax is unequal, the line is drawn afresh every year between the taxables and the exempts; the distinction is never allowed to fade. Every member of the privileged class feels a pressing and immediate interest in keeping it up, and maintaining his isolation from the taxable community.”

I do not advocate any particular position with respect to taxation. All I say is that a nation that makes a conscious decision to forgo fair taxation of the upper classes, ostensibly for a higher social utility, cannot maintain its extremely high levels of military spending—$698 billion in 2010, which represented 42.8% of world military expenditure in that year, and six times the spending of the nearest rival, China (Stockholm International Peace Research Institute 2011)—and still expect to remain a superpower. Education, research, space exploration, infrastructure, and all the other things we commonly associate with a superpower will undoubtedly suffer as well.

The American social safety net was not created by socialists interested in the fairness of income distribution. It was designed by dedicated anti-Communists such as Truman, Johnson, and Nixon, who understood that having millions of trained soldiers returning from battle to a country without jobs, health care, or support in the old age was simply counterproductive and dangerous. To stay solvent in the conditions of regressive taxation, we would need to return to Jeffersonian vision of a nation as a federation of largely self-administered rural communities with limited, mostly mercantile foreign policy, defense based on asymmetric warfare by armed militias, and internal security based on the posse.1

Niall Ferguson (2012), a prominent neocon intellectual, suggests that the developmental success of China and other emerging powers has nothing to do with the distribution of income taxes. This is quite true. We can continue to tax the rich lightly. But for that we may need to follow the Chinese model and reduce the armed forces from an American proportion of 1% of the country’s male population to the Chinese proportion of about 0.2%, and the military expenditures to 1% of the country’s GDP, instead of the American share of 4%. This necessitates a passive, trade-oriented foreign policy. To imitate Chinese model, Americans need to accept the systems of social control depending on tight regimentation of the middle class; violence or the threat of deadly violence against the poor and minorities; and a bevy of state-owned industries directly supporting the government.2 But few Americans are prepared to live with that.

–Peter Lerner

Peter Lerner, PhD, MBA is a semi-retired financial researcher who lives in Ithaca, NY.


1A pivotal part of the economy in Jeffersonian America was the production by a few million slaves of two main export commodities: cotton and tobacco. US factories could afford to import machine tools from England, and US universities to order German research equipment, only because of these exports.

2In this sense, the renationalization of a large portion of the oil industry in 2000s Russia was almost predicated on an earlier reform imposing a flat 13% income tax.


Andrews, Edmund L. October 23, 2008. “Greenspan Concedes Error on Regulation.” New York Times.

Bakija, Jon, Adam Cole, and Bradley T. Heim. October 2011. “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from US Tax Return Data.” University of Indiana Working paper.

De Tocqueville, Alexis. 1856. The Old Regime and the Revolution. New York, NY: Harper & Brothers.

Ferguson, Niall. January 30, 2012. “How the Rising Bottom Billion Could Explode Inequality at Home.” Newsweek.

Fitzgerald, F. Scott. [1925] 1991. The Great Gatsby. New York, NY: Cambridge University Press.

Hacker, Jacob S., and Paul Pierson. 2010. Winner-Take-All Politics: How Washington Made the Rich Richer—and Turned Its Back on the Middle Class. New York, NY: Simon & Schuster.

Hayes, Bill. January 23, 2011. Review of The Growth Map: Economic Opportunity in the BRICs and Beyond. New York, NY: Penguin / Portfolio.

Kaplan, Steven N., and Joshua Rauh. 2010. “Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes.” Review of Financial Studies 23, no. 3.

Kopczuk, Wojciech, Emmanuel Saez, and Jae Song. 2010. “Earnings Inequality and Mobility in the United States: Evidence from Social Security Data Since 1937.” Quarterly Journal of Economics 125, no. 1.

Logan, David S. October 20, 2011. “Summary of Latest Federal Individual Income Tax Data.” Tax Foundation Fiscal Fact no. 285.

Morgan, David. September 19, 2011. “Forbes: Hiking Capital Gains Tax Punishes Rich.” CBS News.

Piketty, Thomas, and Emmanuel Saez, May 2006. “The Evolution of Top Incomes: A Historical and International Perspective.” American Economic Review: Papers and Proceedings 96, no. 2.

Slemrod, Joel, and Jon Bakija, 2008. Taxing Ourselves: A Citizen’s Guide to the Debate over Taxes, 4th ed. Cambridge, MA: MIT Press.

Stockholm International Peace Research Institute. April 11, 2011. “Background Paper on SIPRI Military Expenditure Data, 2010.”

Wolff, Edward N. June 2007. “Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze.” Levy Economics Institute of Bard College, working paper no. 502.

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Wow. Its like the professor read my mind! This is all the arguments I have been making for years! It's like that famous reactionary conservative Prince Otto von Bismark creating the world's first nation-wide social security, national health insurance etc. to stop the Socialist party from gaining prominence in Germany int he 19th century. Or as he says, anti-communist US Presidents exapnding the social safety net.

Its in the enlightened self-interest of the 1% to make sure the 99% - led by the top 10% not in the top 1% - don't riot and/or revolt.

And the US this could be bad, since so many people have guns.

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