The Great Deception

December 27, 201916 Comments

Capital in the Twenty-First Century is a 2013 book by French economist Thomas Piketty. The book attempts to address wealth inequality in North America and Europe by examining long-term trends in wealth distribution – right back to the eighteenth century.

Piketty’s premises: Wealth is concentrated in a few hands of the elite through capital assets. The key words being capital assets.

In a nutshell, he proposes a global system of progressive wealth taxes on excessive amounts of capital assets to help reduce inequality.  Piketty’s concern is less about earned income levels, and more about capital wealth.  This flies in the face of the rhetoric propagated by left wing politicians, who love to target high income earners by increasing income taxes.

Capital assets are unproductive

Capital tends to be held passively.  Stagnant capital assets are economically non-beneficial, and taxed minimally (if at all). For example, let’s say you own a multi-million dollar French Villa held in a trust (like one ultra-rich fellow we’ll talk about later). If you don’t sell it, the Villa increase in value, tax free over time. Your villa really doesn’t do much for anyone else, beyond your immediate pleasure. Its growth in value is non-accretive to the economy. Of note: we are not talking about trading strategies with capital gains being taxed. We are talking about passively held capital assets.

Earned income, on the other hand, is (as the name implies) earned. Individuals provide production, service or brain power in exchanged for income. This income is taxed immediately at a comparatively high rate to capital. Those taxes are put to work to benefit society, assuming prudent decisions by the government (and that topic is an entire blog by itself!). After-tax dollars are used by the individual to invest, or spend – helping the economy.

An upper income earner might buy a Ferrari. We might be jealous of the purchase.  Nonetheless, the sale helped the economy- starting on the day its metal was mined as iron ore in the ground, and ending on the day the salesperson handed the buyer the keys. Jobs, taxes and other economically beneficial effects came about during the entire process of earning the income that affords that fine Italian machine. This productive process continues over and over as income is earned by individuals across the economy. Earn, tax, spend, invest, and repeat.

Higher income is GDP accretive in another way. Working harder, or smarter, or both to produce more and better products and services will increase demand for your skills, and thus, your income. Increased production means more benefits for everyone in the economy (the trickle-down effect). Think of cell phones—which used to be tools for the rich. An innovative company like Apple enhanced the economy, allowing a huge audience to own these once-impossibly expensive toys.  Products like smart phones benefit millions of people. The injection of revenue and earned income into the economy by the phone maker adds to GDP growth and a higher standard of living for all.

 

 A 5% rate of return

Piketty notes that the long termed average rate of return (which he refers to as “r”) on capital assets is 5%. This rate of return, typically through capital gains, affords an unending level of compound growth on assets with little or no taxation. This, so long as the capital remains unsold and retained, held within trusts, etc. In fact, it is quite difficult for governments to track growth on capital – given that it would rely on yearly valuation reporting by individuals holding the assets or trusts. For example – let’s go back to our friend holding the French Villa in a European trust. This villa is likely growing at Piketty’s rate of “r” – meaning it is compounding at 5%.   Similarly, if you held $1 million dollars in a stock and it grew to $2 million – that stock, like the French villa, can be held indefinitely to compound and grow with minimal tax consequence. Moreover, sophisticated tax strategies can help current and future generations utilize capital asset wealth in a tax favored manor.

Contrast this with personal or business income. Unlike growth in capital assets, income is more easily identified by tax authorities – and can be more readily audited if there are suspicions surrounding the integrity of reporting.  Income is the “low hanging fruit” for governments to tax. This, despite the obvious inequity of letting large pools unproductive capital benefit by remaining untaxed in the hands of the mega-rich.

 

The big question

Given the clear and obvious benefit to the mega-wealthy of earning ever-compounding cumulative returns (r) at little or no taxation on their capital – why are the left wing politicians not going after these folks? Why is some hard working and productive surgeon or businessperson losing 53.5% of his/ her income to taxes in Canada while the mega-rich family holding millions of unproductive capital assets passively pays little or nothing in taxes? Left wing governments propagate against “the rich” by taxing income– while making no effort to tax the relatively unproductive capital assets.

Why is that?

The greatest scam on earth

And then it hit me….

Have you ever noticed that almost every “spend & tax” Liberal/Democrat politician is way, way richer than you and I?  I’m not saying they make gobs of income in return for outstanding levels of productivity. Instead, I’m saying they are rich…. as in capital-rich. They hold non-productive family trusts, passively held stocks, real estate assets….  They are often born-into-wealth, capital rich people.

The very people that Piketty talks about in his book as the cause of the wealth inequality gap…..are the ones who point fingers at other people for being “too rich”.

I recently conducted a very easy search on the internet to find estimations of just a few of the more predominant income-tax pushing Liberals and Democrats. And these folks are just a sample. Let’s take a look at a few of my search results.

 

“I’m the dude, playin’ a dude, disguised as another dude”

Tropic Thunder movie line

 

SLICK WILLIE (Bill Clinton): Known as Slick Willie since his Monica Lewinsky days, Bill Clinton and his wife, Hillary are worth a cool $100 million in capital.   Remember Piketty’s study showed an average of 5% (“r”) on capital? Bill and Hillary are likely stacking a cool $5MM, plus compounding, onto their fortune every year under Picketty’s rule.

Hillary’s proposal during the last election was to “tax the rich”. I guess that “rich” doesn’t mean somebody like her & Slick with $100 million. Nah, she’s talking about the people who make $700k in economically beneficial earned income. She called them “ultra-rich”. She didn’t call herself ultra-rich.  She wants her $100 million of unproductive capital assets, and its yearly compounding “r” of $5 million, left alone.

NO DRAMA OBAMA (Barack Obama): When Barack Obama was re-elected in 2013, he made a point of increasing income tax. Like Hillary a few years later, Obama did not propose a capital tax. I wonder why? Read on….

Obama’s campaign focused on taxing the “richest 1% income earners in America“. It made him popular with the left wing voters. Those voters never stopped to examine how rich the guy calling others rich is. But that’s a commonality you’ll notice with these left wing politicians. He’s the dude playing a dude disguised as another dude.  Barack can keep his estimated $40 million of capital safely earning an “r” of 5% away from the tax man if he retains it passively in capital assets.

He recently stayed at a vacation house in Martha’s Vineyard for $50k/week. He liked it so much, he coughed up a cool $15 million and, what-the-heck, bought the darned thing for him and Michelle.  But he’s not the “richest 1%” deserving a new tax. I guess that 99% of us must be able to afford a $15 million vacation home. Just like him.

THE KENNEDY’S: Ya gotta give kudos when they are deserved. The Kennedy family has long been considered in the top tier of America’s wealthier families. With an estimated net worth of over $1 Billion, spread between the clan’s trusts and holdings. In the recession of the 1960’s, JFK did the right thing. He decreased income taxes for all, stimulated spending and investment in doing so, and righted the economy. Son of a gun! A Liberal who understood the benefits of lowering taxes! The last of the breed. Kudos to the Kennedy’s.

 

ELIZABETH WARREN: Elizabeth has a plan. Like the book Capital in the 21st Century suggests – she is one Democrat party candidate who would tax the capital of the rich. But wait! There’s a caveat! She would only tax those individuals with assets over $50 million. I guess that gets her off the hook! She’s worth a mere $18 million. She’ll appeal to the ignorant left wingers who fail to take 15 seconds to Google her – or other – “tax n’ spend” liberals for their net worth and capital assets.

I also hear that Michael Bloomberg is considering the Democrat seat. He too wants to “tax the rich”. But will he tax his billions in capital assets? Same story, new name.

 

LITTLE POTATO (Justin Trudeau): the Chinese call Justin “Little Potato”, given that he is the offspring of a former PM of Canada (Pierre Trudeau). Or is it for his Potato-head qualities in thought and reasoning?

Justin, whos trust is thought to be worth $10 million, and his right hand man, Bill Morneau (more on him next), brought in the new 53.5% tax level to earned income made by Canadians over $200k. Not a problem for Justin. He’s never held a full time job for long until he got the PM job. Income has never been something he’s had to earn much of. He’s more of a trust-fund kinda guy. He spent most of his life “travelling the world”, only working occasionally, living largely off of the trust fund. Why work when you can play?

Meanwhile, let’s revisit that 5% “r” thing. Let’s see…capital of $10MM, x 5% return = $500K/year. So long as he doesn’t cash in his daddy’s trust fund capital assets, this trust fund baby can grow richer while paying little or no taxes.  And his “people” can use sophisticated tax & investment strategies to manage the trust. Meanwhile, Justin decided that “the rich” who productively earn money, must pay taxes at 53.5%. Remember, he’s not the rich. He’s just some trust fund baby.

Do as I say, not as I do

Little Potato claimed that “a large percentage of small businesses are actually just ways for wealthier Canadians to save on their taxes’.  Justin has been spending your tax dollars on things for his personal pleasure… like a cottage ski boat, a sauna, a $7500 play structure for his kids, and other fun stuff. Not to mention numerous taxpayer funded vacations with his own chef and costume maker travelling along.Isn’t that what he’s accusing businesses of doing..i.e. using tax dollars for personal expenses? So I ask you…Who’s the real “tax cheat”?

No surprise that Justin is the only PM in Canada’s history to be charged with not just one, but two ethics commission violations.

Editorial cartoon

Justin tuly is the dude playing a dude disguised as another dude…. in more ways than one.

 

 

Bruce Wayne (Bill Morneau): I saved the best for last. Nicknamed after the crime fighter who keeps his mega-wealth status secret, Bill Morneau is worth a whole lotta money.  He’s likely worth some $100 million, although he’s pretty coy about the actual value of his assets.  Bill’s capital assets are largely held in trusts, none of which are being taxed at the same rate that earned income is. He and Justin are taxing hard working productive income earners at 53.5% . Bill gets gobs of low tax capital gains. Sounds like a good deal…for him.

Here’s what I could uncover on the very discreetly held assets of Bill.

In 2015 he disclosed he held 2.07MM shares of his company Morneau Shepell (MSI-T). From what I’ve read, he sold them in 2017, likely for some $40Million or more.  He also holds a private French trust with a French Villa of hard to uncover value. He is director with another trust called SCI, MAS Des with various international real estate investments- again, hard to uncover value. He holds another Ontario holdco with various Ontario real estate investments. Same story…hard to uncover its value. His wife is the sole holder of another investment holding company. Yup, unknown value. His wife is also expected to be a beneficiary of the massive McCain Family Trust worth somewhere around a Billion or so. Chump change.

This guy ain’t just rich. He’s uber-rich.  And here’s the funny (if you want to call it that) part: When announcing the increase on income tax for people earning over $200k, Morneau said “We are also asking Canadians who have the most to contribute a little bit more.” Um, Bill….someone earning $250K as a real estate agent or business owner is not the guy who “has the most”!

Guess who “has the most”, Bill? Is it that real estate agent with his $250k income? Or is it you, and your millions and millions (and millions…) of trust-held assets?

For you to call somebody with a $200k income “rich”, is, well…rich!  Your trusts and your multiple real estate holdings, growing merrily along while adding no value to society, make you ever richer by the day. Meanwhile, you maximize the income tax levels on the real estate agent, the business owner, or the doctor for  offering economically beneficial services and products. And while you were failing to place your assets in a blind trust while accepting your ministry position, you had the audacity to increase taxes on the little guy – calling him rich! Mr. Piketty would be ashamed of you.

 

Ignore the “Peoplekind” behind the curtain

Magicians use techniques of distraction and sleight of hand to help divert the audience’s eyes away from their deception. Liberal politicians divert your attention to income and away from their non productive riches. Who are the magicians here? Ignore the man behind the curtain, as the Wizard of Oz said.

 SJW unite!

Attention Social Justice Warriors, members of the Victim culture, and “the Woke”. If you want to make a difference in fixing the wealth gap, STOP voting the elite class Uber-rich liberals into power. They pose like they are working for the little guy and the middle class. But they only know the little guy by what they can see from the back seats of their limos. These elites secure lower taxation on their capital by diverting your attention to productive income earners. They trick you into thinking that by taxing earned income, they will solve the wealth inequality gap. They and their millions in capital assets ARE the wealth gap. But they don’t want you to know it. They want to divert your attention away from themselves.  Read Capital in the 21st Century. Learn where the real wealth gap comes from.

 

Of note

Politically, I consider myself to be a moderate Libertarian or Objectivist. As such, the idea of taxation of capital assets is as unappealing to me as is income tax. Also, it has been tried in Europe, and turned out to be disastrous.  Thus, I do not actually advocate Piketty’s capital tax recommendations. This blog was written to stimulate thought surrounding the hypocrisy of wealthy left wing politicians, rather than endorse capital asset taxation. I find it ironic that stagnant capital is not being taxed by the very people who hold the most of it, while productive income remains the taxation target of their campaign promises.

I might recommend another book related in a different manner to this subject. Steven Pinker’s Enlightenment Now illustrates how, thanks to the free market economy, the rate of extreme poverty has dropped from 90% to 10% in the last two hundred years. This – with nearly half of that happening over just the last 35 years. Despite what  left wingers will tell you, the poor are getting richer faster than the rich are getting richer!

Over the last several hundred years we’ve also seen a massive decline in violence, starvation, war, accidents, illness and terrorism. Meanwhile, we’ve witnessed an incredible increase in democracy, longevity & health, equality in rights, knowledge and general happiness. Pinker points out that the reason why so many feel that things have gotten worse is because of news/media’s tendencies to report negative, sensational events. Sometimes, this input can feed into an existing tendency by some towards self- pity or feelings of being victimized.

“Remember, what you “feel” and what is “real” are often very different.”
Eddie Capparucci, LPC

16 Comments

  • So in fairness how about your profile the networth of any of your pick of conservatives. Lets start with Stephen Harper, and any of the current conservative premiers of provinces. Add in Rona Ambrose, and Kevin O’Leary. Down south lets add in Mitch McConnell, and Devin Nuness. Thanks Keith.

    Reply
    • Lana–its not the wealth–its the taxation redirect, and the false identity of the liberals. If a wealthy person runs for office but doesn’t campaign “against the rich” -they are not a hypocrite.

      Reply
  • Thank you! Actions do tell us more about individual motivations.

    “What you know you can’t explain, but you feel it. You’ve felt it your entire life, that there’s something wrong with the world. You don’t know what it is, but it’s there, like a splinter in your mind, driving you mad.” – Famous Quotes by Morpheus From ‘The Matrix’

    Reply
  • Thanks Keith, it is hard to find rational thought these days. The main stream media is just not capable to provide economic truth.

    Reply
  • Always enjoy your comments. Thanks you have put considerable
    effort into this rant.

    Reply
  • Hope you’re rewarded through your contributions to this life: technical analysis and wealth mgmt, bike racer, TV, blogs, willingness to speak your mind. Someone has said, “The people we elected to be our servants have become our masters”. Hopefully there’s someone out there to champion the preservation of our freedoms.

    Reply
    • Thanks Garth–very hard to speak your mind these days, lest you be shouted down. But, somebody’s gotta present the other view.
      BTW–glad to see a much bigger name than mine is out there championing the truth–Kevin O’Leary is a guy I respect.

      Reply
  • OH taxes. Big issue. Personally I much prefer Little Potato to Orange Sociopath.
    Hope you feel better after rant and thank you Keith for sharing your knowledge
    with us. Its very helpful. Happy New Year

    Reply
    • Thanks JD. Although I think comparing Potato to The Donald is irrelevant–sort of like comparing Potato to Putin. Putin or Trump are not trying to be elected in Canada, so the comparison isn’t so useful, I find. We could pick lots of politicians and dictators across the world who are worse or better – I’m only concerned with our current political policies in this country insofar as comparison goes.

      Reply
  • Hope you do the same analysis when the Conservative party is in power!!!

    Reply
    • I do. For example–I was openly critical of Sheer, and am glad he is gone. He’s not the right guy for the job. BTW–that said, he was still more fiscally responsible from a policy point of view.

      Reply

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