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The Greatest Common Denominator

Posted by on May 13, 2015
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If you look at the latest list of the Forbes wealthiest you’ll see that topping the list, as usual, is Bill Gates with a current estimated net worth of approximately $79.2 Billion.  Now to the average person seeing a figure so big represents the idea that should good old Bill and his betrothed Melinda decided to they could go on a $79+ Billion spending spree.  Or if you think like the average liberal you’d probably believe that they should generously start handing out $1 Million checks to the next 79,200 people they meet on the street, right?  Wrong!  They couldn’t do either option even if they wanted to and here’s why. 

When most people see the figures of the wealthy what they don’t realize is that the numbers they are looking at are paper numbers.  In other words they aren’t real.  It’s simplistic math for simplistic minds.  If you own 100,000 shares of a stock worth $10/share then you are worth $1,000,000….except anyone with brains realizes that you aren’t.  This is where the “wealthy” narrative sounds good, but falls completely apart once math and logic are applied. 

Let’s take a quick peak using simple numbers of a fictitious Silicon Valley tech wunderkind (we’ll call her Gertrude) just to illustrate how far off that wealth number actually is.  The first and most obvious thing we see (just like is the case with Bill Gates) is that the vast majority of Gertrude’s “wealth” comes from the very stock of the company that she started.  It’s tied up there and has been since Gertrude offered up her company to public investment access via an IPO (think of what Facebook did just a few years ago).  For our example we’ll say that Gertrude now owns a total of 10,000,000 shares of her own company with an IPO price of $100/share giving her a net worth of $1 Billion…..on paper. 

As you can see the IPO created a lot of sudden wealth for Gertrude, but at the same time locked in her position.  Why?  Well because if she were to now suddenly try to go out and sell all her stock it would create a run on its perceived value since stocks are a direct product of the supply/demand curve and she would be creating a sudden surge on the supply side.  So just like what would happen with Bill Gates above she can’t just go out and sell it all and pocket the money and even if she could the depleted value after a run means she would probably only get to pocket about ½ the original value, right?  Once again, wrong!

 If sweet hard working Gertrude could sell it all (even at the depleted value) her net take wouldn’t be $1 Billion, or even the depleted $500 Million value.  That’s because the first to step forward to collect on her newfound cash flow would be the government.  Combined capital gains taxes along with the average state income taxes would quickly turn that $500 million into only about $333 million. That’s still a lot, right?  Well, we aren’t done yet.  For you see if Gertrude were to attempt spending any of that money she’d be hit by another average 8% sales tax against her potential buying power.  So basically the net useful value of our good friend Gertrude’s wealth before she’s even had a chance to spend a single dime on her own is all the way down to just over $300 million.

 The ugly truth is that the average “wealthy” person is actually only worth about 30% of what shows up on paper.  You might try to argue that’s still a lot, but then again the wealthy do a lot with what they have.  Roughly 45% of all federal incomes taxes come from just the top 1% of the income earners (that’s AFTER all the supposed loopholes and dodges have been applied).  Beyond simple taxes many of our institutions of culture and higher learning wouldn’t exist without the endowments of the wealthy.  Most people wouldn’t have jobs without the ingenuity that created both wealth for some, but also jobs and a better lifestyle for us the rest of us.  You may disagree with what the Walton’s pay their employees, but without Sam Walton’s efforts all those people’s pay would be $0.

 I wasn’t born wealthy.  Fortunately, I also wasn’t born stupid either.  If a wealthy person were to move in down the street from me I wouldn’t waste my time being jealous or demonize him.  As an intelligent adult I’d prefer instead spending my time learning from him so that I can catch up to his level rather than dragging him down to mine.  That’s because I’m smart enough to understand that for ANY society to succeed we must forego trying to pull everyone down to the least common denominator and instead we should all strive toward that greatest of common denominators called opportunity.

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