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31
Dec 2011

Where to Find Financial Security

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I grew up with the expectation that I should strive to financially support myself and my family all by myself, regardless of what my partner might earn. Why? Death, divorce, disability, disease, you name it. Life is risky. Anything can happen and often does. My work ethic was my personal safety net to insure me against potential financial disaster. I thought as long as I could work, I would be safe.

And then one day, I couldn’t work anymore. Poor health and severe post-partum depression set in after my daughter was born, and I left the workforce to care for myself and my new baby. When I suddenly realized I no longer had the self-sufficiency that working meant to me, my depression deepened. I felt helpless without a means of earning money. I hated depending on anybody, and my stress compounded with financial insecurity.

In truth, I wasn’t financially insecure at all. I was actually deeply supported by my husband, family, friends and collegues. I had a spouse with a job, some savings, maternity leave and COBRA health insurance. Those people and resources helped me get better, and two years later I joined the workforce again.

Here’s what I learned from that experience: When I thought what I needed was more cash, what I really sought was freedom from financial anxiety. I didn’t want to worry about if we were going to have enough to pay the rent just because I couldn’t pull my weight at the moment, but I also thought that caring for myself was a luxury I could not afford. What turned the dial down on my financial fear and worry was recognizing that I was part of a community that was not going to let me fall through the cracks. It turns out that my  self-sufficiency — my confidence in my own resourcefulness to be able to care for myself and family  – had a limit, and that limit was me. My bootstraps could only pull me up so far. To transcend the limits of my self, I needed to see that I was connected to and supported by others — even financially.

It turns out that even people who do have ample bank accounts feel financially insecure. A study from early 2011 by Boston College’s Center on Wealth and Philanthropy found that even the super rich “still do not consider themselves financially secure; for that, they say, they would require on average one-quarter more wealth than they currently possess.” The average net worth of the people in this study was $78 million. If $78 million didn’t make someone feel financially secure, then what would?

Our instinct in times of financial hardship is to narrow our focus to the survival of ourselves or our family. Unfortunately, it also ends up narrowing our focus of solutions to what we can do all by ourselves: cut expenses or increase income. Ironically, what creates the financial security and financial wellbeing that we actually seek lies outside the small, narrow focus in the larger networks of communities. With more resources to access, there is also more flexibility in how to respond.

But right now, our communities and governments are going through the same downward spiral of scarcity, cost-cutting and income-raising dilemmas we have at home. This is the time  to make investments in our capacity to support each other. Instead of debating what to cut and who to tax, we can ask ourselves:

  • How would we feel if we knew that the community supporting us was as big as a town, city, nation or a continent?
  • What would we do differently if we knew that our basic financial needs would be met through our community networks and supports when we hit rough spots such as unemployment, caring for sick family members, our own ill health?
  • What government policies can create the conditions in which we will feel supported by the financial strength of an entire community until we can regain our self-sufficiency?
  • What can we do now to dial down our collective financial fears? Who needs to be involved and how?

I’m not suggesting that we don’t need to cut expenses or raise taxes, but those are actions that need to be taken in the context of a vision we are trying to achieve. We are a country of unquestionable, tremendous wealth, and that wealth was supposed to be a proxy for financial security. But none of us feel financially secure, even if we have the wealth. If having the wealth doesn’t do it, then what would actually free us from financial fear?

Here are two things we can do with public policies to create conditions that lessen financial fear and increase our overall financial security:

  • Narrow the bandwidth for wealth– The wider the gap in wealth, the more room there is for comparison and stronger feelings of financial inadequacy. It’s like trying to keep up with the Joneses but always failing because there will forever be someone with (lots) more money than you. The more narrow the room for comparison, the less inadequate we feel. Plus, when we narrow the bandwidth, the fall from fiscal grace is shorter and the climb back up not so steep. Policies that narrow income and wealth gaps (such as progressive taxation) can do this.
  • Fulfill universal needs without contingencies for income — Our need to be able to care for each other is universal, not limited to those at the poverty line. If the need is universal, then so should be the program. Designing policies that help anyone who needs it, not just those who fall below certain income thresholds, creates a public good for everyone even though it will only be used by those who need it when they need it. One existing example is the Family and Medical Leave Act which requires employers of a certain size to offer unpaid leave to workers caring for new or ailing family members. Workers are eligible regardless of their income, and while anyone can envision a situation where they might need to use it, only some will need to at any given time. Strengthening this program allows us to focus on supporting the people who support others in need, so that there isn’t a competition between income and care. It supports a community’s ability to care for itself.

Maybe our government solutions to provide income supports (such as unemployment or welfare) have been incomplete in part because of our focus on getting individuals back on their feet. Investments in the community’s capacity to care for each other could top off those efforts, because it’s the supportive relationships that will give us the financial security we truly seek.

 

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Note: This is the last in a series on financial wellbeing. You can read the other posts in the series here, here and here.

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Categories: Government, Taxes, wellbeing Tags: , , , ,
29
Mar 2011

Taxes and Fairness

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Just and fair inclusion. An equitable society is one in which all can participate and prosper. The goals of equity must be to create conditions that allow all to reach their full potential. In short, equity creates a path from hope to change.

Striving to be fair often feels like a futile pursuit. As the mother of two young children, I hear a lot of “That’s not fair!” and it drives me nuts because all that really is being said is “I don’t like it. I don’t agree.” Criticizing something as unfair is rather easy to do, while proving that something is fair is rather difficult because somebody somewhere will figure out how it is not fair for them (“Mommy, she has more sprinkles.” “No, you each got 30.” “But she has more red ones.” Ugh.)

The claim to fairness in taxes especially makes me want to scream. Everyone claims their tax proposal is fair. And, frankly, they all probably are. Let me show you:

 

    • Fair #1: We all pay the same amount or percentage of what we buy. The bill is fixed at a certain dollar figure or a percentage of the cost of a good or service. Examples include sales taxes and taxes on gasoline or cigarettes. The rationale for this kind of tax is that we have a choice about what we buy and whether to buy at all. The amount of tax to which one is subject is under the individual’s control.
    • Fair #2: We all pay the same percentage of what we make (income) or have (wealth). This is the Steve Forbes-style, do-your-taxes-on-the-back-of-a-postcard kind of taxation. Regardless of what you make, we all pay the same percentage. The rationale here is that we should all bear the same burden of tax.
    • Fair #3: Those who earn the most pay the most. In this version, people pay different percentages of their income or wealth, and the burden you bear increases in proportion to your income or wealth. It assumes that those with the most wealth or making the most income can more easily bear the burden of taxation without it affecting their well-being substantially.

Taken alone, all three versions of the tax are fair. In Fair #1 and Fair #2, the fairness as equal treatment is pretty clear because you are talking about everyone paying the same amounts or percentages. Fair #3 requires a sense of duty or responsibility to contribute more to the common good when you have been blessed with more in order to understand why this is fair.

But so what? If each can be seen as fair, then they can also be seen as unfair:

    • Fair #1, this type of fairness usually has regressive redistributive effects (pushes us further apart) and is tied to consumption, not income or wealth. Those with the least spend actually spend virtually all that they have in order to subsist. There is no choice to not consume that doesn’t significantly alter one’s well-being. (This argument doesn’t apply to luxury taxes, and may only dubiously apply to sin taxes.)
    • Fair #2 has a flat effect — it doesn’t do anything to redistribute wealth. This version of fairness doesn’t change anything, which I suppose is a version of fairness, but then why bother having taxes at all? (Oh right, that’s probably the point.) In fact, depending on the percentage and to what the tax applies (define “income” and you’ll get the point), it actually could have regressive redistributive effects even though it is theoretically flat.
    • Fair #3 has a progressive redistributive effect (brings us closer together) and that just strikes some folks as wrong – “if you earned it, why can’t you keep it?” Critics who don’t agree with the progressive redistributive effects of this kind of tax usually assume that those who earn money deserve it and should maintain control over it. I also tend to hear people say that private philanthropy is the appropriate role for wealthy people to make contributions towards the common good, rather than through taxes and government (but that’s a future blog post).

Pro or con “fair taxes” arguments are morally anemic largely because taxes are a tool. If you need to build a house, are you really going to argue about whether using the wrench or the hammer is fair? No, you are going to see if it is the tool you need to get the job done. Avoiding the conversation about a vision of an economy we really want, and just bickering about the means as if this could substitute for having the real conversation about what we really want, hasn’t worked very well so far. How much longer are we going to keep doing this?

Let’s talk about equity instead of fairness (the definition I like is from PolicyLink’s Equity Blog shown above). If we are serious about wanting a society where all can participate and proper, then policies that minimize inequality should be our highest priority. Even the language of equity has a more robust feel to it, especially compared to “fair.” Of course we want things to be fair, but equity is something for which we can strive. And an economy where all can participate and prosper must exist before we truly can have a nation of equals.

It’s about life, liberty and the pursuit of happiness. A country where all can participate, prosper and reach our full potential has always been an American ideal, and it should be what drives our tax and fiscal policy. At a minimum, we should be adopting tax policies that narrow the range of income inequality and create the foundation for a healthy and vibrant middle class. And the steps to getting from here to there are going to mean that some policies will look unfair when considered in isolation, but when taken in context of the larger goal, many people will embrace them because they understand why they are necessary. So let’s quit bickering over what’s fair and hold up a vision worth working towards.

(See this bonus blog post about how my seven-year old learned why vision is important and why fair processes or means don’t always get you to your vision.)

Definitions of regressive, flat and progressive can be found here.

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Check out United for a Fair Economy’s Fairness in Taxation Act (yes, I know I just blasted the use of the word “fair” with taxes, but they didn’t consult me!) Their members of the Responsible Wealth project have a vision for a more equitable society and have this to say about the wealthy paying higher taxes:

“I think very wealthy people like me should pay substantially higher taxes, since we have done exceedingly well in the last few decades. Our taxpayer-funded government contributed to my success.” – Katharine Myers, Responsible Wealth member, in a March 16, 2011 press conference with Rep. Schakowsky et al.

“I strongly support the Fairness in Taxation Act…While I certainly wish to pass on to my children some of the wealth that I have been fortunate to accumulate, I also want my children to live in a country which avoids the political polarization that may develop as the wealth gap increases.” – James E. Mann, Co-owner of New Hampshire Business Development Corp. & Partner in MerchantBanc

“[M]y husband and I are huge beneficiaries of government support. Every step of our careers was made possible with taxpayer dollars. We strongly feel the debt we owe our society… [R]aising our taxes would not affect our standard of living…I  heartily support Rep. Jan Schakowsky’s Fairness in Taxation Act.” – Dr. Alice Chenault, Responsible Wealth member

“I support the Fairness in Taxation Act…because rich people can afford to pay higher taxes. About 90 percent of my income comes from investments, which currently are taxed at the lower capital gains or dividend rate of 15 percent. I would pay much higher taxes under this bill. That’s fine with me, because our government helped contribute to my wealth by protecting the patents I used to start a company.” – Steve Kirsch, CEO of Propel Software Corp.

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Categories: Government, Taxes, Values Tags: , , , , , , , ,
20
Oct 2010

Measuring Inequality

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Economists often look at the distribution of income as an indicator of economic well-being (today, in fact, in another NY Times article). The theory goes that if we see how much a person makes, then we will have some idea of how well-off they are assuming higher incomes mean better-off. In today’s economy though, many of us have accumulated a lot of debt; so if your income can’t keep pace with what you owe, income is no longer an accurate barometer of your financial well-being.

One alternative is to look at wealth. Wealth is the value of what we own minus what we owe. It’s the value of your home, car, jewelry, TV, savings, retirement accounts, stock investments, and baseball card collection minus your credit cards, mortgage, car loans, etc.

The distinction between wealth and income is significant. Wealth represents financial stability and security, the capacity to be economically resilient when times are tough. Income is just about what’s coming in, without regard to how much goes out. If you have some wealth, you can better withstand unemployment, manage a health crisis, send a kid to college or start a new business. Wealth makes the risks of life less risky and the great opportunities in life more possible. Some people aim for high income as a goal, but what most of us really want is wealth.

How is Wealth Distributed?

So here is what the distribution of wealth looks like in the United States as of 2007.

Each chair represents 10% of the wealth, and each person represents 10% of the households. So if a person is sitting down, that 10% of the households hold 10% of the wealth.

This picture shows that actually the top 20% of households hold more than 80% of the wealth (the real number is 85), while the bottom 80% of households hold less than 20% of the wealth (in reality many of them have negative wealth because they are in debt).

Differences in types of wealth

The concentration at the top is actually more extreme than in appears. The top 1%, say one person’s hand, holds 35% of the nation’s wealth alone. The income of the top 20% comes primarily from their wealth – the stocks, bonds, trusts, real estate, business investments, etc. that provide them with capital gains income (capital gains is a type of income derived from investments, as opposed to income from labor). It is liquid — meaning its form can be easily shifted or changed back into cash (again, handy in a pinch).

For the bottom 80% trying to share two chairs, those chairs represent homes, savings accounts, retirement savings and pensions. The income of the bottom 80% is not really coming from these investments though; it is mostly coming from work. That is why you can have someone making $100,000 a year in this category. They may make a lot, but it might be paying off the debt in her house, medical bills or college tuition. Also, the wealth is less liquid. Yes, one might have savings in an IRA, but there are limits to how much you can access and penalties for doing so. In other words, the bottom 80% has more trouble accessing the little wealth they do have.

Scarcity, Excess or Sufficiency?

So where is the scarcity and excess in this picture? Where is the sufficiency? Do we have enough for everyone to sit down or not? This picture reminds me of those black-and-white drawings where if you look at the black space you see two people facing each other, but if you look at the white space you see a vase. What do you see?

Sometimes I see eight people focused on two chairs and fighting like crazy to be the one that sits down whether it is a debate about taxes, stimulus packages, education spending or reforms to entitlement programs. And I see the eight chairs with two people who can’t figure out what to do with them, and are probably a bit worried about what will happen if the other eight people actually see just how many chairs they have (if they even know). When I put myself in the shoes of the people in this picture, mostly I see us vs. them. And the resulting relationships and conversations between them are not pretty.

Occasionally, I see the whole picture at once — that there is more than enough chairs for everyone to sit down and change the picture entirely. But it takes conscious effort on my part to look at this picture and remember that there is no them, only us.

If we want an economy that is based in sufficiency rather than scarcity, the first step is to choose to see differently. We can focus narrowly and talk about how eight people should share two chairs or how those with eight chairs should share, the us-vs.-them mode. But to come from sufficiency, we can choose to see ourselves in all those people and with all those chairs — people with the opportunity to come together as one and make different choices.

NOTES to readers:

The data on wealth is hard to come by. Professor Edward Wolff has faithfully written about wealth statistics over the years and his latest research which includes the data used in this article can be found here and “pre-crunched” by Professor G. William Domhoff here.

Over the next couple of weeks I will have a series of posts about the Ten Chairs, what we learn about the economy simply by looking at the distribution of wealth. It provides critical context for understanding how we created the economy we have and how to create a different one. Like many good ideas, there are many versions of this illustration being used by various activists, and mine draws largely from the workshop designed by Just Economics and University of Massachusetts, Boston Professor Marlene Kim. United for a Fair Economy also has excellent versions of it on its website and live trainers available to give it as a workshop, too.

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Categories: Wealth Distribution Tags: , , , , ,