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Archive for January 6th, 2011

If you are interested in either Facebook, Goldman Sachs, the SEC or securities regulation in general, you’ve probably been following this controversy about investment bank Goldman’s deal to secure extra funding for Facebook. A special investment pool for wealthy investors will allow rich investors into the social networking company through backdoor channels that skirt SEC rules so that the company doesn’t have to do an IPO yet. Usually, companies must go public when they have 500 investors. So Goldman set up a special purpose entity in which several investors magically become one. It’s a deal that’s got some people apoplectic, because as always, it will allow the wealthiest Americans to get into a private company early. When Facebook eventually becomes the kind of company that we mere carbon-based life forms can invest in, it could well be a less attractive investment. Why do I say that? Yes, I use Facebook, and love it. Yet, you might be shocked when I tell you–Facebook is actually just an Internet bulletin board. It might still be a dog someday. Small shareholders might be the last ones in and get the least value. The large investors are buying because they know you’ll be there to take it off their hands later. Remember AOL-Time Warner? Almost a hundred billion dollars flushed down the toilet?

While others gripe about the rules of trading, I’d like to step back and ask another timely question: Given the many ways the wealthy rig our system, why is our tax system protecting them? From stock options to special purpose entities to private equity investments to poor corporate governance to outrageous signing bonuses, the rich already have many great advantages to suck value out of our investments. We are to believe as small investors that we are participating in the great wealth-generation of capital, but we do so at a disadvantage to those who get in early and to others who trade at lightning speed. So why are we laboring under the delusion that continuing low marginal tax rates for the wealthy are fair and/or productive?

Many people shrug and say that it’s a necessary evil of capitalism–that the rich need more advantages than the rest of us because they will reinvest and give us jobs. But then you might have also noticed that American companies are posting record profits–and sitting on them without doing much new hiring. The American worker, meanwhile, has seen her wages stagnate while unemployment has remained at 9% to 10%. Corporations are sending their reinvestments overseas.

Most Americans believe that the tax rates on the wealthy should rise. And yet in the last election they elected a Congress that made sure rates wouldn’t.  What gives?

Could it be an abiding belief among many Americans that the wealthy deserve the big money for some reason? They work for it, don’t they? Splenetic Fox commentators insist the richest 1% are actually working 400 times harder than those in the bottom 50%. But let’s keep everything honest here: they aren’t. Corporate governance is a sham. People are vastly over-rewarded in corporate America for things they don’t deserve, including the people who got bonuses in 2009 for destroying our economy. Some companies are responsible in the way they compensate their employees. But we have to trust them to do it.

Yes, capital creates wealth, but only to a point. But somewhere along the way, lower taxes simply prompt the wealthiest not to reinvest but to hoard. These nuances, if not lost on supply siders, are conveniently ignored. And when they address their arguments to lower income people, they try to appeal to what they think is an innate sense of fairness. The rich work hard for that money, don’t they?

Well, yes, if you consider a used car salesman lying to you and selling you a shitty car with a bad engine for three times its book value working hard.

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