There are basically five ways to become a billionaire and none of them are legitimate in ethical, free market capitalism. Furthermore, while it’s fine for people who work hard and are innovative to get rich, getting rich to the tune of billions has substantial social costs. Billionaires have effectively bought our policy makers (including Supreme Court justices) and have gotten incredibly favorable treatment in tax laws and other policies. They have purchased or built mainstream and social media outlets that spew right-wing propaganda. The existence of billionaires, therefore, undermines the common good and our democracy.
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For the last 30 – 40 years, the American economy has been consistently producing and enriching billionaires while the typical worker’s wages have been nearly stagnant. As Bob Reich highlights in a recent blog, there are basically five ways to become a billionaire and none of them are legitimate in ethical, free market capitalism. [1]
One way to become a billionaire is to own or run a monopolistic business. For example, Jeff Bezos, who founded and built Amazon, is worth over $100 billion. For being innovative and a good manager, he deserves to be rich. However, the billions come from Amazon’s monopolistic practices. The federal government and 17 states have charged Amazon with using its monopolistic power to inflate prices, stifle competition, and effectively blackmail organizations that want to (and often need to) sell via Amazon’s platform. Bezos also benefits from several patents granted by the government that many potential competitors feel are too broad and contribute to Amazon’s monopolistic power.
For 40 years, the government has failed to enforce antitrust laws to prevent monopoly power. Other examples of billionaire monopolists include Larry Page and Sergey Brin of Google, Bill Gates and Steve Ballmer of Microsoft, and Mark Zuckerberg of Facebook. Under President Biden, antitrust enforcement is being reinvigorated.
A variation on this theme is to own or run a business that is deemed “too big to fail” and therefore gets bailed out by the government when business goes badly. The government spent trillions bailing out big banks during the 2008 financial collapse. As a result, Jamie Dimon, CEO of JPMorgan Chase, is worth $1.7 billion. There are dozens of other billionaires in finance and investment businesses who might well not be billionaires today if the government hadn’t bailed out the big banks and financial companies in 2008.
A second way to become a billionaire is to illegally get and use investment information not available to the public, i.e., to engage in insider trading. For example, Steven A. Cohen is worth an estimated $17.5 billion. He founded S. A. C. Capital Advisors which pleaded guilty to insider trading in 2013 and paid $1.8 billion in penalties. Cohen was banned from managing other people’s money for two years. Nine of his employees were found guilty of insider trading that the Justice Department described as “substantial, pervasive, and on a scale without known precedent in the hedge fund industry.” Cohen walked away with a fine but billions of dollars. He changed the name of the firm to Point72 Asset Management and continued to manage money, primarily his own.
Insider trading is endemic among corporate executives and board members. Frequently, they illegally sell or buy their company’s stock just before or after a major announcement that affects the stock price. Corporate executives and board members often know inside information about competitors (i.e., other companies in the same line of business as they are) and buy or sell a competitor’s stock based on this information. A previous post described what appeared to be insider trading by executives at companies developing Covid vaccines and treatments, as well as by members of Congress (who had non-public information) during the early days of the pandemic. To reduce insider trading and increase competition the Biden administration is more aggressively enforcing the existing ban on directors serving simultaneously on the boards of competitors.
A third way to become a billionaire is to get politicians to enact policies that are beneficial for wealthy people. The tax cut law of 2017 is a perfect example. Wealthy Republican donors threatened members of Congress and President Trump that if they didn’t pass tax cuts the donors would withhold contributions in the upcoming elections in 2018. For example, the Koch brothers spent $20 million in campaign contributions and lobbying to promote a tax cut. The 2017 law’s tax cuts are estimated to save them $1 billion a year in taxes. And this doesn’t include the benefits they get from favorable tax treatment of offshore profits and from cuts in the estate tax.
The fourth way to become a billionaire is to defraud investors. Adam Neumann conned investors into putting hundreds of millions of dollars into his office-sharing startup company, WeWork. While the company never made a profit, Neumann bought buildings that he leased back to the company and lived a jet-setting lifestyle, that included a $60 million private jet.
Other CEOs that have defraud investors and/or customers are Elizabeth Holmes and Sam Bankman-Fried. Holmes has been convicted of fraud via her firm, Theranos, and is now in jail. Bankman-Fried was just found guilty of fraud for his actions at the crypto currency exchange FTX. And then, of course, there’s Donald Trump, now on trial for business fraud, among other things.
The fifth way to become a billionaire is to receive money from rich parents or other relatives. It’s estimated that 60% of the wealth in the U.S. was obtained this way. Two key policies are responsible, both heavily promoted by campaign contributions and lobbying by the wealthy. First, when assets, including stocks or mutual fund shares, are passed on to heirs neither the giver nor recipient has to pay taxes on their increase in value since they were received or purchased. So, as hypothetical examples, Bill Gates or Warren Buffett can give a billion dollars of his company’s stock (that he got years ago for say $10,000) to his child and no one ever has to pay any tax on the gain in its value. Furthermore, the estate tax is so minimal and easy to dodge that less than 0.2% of estates pay any estate tax. And, of course, there is no wealth tax in the U.S.
In addition, wealthy people avoid paying the income tax they owe (despite the cutting of the top tax rate in half over the last 45 years). The Internal Revenue Service (IRS) (until very recently) has been starved of the resources it needs to enforce our tax laws and make the wealthy pay. From 2010 to 2021, Republicans cut IRS funding by 19% and currently are trying to cut the IRS’s increased funding in President Biden’s 2022 Inflation Reduction Act (IRA). A study in 2021 estimated that the 1% of people with the highest incomes failed to report more than 20% of their earnings to the IRS. With the new funding in the IRA, the IRS has, in just a few months, recovered $38 million in delinquent taxes from 175 high-income taxpayers. It is estimated that for each dollar the IRS spends auditing the top 1% of taxpayers it will recover $3.18; for the top 0.1%, it will recover $6.29 for each $1 spent. [2]
[1] Reich, R., 10/26/23, “Do billionaires have a right to exist?” (https://robertreich.substack.com/p/billionaires-dont-have-a-right-to)
[2] Richardson, H. C., 10/30/23, “Letters from an American blog,” (https://heathercoxrichardson.substack.com/p/october-30-2023)
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