By Patrick F. Cannon
In what has now become a constant refrain, CBS Sunday Morning last Sunday had a piece on the income gap. They trotted out the usual figures on how much of the world’s wealth was held by the top one percent as opposed to the bottom 50 percent. As we all know, the gap is real, real big.
I have long been on record as believing that the highest earners among us should pay more in income taxes. The current top rate is 37 percent. I believe it should rise in increments to as high as 50 percent. Alas, with the current political situation, this is unlikely to happen.
But most people don’t understand the difference between net worth and income. Because the information is confidential, we don’t know what Elon Musk’s actual taxable income was last year. We do know that he’s the world’s richest man. At one point last year, he was reportedly worth $300 billion. Some people seem to think – and the media supports this view – that all that dough is in Elon’s grubby hands. In fact, most of his fortune is tied to the stock price of Tesla, which has a market value (as of Monday) of $944 billion.
Instead of being worth $300 billion, as of January 22 the poor guy was worth only $244 billion. You see, his wealth is actually tied to the worth of Tesla stock, which has declined in the short term. As it goes up and down at the whim of the markets, so will Musk’s net worth. Somebody – was it that font of good ideas, Elizabeth Warren? – came up with idea of taxing net worth, in addition to income. But what if the market crashes after the tax is paid? Does the government give it all back? Or does the poor tax payer have to start selling apples?
The Tesla stock price is based on some formula of fantasy vs. reality. While it fluctuates from day to day, Tesla’s market capitalization (total value of its stock) was (on Monday) about $950 billion. Late last year, it had actually reached a trillion! Estimated sales last year were $52.5 billion, with a profit of roughly $7 billion. Now, with a market cap of $78 billion, General Motors had sales of $127 billion, with profits estimated to be about $13 billion. If you do the math, you’ll see that Tesla had a better profit margin, but is it really worth more than 10 times what GM is?
If I were a betting man, I would wager that Tesla’s stock price may well come back to earth in the years to come. With the exception of some lame competitors, whose batteries gave them only a fraction of Tesla’s range, up until recently they had a virtual monopoly in the practical electric car market. No more. The big legacy automakers have entered the fray in a big way. What will Tesla look like when faced with competition from Mercedes, GM, Toyota and Ford? All of them (and more) are making massive investments in electric vehicle technology.
Back to the point – there is often a significant difference between stock-based wealth and income. Instead of heaping abuse on Musk, Bezos and Gates, maybe we should complain about overpaid sports figures and corporate nabobs. As an (admittedly minor) stockholder, I think that many corporate executives are compensated far beyond their actual value to the company. One of the reasons for this is boards of directors made up of – you guessed it – corporate executives from other, non-competing, companies. It’s a “I’ll take care of you if you take care of me” mentality.
By the way, in what has become a cliché, CBS couldn’t resist illustrating its story with a shot of mega yachts riding at anchor in some exotic port. Are they a vulgar display of wealth? Indeed they are (see last week’s article). On the other hand, they provided jobs to the people who built and now man them. And perhaps to a lesser extent, the folks who make the skimpy bikinis that are such a feature of their topside decoration.
Copyright 2022, Patrick F. Cannon