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THE BOTTOM LINE

Billionaires have never had it so good in the present day

THE world's billionaires do not have everything their own way these days. They are still rich and powerful, but they are less feted for exceptional achievement and are under pressure to pay more tax.

Elizabeth Warren, the US presidential candidate, plans a wealth tax to denude the fortunes of those, such as Bill Gates, by tens of billions over decades. "I'm starting to do a little math about what I have left over," Mr Gates joked last week. Jeremy Corbyn, the UK Labour leader, launched his general election campaign by promising to make billionaires pay a lot more tax.

Billionaires still have some friends. UBS last week sprung to their defence, arguing that its private banking clients merit their wealth. The "smart risk-taking, business focus and determination" of rich entrepreneurs give them the ability "to transform entire industries, to create large numbers of well-paid jobs, and to rally the world to find cures for diseases such as malaria".

UBS says "the billionaire effect" enables companies controlled by their founders to take a long-term view and beat those with impatient shareholders. The 2,100 billionaires it counts have "an obsessive business focus, constantly scanning the world for new opportunities. And they are highly resilient, undeterred by failures and roadblocks".

There is plenty of truth to this. Even if one sets aside the heirs and heiresses to fortunes, and the oligarchs who seized their wealth, it leaves many entrepreneurs who started their businesses from scratch among what Ms Warren calls "ultra-millionaires".

Indeed, the world's billionaire super league is more meritocratic than in past decades. As one study of the Forbes 400 list of richest US billionaires found, they "did not grow up nearly as advantaged as those in decades past". There are more entrepreneurs from middle-class backgrounds who went to elite universities before making their fortunes.

But such success would have been less lucrative in the past - they might have been merely rich rather than super-rich. Before lionising or demonising elite entrepreneurs, consider how their personal talents are amplified.

First, the superstar effect. Globalisation and technology that allows businesses, such as Google and Facebook, to span markets, help the most successful entrepreneurs to profit faster and at greater scale. Successful founders can create superstar franchises, like some Hollywood stars in China.

SUSTAINING RICHES

The economist Sherwin Rosen once noted that "superstar economics" mean the returns to the winner in any category can be vastly higher than the returns to second place. These winners can, as the economist Alfred Marshall commented in 1890, "apply their constructive or speculative genius to undertakings faster, and extending over a wider area, than ever before".

Second, the security effect. One reason why the poor stay poor is that they cannot plan for the long term. Abhijit Banerjee, Esther Duflo and Michael Kremer won this year's Nobel economics prize for showing, among other things, that "the present takes up a great deal of people's awareness, so they tend to delay investment decisions".

The reverse is true of billionaires, who can finance ideas over decades and ride out failures and setbacks. UBS says that "the outperformance we call the 'billionaire effect' depends on the entrepreneur keeping control", but they may be advantaged by security as much as genius.

Third, the insider effect. People do not turn into billionaires without a keen sense of financial opportunity and the drive to make a series of good decisions. But once they achieve positions of power, they are reinforced by a network of advisers and brokers.

Billionaires do not leave their cash at banks - UBS or other private banks handle it. They have insider access, such as the opportunity to invest in private businesses, or initial public offerings of fast-growing companies. Wealth does not automatically beget wealth but moving in elite financial circles with enviable resources helps.

Fourth, the tax effect. Many countries tax income higher than capital, because it is simpler and they want to encourage entrepreneurs. But this leads to the rich paying less as a share of their wealth than those on average incomes.

Wealth is also mobile. Some billionaires reside in jurisdictions such as Monaco or (in the case of Sir Richard Branson) the British Virgin Islands. Even those who stay at home have scope through trust and offshore structures to shield some of their wealth.

These effects mean that entrepreneurs with great talents are in better positions to gain and sustain riches than in previous decades. Mr Gates dislikes Ms Warren's plan to drain his wealth but he observed that "we are not close to the limit" in terms of raising taxes without damaging enterprise.

It is salutary that more of today's super-wealthy built their own fortunes, but they are also lucky to live at an unusually helpful time in economic history. Mr Gates has acknowledged it by devoting tens of billions to philanthropy, as well as in prompting others to give back. Rather than getting too angry at Ms Warren's wealth tax plan, it behooves others to recognise it too. FT

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