How the Rich Got Rich

Howard Lipset of Progressive Management, Inc. and www.thecfo.com dissects the top wealthiest people in the country. Want to emulate the success of others? If wealth is what you’re after, look to an unconventional source for tips: the IRS.

John D. Rockefeller, America’s first billionaire, said, “If your only goal is to become rich, you’ll never achieve it.”

Easy for him to say, but his point is: If the only thing you care about is making money, no matter how much money you make, it will never be enough.

Still, even though we all define and calculate success differently, most of us would like wealth to factor into our equations.

To find out how, check out the 400 Individual Tax Returns Reporting the Largest Adjusted Gross Incomes, an annual report issued by the IRS. There’s interesting data buried in all the charts and tables.

(The latest report is for 2009, which to you and me was a long time ago but to the government is really, really up to date.)

In 2009 it took $77.4 million in adjusted gross income to make the top 400. That might sound like a lot, but it’s down from $109.7 million in 2008 and significantly down from a record high of $138.8 million in 2007.

A mere $77.4 million only got you in, though; the average earnings were $202.4 million, a lot of money but well down from the $334.8 million average in 2007.

Where it gets interesting is how the top 400 made their money:

• Wages and salaries: 8.6%

• Interest: 6.6%

• Dividends: 13%

• Partnerships and corporations: 19.9%

• Capital gains: 45.8%

The top 400 averaged $92.6 million in capital gains income–16% of the total capital gains reported by all taxpayers. Obvious conclusions:

• Working for a salary won’t make you rich.

• Neither will making only safe “income” investments.

• Neither will investing only in large companies.

• Owning a business or businesses, whether in whole or partnership, could not only build a solid wealth foundation but could someday…

• Generate a huge financial windfall.

The data clearly supports the last point. A total of over 3,800 taxpayers have made the top 400 since 1992, but only 27% appear more than once, and only 2% appear 10 or more times.

Clearly, getting rich–in monetary terms–is the result of investing in yourself and others, taking risks, doing a lot of small things right… and then doing one big thing really, really right.

And hopefully achieving other goals along the way–because then, even if you don’t get rich, you’ll still be wealthy.

But you will never get there, if the government is allowed to interfere.

One response to “How the Rich Got Rich

  1. This is an interesting analysis. Similar to that in the book The Millionaire Next Door. Only it’s about people with less money – the one percent not the one tenth of the one percent.

    Your last sentence makes me a little nervous. It’s true but also true that you can’t build a company if the govt doesn’t provide the right infrastructure and support. You don’t see wealthy people in Somslia or other places with very small government. In this era of historically low taxes – especially on the wealthy – I worry that a backlash against govt will send us in the wrong direction.

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