Introducing ... the Lemmy

And the Lemmy Tax.

Named after Motörhead bassist and founder Ian Fraser Kilmister, the Lemmy is the pronunciation for the LMI, or Lifetime Median Income. As the disparity between the 1% and everyone else has grown, it has become harder and harder to to illustrate how much money some of these guys are making. For example, when we learn that Mitt Romney made $20.9 million last year, it seems like a lot -- but can we properly understand how much of "a lot" it is?


Here's where the Lemmy is useful. The LMI is based on a simple formula:

Median Income per Year x Total Years Working

which gives us a basic calculation of how much the average American could expect to make over the course of his life. In short, this is the total aggregate revenue value of an average American life.


According to the Social Security Administration, the median income in 2010 was $26,364, and inflation in 2011 ran at 3.2%, so let's bump that figure up to $27,207. And figuring the average work life at 50 years (which might be a bit high, but we're being conservative here), that gives us a 2011 Lemmy of $1,360,000.


So Mitt Romney' $20.9 million translates into 15.4 Lemmies. Which means that if you took fifteen average (median) Americans, put them to work and then grabbed every penny they ever made, over the course of their entire lifetime -- literally leaving them with nothing -- you still wouldn't have as much money as Mitt Romney made last year.


We raise this idea because the New York Times published  a list of the top five most profitable hedge fund managers for 2011. They are:

	NAME	FIRM	VALUE
1	Ray Dalio	Bridgewater Associates	$3.9 billion
2	Carl Icahn	Icahn Capital Management	$2.5 billion
3	James H. Simons	Renaissance Technologies	$2.1 billion
4	Kenneth C. Griffin	Citadel	$700 million
5	Steven A. Cohen	SAC Capital Partners	$585 million

But these numbers are simply too big to comprehend. But with the Lemmy, we can put a more human face on these stats.

	NAME	FIRM	LEMMIES
1	Ray Dalio	Bridgewater Associates	2888
2	Carl Icahn	Icahn Capital Management	1838
3	James H. Simons	Renaissance Technologies	1544
4	Kenneth C. Griffin	Citadel	514
5	Steven A. Cohen	SAC Capital Partners	430

So last year, Ray Dalio made, roughly, the same amount as 2888 people would -- over the course of their entire lifetimes. Or, to put it another way, in one year, Ray made as much as an average American would in 2888 lifetimes. With life expectancy now being about 78 years, it would take that average American 225,264 years to make that much (if you include childhood and senescence).

The only problem with this (yes, the only one) is that there were no humans 225,000 years ago (the Middle Paleolithic era) -- there were only Neanderthals. So, technically speaking, you'd need to go back to 225,000 years, be reborn 2888 times and change species, from Homo neanderthalensis to Homo sapiens (and eventually to the sub-species Homo sapiens sapiens).

Lemmy?

In short, Ray Dalio made more last year than one median person could have in all of human history. So good for Ray, but we'd like to see him pay a bit more in taxes.

Readers of our earlier posts may remember that we've already called for a top marginal rate of 50% (as well as treating capital gains and the like as regular income). But because these numbers are so obscene, we'd like to introduce a surtax, applicable to a portion of the 1%.  Here goes:

The Lemmy: If you make more in a year than the average American does in his life, your top marginal rate goes to 55% (with the top bracket starting at one Lemmy). 

The Double Lemmy: If you make more in a year than the average American does in two lifetimes, your top marginal rate goes to 60% (with the top bracket starting at two Lemmies). 

The Triple Lemmy: If you make more in a year than the average American does in three lifetimes, your top marginal rate goes to 65% (with the top bracket starting at three Lemmies).

To be fair, the idea behind the Lemmy Tax is meant to address gross inequality more than raise money. But instituting the Lemmy Tax on just these five gentlemen would raise over $1.4 billion when compared to this site's tax reform package, and over $4.8 billion when compared to current tax law.

Now here's the cool part. Because the Lemmy is based off of median personal income, the level at which any of the Lemmy Taxes would kick in goes up whenever personal income increases. So the interests of the 1% become aligned with those of the rest of us, which is a good thing as median personal income has barely grown in the last twenty years. In 1990, it was $14,498, which converted to 2010 dollars gets you $24,199. So in twenty years, median personal income has gone up $2164, or about 9%.


Meanwhile, the top 1% have seen their average income increase by 47% in that same time period, and by 52% if you include capital gains. (Folk at the median personal income have virtually no capital gains.)

From the Top World Incomes Database

If the median personal income had grown by 50% since 1990, it would be at $36,300, and the Lemmy would be $1,815,500. That's roughly an extra half-million a year that would not be subject to our surtax.


Bonus question: Why no Quadruple Lemmy? Because of The Case for a Progressive Tax: From Basic Research to Policy Recommendations by Peter Diamond and Emmanuel Saez. (Obama nominated Diamond, a Nobel laureate, to the Federal Reserve Board, but mouth-breathing Sen. Richard Shelby blocked the vote.) Paul Krugman explains:

D&S analyze the optimal tax rate on top earners. And they argue that this should be the rate that maximizes the revenue collected from these top earners — full stop. Why? Because if you’re trying to maximize any sort of aggregate welfare measure, it’s clear that a marginal dollar of income makes very little difference to the welfare of the wealthy, as compared with the difference it makes to the welfare of the poor and middle class. So to a first approximation policy should soak the rich for the maximum amount — not out of envy or a desire to punish, but simply to raise as much money as possible for other purposes. 

Now, this doesn’t imply a 100% tax rate, because there are going to be behavioral responses – high earners will generate at least somewhat less taxable income in the face of a high tax rate, either by actually working less or by pushing their earnings underground. Using parameters based on the literature, D&S suggest that the optimal tax rate on the highest earners is in the vicinity of 70%.

Or, to put it another way, 70% or so is where the Laffer Curve kicks in -- where you actually raise less money with higher rates. A Quadruple Lemmy would put us at 70%, so to be cautious, we simply won't go there.