Poof - I made you a billionaire. No - hypothetically, you did it yourself. You stood on the shoulders of giants; you reconfigured some great ideas and some promising startups and came up with the next greatest thing. The people love it and they love you too. Now your net worth is exactly one billion dollars. The first question is, How much do you need to look and feel unquestionably wealthy and comfortable for the rest of your life?
Of course you’ll need to provide for your children - and your children’s children. You wealthy folks have families with 2.3 children. (I made that up. It sounds reasonable.) With the good health and long life that you can afford, you will probably enjoy a warm relationship with at least one great-grandchild. Let’s create a $10M trust fund for each of the kids - all 12.167 of them. Hopefully, with good financial management, those nest eggs will have appreciated handsomely by the time they are ready to hatch.
That was very generous of you but it decreased your principal - your $1B - by $121.7 M. You are now only an 878.3-millionaire. Not only that, your investments are doing poorly - lately only a 1%/year rate of return on your principal, giving you, this year, passive income of only $8.783 million dollars. For political and public relations reasons you only accept $2M/year as chairman of your corporation but with that $10.783M/year, you should be able to scrape by without touching your principal.
In your position you have to keep up appearances. I’m not talking about expensive suits and runway fashions. I’m talking about noblesse oblige. Phil Knight is the 24th richest man in the US and currently worth about $16.3B. Bill Gates is, well, much richer. Wikipedia says of Bill and Melinda Gates, “As of 2007, Bill and Melinda Gates were the second-most generous philanthropists in America, having given over $28 billion to charity; the couple plan to eventually donate 95% of their wealth to charity.” If Bill and Melinda reach their goal, their fortune will have shrunk to a mere $3.6B based on Bill’s current net worth.
Phil Knight just pledged a $500M challenge grant to Oregon Health Sciences University - or 3.1% of his current net worth. Good suits aren’t cheap. What if you did that? You’re not even in his league. You’d be reduced to a mere 378.3-millionaire.
And what if the apocalypse came and your effective tax rate became 75%? Well, that would only affect your miserable pittance of an income and not your net worth. Now, you might take a heavy hit with a 75% estate tax but you’d be dead. Hopefully, your kids could eke out a living on the trust funds and the $94.6M worth of crumbs left over after estate taxes. Considering that Doomsday scenario, the $500M pledge would be worth it. That kind of gift giving buys you a lot of credibility. You are among the magnanimous rich - a pillar of your community and a benefactor to the world … and not nearly as prominent a target.
Will it buy off the peasants with pitchforks, screaming for tax revenue for schools and health care? Apparently it does. If you didn’t have to pay a 75% effective tax rate or a 75% estate tax, then you - now only a $378.3-millionaire - could pick and choose and orchestrate your grand gestures, look good, and live large. About Phil’s $500M gesture: I applaud OHSU’s good fortune and I know they will give back vital services to the community. But if they were in a lineup with food-stamp clients, students, the elderly, the sick, and the homeless, would they get all $500M? That kind of distribution is inefficient, unfair, undemocratic, even whimsical, since it is based entirely on a single person’s choice.
But you and Phil and Bill earned it, right? This is America and you have the right to do whatever you want with your money - all billions and billions of it. That brings us to the second question: How much is enough?
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