I have always appreciated the straightforward questioning and curmudgeonly manner of Leon Cooperman in the handful of times that I have encountered him at investment meetings over the years. I have also admired the story of his humble beginnings, and the hard work and acumen that led to his tremendous success.

Similarly, I too believe in the meritocratic ideal of capitalism, but in the 21st Century the “meritocracy” of that ideal has been severely weakened. And the serious flaws of capitalism as it is practiced in the U.S. today might very well lead to its demise in almost the exact manner, and for the same reasons, that Karl Marx described 150 years ago.

Highlighting those flaws – many of which are or were off the radar when I did – describing in detail the implicit errors in them, and providing solutions is why I began this website eight years ago. The tagline says it all: The Capitalist Revolution Begins Here.

The reason for this post is that based on what I know of the man, and the timeliness of the lengthy and mournful interview he gave The Washington Post last month, I would very much like to recruit Leon Cooperman to the cause of reforming capitalism, with one very specific mission in mind.

Before I do, I would be remiss in not bringing two issues to the fore, which I hope will give Mr. Cooperman a better understanding of the vilification that is currently being hurled at billionaires. These two issues he has an intimate connection with due to the nature of his work analyzing and investing in publicly traded companies. They are also a contradiction to a simplistic and somewhat archaic view regarding the attainment of wealth that he shared in the Washington Post interview:

“How do you become wealthy?” he asked. “You develop a product or a service that people want. The world is better off for a Larry Ellison, a Bill Gates. Look at the jobs they created. Look at the good they did for the world. The attack on wealthy people makes no sense to me.

Eli Saslow on Leon Cooperman in The Washington Post 1/31/2022

Agreed, the world is better off for most products and services created by the entrepreneurs you mentioned, and many others like them. Yet it is not better off by the overwhelming majority of “products” and services created by the financial sector. While I am willing to give you a pass based on the returns you generated at Omega, most products offered by Wall Street have no value add. And I am not just referring to retail brokers and what they push on retail investors. Alternative investments such as Private Equity, Private Debt, Hedge Funds, “Opportunistic” Real Estate Funds, are being gorged on by institutional investors – aka state & municipal pension funds, aka the average American taxpayer – also add no value to the economy.

Worse, the fees they extract are growing at rates faster than revenue generated by the red-hot tech sector in the past few years. Given that there is no value-add from these products in terms of out-performance, and the fees are so massive, this is a direct transfer of wealth from the middle class to the already extremely wealthy. Thus, most of the billionaires created in the financial sector these days are not in the same category as the two you listed or other non-financial entrepreneurs. No one has a better understanding of the truth that is written in this paragraph than Leon Cooperman. Sorry.

The second shortfall in the quote above, is that it does not take into account another group of billionaires (and many more centi-millionaires) whose business wealth was not derived from creating a useful product or service. I am referring to non-founder CEO’s, whose compensation growth has also compounded over recent decades at rates that belittle those of the tech sector.

Simplistically I could spew oft-quoted statistics such as the multiple of CEO pay to that of the average worker was 30x in the 1970’s and 300x today. Yet a keen reader of proxies over those decades should already have a full awareness of this expansion. It defies the laws of supply and demand that we both cherish. Had we replaced the 500 CEO’s of the S&P 500 only with those willing to work at 30x, there would have been zero diminution of growth or productivity in America over the same period. Nor would there be going forward were such a change to take place. Pitchforks anyone?

As an aside, I believe the ~300x number is greatly understated, exacerbating income inequality by not only increasing wealth for a few but by taking it from shareholders = the people across America with retirement accounts & the taxpayers who must make up any state & municipal pension shortfalls.

The two groups of ‘Undeserving’ billionaires detailed above are meant to help elucidate why so many in this country are increasingly vilifying billionaires: the undeserving are outnumbering the deserving. While I have ideas as to “What Is To Be Done” to solve some of the problems mentioned above, let’s turn inwards and take a closer look at another ‘lament’ in the Post interview as an intro to how you can help.

He sent in a quarterly check for US$10m to the federal government in estimated taxes and said he paid an effective tax rate of 34 per cent. He’d told politicians in his letters that he was willing to pay more, but he believed the highest effective tax rate should be no more than 50 per cent.

Eli Saslow on Leon Cooperman in The Washington Post 1/31/2022

The quote above completely lacks financial context, and there is none provided before or after in the article either. My guess is were one of his analysts to present an investment idea to Leon Cooperman so lacking in such context he/she would a) definitely be excoriated b) probably receive a pink slip, and c) possibly a new orifice.

That glaring omission, and my unwillingness to simply accept the absolute dollar amount and tax rate percentage proffered by Mr. Cooperman as an indication of equitability, gives me the permission to provide my own numbers for context. $10 million a quarter extrapolated over the year = $40 million paid in taxes. Fair? I think so. The next question is what revenue were those taxes paid on? I’m going to use $1 billion, true or not, which equates to a 4% tax rate!

Oops, the article cites a “34% effective tax rate.” Lacking context, I’m going to still use my $1 billion in revenue number, but instead assume that he was able to avail himself of a loophole to avoid or at least defer taxes on $880 million.1 That leaves only $120 million of taxable income left on which he paid 34% or $40 million. 4% marginal tax rate or huge loophole, lacking context leaves astute readers assuming the worst. Pick your poison.

The poison I choose is actually a combination of them both. My guess is that like a lot of long-biased investors, Leon Cooperman’s net worth increased significantly in 2021, a year in which the total return on the S&P 500 was 27%. Yet while a surgeon making $2 million a year would pay a federal tax rate of 37% on the majority of her income, Leon tops out at 23.8% because the majority of his income is capital gains and dividends.

37% vs. 23.8%, or as a percentage of the percentage, the surgeon is paying taxes at an incremental rate 50% larger than the investor. In fact, based on earned income, wages, labor, compensation, Cooperman’s top incremental rate of 23.8%, is almost the exact same as an individual earning $86k – $165k a year, or a couple earning $172k – $330k.

Is that fair? Zealous defenders of the 23.8/37% differential usually spew a spurious theory along the lines of ‘lower capital gains taxes mean greater capital efficiencies leading to more growth overall which benefits everyone.’ Which is all that is required for unknowing (or uncaring) politicians to block any changes to this tax gap and simplistically parrot the rationale to their constituents. Yet the reality is that Leon Cooperman, or any other self-respecting hedge fund manager, would practically sacrifice their first-born for an extra 25 basis points in additional return, tax rates be damned. Just ask him.

And we haven’t even mentioned the benefits of deferral, possibly forever if you are a billionaire. In the interest of brevity we’ll leave the details of how that is done to the folks at ProPublica – whose expose may or may not have been a revelation to Leon Cooperman. He’s a highly intelligent man well-versed in all aspects of finance, so I’m guessing the details were not a revelation, but the scale may have been? Either way, with absolute numbers so large and implicit tax rates so low you cannot claim innocence as to the ire directed towards billionaires.

In fairness Leon has declared that he is giving away 90% of his fortune. I fully believe him and genuinely find his heart to be in the right place, which is true with a lot of billionaires. Yet this in no way absolves them from paying their fair share of taxes now from a percentage perspective, if not a timing one. Specifically, he and a large swath of billionaires, including the two he mentioned, Gates & Ellison, have generated the overwhelming majority of their wealth in a manner that subjected them to capital gains tax rates, not income tax rates. The distinction is completely unfair and tiptoeing around it while seeking charitable accolades or affirmation for creating businesses that benefit the world is a complete charade. If it makes you feel better about it Lee, the carried interest upon which you earned your principal can barely hold a candle to the taxes deferred by today’s generation of start-up founders.

Furthermore, given the humongous upside potential and very limited downside risk, nobody is not going to start an investment fund of any kind were the differential between 23.8% and 37% go away. The lack of that delta would have never stopped you from starting Omega.

This is equally true about any start-up, be it the next Microsoft, WeWork, or your local dry-cleaner looking to add a new location – who by the way does not get favorable capital gains treatment.

So instead of defending Capitalism as it is, pick a flaw in the system that you want to change to make it better. Even if that flaw is one that you have been a tremendous beneficiary of and might make you a bit less popular among your fellow billionaires.

Ninety percent of three billion dollars is very generous Lee, but will it move the meter to the extent that you really hoped when you were accumulating your fortune? Is there a better use of your expertise and the soapbox that you have been given in light of that fortune? Is there a non-monetary contribution for you to still make to this country, this economic system, your grandchildren? You know the answer, the only question is will you act on it and minimize your regrets?

The Moral Calculations Of A Billionaire – time to act?

Two recent examples of the ‘Deserving’ and ‘Undeserving:’

John C. Koss, Stereo Headphone Innovator, Is Dead at 91 – sadly, they don’t make them like this anymore

Hedge Fund Millions Are At Stake In Sculptor CEO Pay Dispute – “Last year, when Sculptor’s main fund returned 5% — near the bottom of the pack compared with its multi-strategy peers — Levin collected a bonus of almost $48 million, mostly in cash”

1. While that “loophole” might be a normal tax break available to all, we simply do not know [↩]