How wealth inequalities got out of hand
Elon Musk’s fortune has exceeded $ 200 billion. It would take the median American worker over 4 million years to earn that much.
The inequality of wealth devours this country alive. We are now in America’s second golden age, just like at the end of the 19th century, when a handful of robber barons monopolized the economy, kept wages low, and bribed lawmakers.
As today’s robber barons take space walks, the distance between their gargantuan wealth and the financial hardships of American workers has never been clearer. In the first 19 months of the pandemic, US billionaires added $ 2.1 trillion to their collective wealth and that number continues to grow.
And the rich have enough political power to cut their taxes to next to nothing – sometimes literally to nothing. In fact, Jeff Bezos paid no federal income taxes in 2007 or 2011. In 2018, the richest 400 Americans paid an overall tax rate lower than almost everyone else.
But we can’t fix this problem unless we know how it was created in the first place.
Let’s start with the basics.
I. The basics
Wealth inequality in America is far greater than income inequality.
Income is what you earn each week, month or year. Wealth refers to the sum total of your assets – your car, your stocks and bonds, your house, your artwork – anything that you own that is valuable. Valid not only because there is a market for it – a price other people are willing to pay to buy it – but because the wealth itself grows.
As the population increases and the nation becomes more productive, the global economy continues to expand. This expansion drives up the value of stocks, bonds, rental properties, homes and most other assets. Of course, recessions and occasional depressions can reduce the value of these assets. But in the long run, the value of almost all wealth increases.
Lesson: Wealth builds up over time.
Then: personal wealth comes from two sources. The first source is the income you earn but don’t spend. It’s your savings. When you invest these savings in stocks, bonds, real estate or other assets, you create your personal wealth which, as we have seen, increases over time.
The second source of personal wealth is anything passed down to you from your parents, grandparents, and perhaps even generations before them – in other words, what you inherit.
Lesson: Personal wealth comes from your savings and / or your inheritance.
II. Why the wealth gap is exploding
The wealth gap between the richest Americans and everyone else is staggering.
In the 1970s, the richest 1% owned about 20% of the total household wealth in the country. Now they own over 35 percent.
Much of their earnings over the past 40 years have come from a dramatic increase in the value of stocks.
For example, if someone invested $ 1,000 in 1978 in a broad stock index – say, the S&P 500 – they would have $ 31,823 today, adjusted for inflation.
Who benefits from this push? The richest 1%, who now own half of the entire stock market. But the salary of the typical worker has barely increased.
Most Americans haven’t earned enough to save anything. Before the pandemic, when the economy seemed to be doing well, nearly 80% lived on paycheck to paycheck.
Lesson: Most Americans don’t earn enough to save money and build wealth.
So, as income inequality widened, the amount saved by the few high-income households – their wealth – continued to grow. Their growing wealth has enabled them to pass on more and more wealth to their heirs.
Take, for example, the Waltons – the family behind the Walmart empire – which has seven heirs on Forbes’ billionaire list. Their children, and other wealthy millennials, will soon consolidate the nation’s wealth even further. America is now on the cusp of the greatest intergenerational transfer of wealth in history. As the wealthy baby boomers die, between $ 30,000 billion and $ 70 trillion will go to their children over the next three decades.
These children will be able to live on this wealth, then leave most of it – which will continue to grow – to their own children… tax-free. After a few generations of this, almost all of America’s wealth could be in the hands of a few thousand families.
Lesson: Dynastic wealth continues to grow.
III. Why concentration of wealth is a problem
Concentrated wealth is already endangering our democracy. Wealth doesn’t just breed more wealth – it breeds more Power.
Dynastic wealth concentrates power in the hands of fewer and fewer people, who can choose which nonprofits and charities to support and which politicians to fund. This gives an unelected elite enormous influence over both our economy and our democracy.
If this continues, we will end up resembling the kind of dynasties common to European aristocracies in the 17th, 18th and 19th centuries.
Dynastic wealth mocks the idea that America is a meritocracy, where anyone can do it on the basis of their own efforts. It also flies in the face of fundamental economic ideas that people earn what they are worth in the market and that the economic gains should go to those who deserve it.
Finally, the concentration of wealth amplifies gender and racial disparities, as women and people of color tend to earn less, save less, and inherit less.
The typical single woman owns only 32 cents of wealth for every dollar of wealth a man holds. The pandemic has likely increased this gap.
The racial wealth gap is even more marked. The typical black household owns only 13 cents of wealth for every dollar of wealth held by the typical white household. The pandemic has likely widened this gap as well.
In all of these ways, dynastic wealth creates a self-sustaining aristocracy that goes against the ideals we claim to live by.
Lesson: Dynastic wealth creates an aristocracy that continues.
IV. How America Handled Wealth Inequality During the First Golden Age
The last time America faced anything comparable to the concentration of wealth we face today was around the turn of the 20th century. It was then that President Teddy Roosevelt warned that “a small class of extremely wealthy and economically powerful men, whose main objective is to retain and increase their power” could destroy American democracy.
Roosevelt’s response was to tax fortune. Congress has adopted two types of wealth taxes. The first, in 1916, was the inheritance tax – a tax on the wealth that a person has accumulated over their lifetime, paid by heirs who inherit that wealth.
The second wealth tax, enacted in 1922, was a capital gains tax – a tax on the capital appreciation of assets, paid on the sale of those assets.
Lesson: The inheritance tax and capital gains tax were created to curb the concentration of wealth.
But these two wealth taxes have since declined, or have become so riddled with loopholes that they have failed to prevent the emergence of a new American aristocracy.
The Trump Republicans’ tax cut allowed individuals to exclude $ 11.18 million from their estate taxes. This means that a couple can pass over $ 22 million to their children tax-free. Not to mention that the very rich often find ways to circumvent this tax entirely. As the former director of Trump’s White House National Economic Council, Gary Cohn, said, “Only morons pay inheritance tax.”
What about the capital gains on the rising values of stocks, bonds, mansions and works of art of the rich? The biggest loophole here is what is called the “reinforced base”. If the rich keep these assets until their death, their heirs inherit them without paying any capital gains tax. All the added value of these assets is simply erased, for tax purposes. This loophole saves heirs around $ 40 billion a year.
This means that huge accumulations of wealth in the hands of a relatively small number of households can be passed from generation to generation without being taxed – increasing along the way – generating comfortable incomes for wealthy descendants who will not. never have to work a day in their life. This is the dynastic class that we are creating right now.
Lesson: Inheritance tax and capital gains tax have been abolished.
Why have these two wealth taxes eroded? Because, as America’s wealth has been concentrated in fewer and fewer hands, the wealthy have more ability to donate to political campaigns and public relations – and they have used that political power to lower their taxes. This is exactly what Teddy Roosevelt feared so many years ago.
V. How to reduce the wealth gap
So what do we do? Follow the wisdom of Teddy Roosevelt and tax the great accumulations of wealth.
The ultra-rich have benefited from the American system – laws that protect their wealth and our economy that allowed them to build their fortunes in the first place. They should pay their fair share.
The majority of Americans, Democrats and Republicans alike, believe the ultra-rich should pay higher taxes. There are many ways to do this: close the base increase loophole, increase capital gains tax, and fully fund the Internal Revenue Service so it can properly audit taxpayers. the richest, to begin with.
Beyond these fixes, we need a new wealth tax: a tax of just 2% a year on wealth over $ 1 million. This is hardly a drop in the ocean for billionaires like Jeff Bezos and Elon Musk, but it would generate a lot of income to invest in health care and education so that millions of Americans have a fair chance at death. ‘achieve it.
One of the most important things you can do as an individual is take the time to understand the realities of wealth inequality in America and how the system has been rigged in favor of those at the top. – and to demand from your political representatives that they take measures to destroy it. .
Wealth inequality is worse than it has been in a century – and it has contributed to a vicious politico-economic cycle in which taxes are further reduced, resulting in an even greater concentration of wealth there – low – while everyone is living under the cruelest form of capitalism in the world.
We must stop this vicious cycle and demand an economy that works for the many, not an economy that concentrates more and more wealth in the hands of the privileged few.
Republished with permission from Robert Reich’s blog