How we can prevent the wealthiest of our wealthy from exempting virtually unlimited billions from tax.
If you follow the reporting on wealth inequality closely, you may have noticed that things have taken a darker turn. Just a few years ago, we were focusing — quite appropriately — on the ongoing accumulation of massive fortunes at our economic summit. But a second and equally compelling story has of late emerged. The world’s billionaires, the activist global charity Oxfam reports, grew their wealth by $900 billion last year. Households in the world’s poorest half, meanwhile, saw their wealth decline, by a fairly stunning 11 percent.
The wealth of America’s median black households, adds a recent Institute for Policy Studies report, has dropped to half the wealth level of 35 years ago.
Have we passed a tipping point, the threshold at which the rich can’t get any richer without the poor — and middle class — getting significantly poorer?
Quite possibly, yes. Wealth typically concentrates at the top because the wealthy can generally invest their wealth at a rate of return greater than the rate of increase in the country’s overall wealth. Thomas Piketty’s 2013 bestseller Capital in the Twenty-First Century famously explained this phenomenon with a simply equation, r > g.
That equation only holds, mind you, for the wealth held by those who can invest large sums they don’t need to set aside for their basic household financial support. The wealth ordinary folks hold in the form of home equity, savings accounts, and modest retirement accounts can’t grow nearly as quickly.
So does all this make the concentration of wealth in a nation like ours unavoidable? No. Any country may choose tax and other economic policies that slow how fast the rich can accumulate wealth and, in the process, keep wealth from concentrating. Over the last several decades, unfortunately, the United States has opted against such policies — and our wealth is concentrating.
Early on in a wealth concentration process, as a country’s wealth increases, those at the top grab a disproportionate amount of that increase. But at least some wealth remains left over for the rest of the population to share.
Suppose, for example, a relatively wealthy country of two million households has $1 trillion of total wealth, with its top 1 percent holding 20 percent, or $200 billion, of that wealth. Those top households average $10 million of wealth. Our imaginary nation’s remaining 1.98 million households would be averaging just over $400,000 of wealth.
Now let’s suppose that our imagined society has the capacity to grow its economy and its total wealth by 3 percent per year, while its economic policies allow households in the richest 1 percent to grow their wealth by 6 percent per year. After one year, the overall society will have grown its wealth by $30 billion, while top 1 percent households will have grown their wealth by $12 billion. That would leave $18 billion of additional wealth to be shared by the bottom 99 percent.
Households in this bottom 99 percent obviously don’t do as well as their wealthier counterparts, but they still — at this point — are moving ahead.
Not so terrible, huh? Well, actually, in the long run, pretty terrible indeed. Consider what happens if this pattern continues for 32 years, barely more than a generation. At the end of that 32-year period, the total wealth of our imagined society will have grown to $2.575 trillion, with the top 1 percent now holding $1.3 trillion, a trifle over half our society’s total.
If our small society’s population has expanded by 50 percent during that same period, each of its three million households in the top 1 percent would now be worth over $43 million, a 330 percent increase. The rest of our country’s wealth has increased by only 6 percent per household.
And in the following year the country’s 3 percent growth rate will generate $77.25 billion of additional wealth, with the 6 percent return on investment flowing to its top 1 percent translating into $78 billion of additional wealth. Our sample country will have reached the point where its entire economic growth will be insufficient to satisfy the investment return flowing to its wealthy class.
But those investment returns won’t go unsatisfied. The remainder of the population will pay them, out of its now diminishing wealth.
This transfer of wealth should hardly be surprising. At the micro level we already see it all the time. Consider a poor person in America getting whacked with a $35 penalty for overdrawing his bank account buying a $2 cup of coffee on his debit card. That $35 penalty will ultimately pad the bank accounts of 1 percenters.
Or consider the crush of medical bills that forces a formerly middle-class American family to file for bankruptcy. Most of the modest wealth that family once held now gets reflected in the bloated stock price of corporations that operate for-profit hospitals. Top 1 percenters hold the bulk of that company’s stock.
Or consider the tax dollars of hard-working Americans that fund the food stamps and other safety-net benefits that go to hard-working — and underpaid — Walmart employees. Those tax dollars are subsidizing the low wages that go to Walmart workers and helping the heirs of Walmart founder Sam Walton pad their family fortune, a concentration of wealth that already rates as America’s largest private pot of gold.
At some point, this craziness will end, but it’s not going to end well.
Bob Lord, an Institute for Policy Studies associate fellow, practices tax law in Phoenix.