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A Third of a Trillion for Three Families

Research & Commentary
March 20, 2014


How concentrated has America’s wealth become? In the not-so-distant future, if current trends continue, a mere handful of Americans will together hold over $1 trillion in wealth.

By Bob Lord

Billionaire David Koch divides most of his time between this $37-million oceanfront manse in Palm Beach, another $18-million oceanfront estate in Southampton, a $9.5-million apartment in Manhattan, and a $15-million mountain getaway in Aspen.

Billionaire David Koch divides most of his time between this $37-million manse in Palm Beach, another $18-million beachfront estate in Southampton, a $9.5-million apartment in Manhattan, and a $15-million mountain getaway in Aspen.

At the very top, the rate of concentration of wealth has become nothing short of breathtaking. The share of wealth held a generation ago by our 1,500 wealthiest Americans now sits in the hands of just our wealthiest 51.

Some of our billionaires seem to recognize the unseemliness of this intense concentration of wealth.

These billionaires have joined together to take the “billionaires’ pledge.” They’ve made a public, but non-binding, promise to leave half their wealth to charity upon death.

We have plenty of other billionaires who won’t even make this token gesture.

On that front, three families stand out: The Koch, the Walton, and Mars households. Their combined net worth: a cool quarter-trillion dollars or so, according to the Forbes magazine list of the 400 wealthiest Americans released this past September. But a more recent survey, the Bloomberg billionaires index, has their collective wealth much closer to a third of a trillion.

Remember, these figures represent just estimates. The actual wealth of these three phenomenally wealthy families likely runs greater, perhaps far greater. These three clans have no reason to reveal all their wealth and many reasons, including substantial tax savings, not to.[pullquote]The Waltons alone likely control more wealth than the populations of several states.[/pullquote]

The collective wealth of the entire populations of some of our states can’t match the wealth of those three families. In all likelihood, the Walton family alone controls more wealth than the populations of several states.

And the wealth of these three families, especially the holdings of the Koch brothers, is increasing at an astounding rate. In 1999, the combined net worth of David and Charles Koch, according to Forbes, stood at $6.8 billion, less than one-tenth the wealth of Bill Gates. But by the time Forbes conducted its 2013 survey, the Koch brother wealth had increased over ten-fold, to $72 billion, a total as large as the Bill Gates fortune.

Bloomberg currently estimates the combined Koch brother wealth at $101 billion, about 25 percent greater than the Bill Gates net worth.

See the trend here? We have a 20 percent annual rate of growth for the Koch brothers, net of all expenses, including taxes.

Even average billionaires today are getting richer at an incredibly rapid clip. A new investment fund, CNBC reports, is patterning its investments on the investments of billionaires. Based on its investment formula, the fund, iBillionaire, would have returned 12.6 percent per year over the last eight years, a period that includes the Great Recession!

The rest of us can’t, of course, accumulate wealth at such a clip. Nor can the nation as a whole. Over time, our aggregate national wealth increases at about the same rate as the size of the economy. If things go well, we might be able to grow our nominal aggregate wealth by 7 percent per year, about half of that as real growth, and the other half from inflation.[pullquote]Even average billionaires today are getting richer at an incredibly rapid clip.[/pullquote]

Therein lies the problem.

Even if the rate at which today’s grand fortunes are accumulating wealth slows a little, the day when the Koch, Walton, and Mars families alone control over a trillion dollars of wealth — and over 1 percent of the nation’s total wealth — is not far away.

Reflect on that a moment. One percent of the wealth of a nation of over three hundred million in the hands of just three families. It’s so … third-worldly.

Why are we heading in this direction? Tax policy.

Most Americans have some desire to accumulate wealth, but the great majority of us, even many in the top 1 percent, find ourselves constrained in ways the ultra-rich do not.

Ordinary Americans pay both income taxes and employment taxes on the income from their labor and consume the bulk of what’s left on living expenses.

Billionaires don’t face these constraints. Their income comes overwhelmingly from capital. They don’t face employment taxes. Their living expenses consume only a sliver of their annual income. They don’t pay income tax until they sell assets and, when they do, they pay tax at the lower tax rate for capital gains.[pullquote]Federal estate tax receipts today barely exceed 1 percent of the wealth that passes between generations each year.[/pullquote]

Our three mega-rich families theoretically face one constraint most of us don’t: inheritance taxes. But the estate tax law has been emasculated in recent years. Many states have repealed their inheritance tax entirely. At the federal level, tax planners have seized on distortions in the tax code to create planning vehicles that minimize the effective rate of tax. Federal estate tax receipts today barely exceed 1 percent of the wealth that passes between generations each year.

Ultimately, if we’re going to rein in the concentration of wealth at the top, tax policy must change — and fast. First, taxes on income from capital must be raised sharply in order to slow the growth of mega fortunes. Second, our system of inheritance taxes must be structured to impose taxes on the super-rich at an effective rate high enough to reverse at death all the advantages the super-rich have over the rest of us in the ability to accumulate wealth during life. It’s that simple.

If we don’t take those steps, the concentration of wealth at the top will be limited only by the generosity of our billionaires. Many may sign the billionaires’ pledge — and some may even follow through in a meaningful way. But that only will slow the concentration of wealth, not eliminate it. And do we really want to condition our economic well-being on self-regulation by the ultra-wealthy?

If we do, families like the Kochs, Waltons and Marses will simply garner an ever larger share of our nation’s wealth and with it more and more clout.

After all, if you have billions in the bank and you’re still hell-bent on accumulating more, you’re really not chasing after wealth. You’re chasing after power.

Bob Lord, an Institute for Policy Studies associate fellow, practices tax law in Phoenix.

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