Extreme Wealth Inequality in America and How It Can Be Fixed

We've all heard about the growing inequality in American society and a report by Chuck Collins and Josh Hoxie at the Institute for Policy Studies takes a unique look at just how unbalanced the United States has become along with offering two policy interventions that can be used to reduce the nation's extreme wealth inequality.  Let's look at some statistics followed by the solutions.

1.) The total wealth of the members of Forbes 400 wealthiest individuals in the United States adds up to a record $2.34 trillion, more than the GDP of India, a nation of over a billion people.  All 400 of these people have fortunes that are worth at least $1.7 billion.

2.) An estimated 115,000 U.S. households (the top one-thousandth of America's population) owns more than 20 percent of U.S. household wealth, up from 7 percent in 1970.

3.) The wealthiest 400 people in the United States have more wealth than the bottom 61 percent of the U.S. population which is comprised of 70 million households or 194 million people.

4.) The wealthiest 20 people in the United States have as much wealth as 152 million people who live in the 57 million households that make up the bottom half of the United States population.  These people include the following:

Their combined wealth totals $732 billion.  It is interesting to see that six of the top twenty are in the tech sector and nine have inherited their wealth from the previous generation.

5.) A typical U.S. household has $81,000 in total wealth.  The Forbes 400 have more wealth than 36 million American households, equal to the number of households that own cats!

6.) The Forbes 400 have as much wealth as all of America's African-American households plus one-third of America's Latino population combined.  The wealthiest 100 members of the Forbes 400 have as much wealth as the entire African-American population of 42 million people.  The wealthiest 186 members of the Forbes 400 have as much wealth as the entire Latino population of over 55 million people.

7.) African-Americans make up 13.2 percent of the United States population but have only 2.5 percent of the nation's total wealth.  Latinos make up 17 percent of the United States population but have only 2.9 percent of the nation's total wealth.  Here is a table showing the inequality in wealth by race:

I think that's enough statistics for this posting.  Why does inequality matter?  Here are four reasons:

1.) Inequality disenfranchises less wealthy voters largely because wealthy Americans dominate the campaign financing business.  

2.) Inequality undermines the public health system and leads to higher rates of illness.  Communities with less wealth inequality have stronger social cohesion and greater networks of mutual aid and caring.

3.) Extreme levels of inequality undermines the values of equal opportunity and social mobility.

4.) Less equal societies are more vulnerable to financial crises and political instability.

How can we reverse this extreme level of wealth concentration?  Here are two mechanisms that could be used to change wealth inequality:

1.) Close the Wealth Escape Problem:  The very wealthy have access to both offshore tax havens and private trusts to hide wealth and avoid taxation.  Estimates by Gabriel Zucman suggest that the United States loses about $200 billion annually in tax revenue from wealthy individuals as a result of their use of tax havens.  As well, the Grantor Retained Annuity Trust (GRAT) enables very wealthy families to pay little estate and gift taxes, sheltering wealth from the taxman for up to a century.  Casino mogul Sheldon Adelson, one of the wealthiest men in the United States, has used the GRAT scheme to transfer $8 billion to his heirs, avoiding $2.8 billion in estate taxes.  If these two wealth escape mechanisms were closed, trillions of dollars of hidden wealth would be exposed to taxation.

2.) Reduce the Concentration of Wealth:  A direct tax on wealth does not exist in the United States.  This could be implemented relatively simply by adding a tax of one percent on America's most wealthy.  A one percent tax on the top one percent of Americans who control $26 trillion in wealth would generate $260 billion in tax revenue annually.  A one percent tax on the Forbes 400 would raise $234 billion over a ten year period.   Currently, capital gains through the sale of stocks and other financial assets are taxed at 23.8 percent compared to a rate of up to 39.6 percent for earned income.  Since the wealthy are more likely to benefit from capital gains than the sweaty masses, ending this preferential treatment for wealthy owners of capital would raise more than $600 billion over ten years.  As well, by implementing a progressive income tax system (i.e. taxing highest income households at higher tax rates), if America's top one percent paid federal taxes at an effective rate of 40 percent of their income instead of the current 33 percent, the federal government would collect an additional $157 billion in personal tax revenue in the first year alone.

In his book "Capital in the 21st Century", French economist Thomas Piketty has noted that there is a significant difference between inequality in income and the level of extreme inequality in capital where a handful of people control a growing and very significant portion of the economy.  He has warned that the United States is rapidly becoming a hereditary aristocracy of wealth and power.  By protecting inherited wealth, the United States has compounded the problem of wealth inequality and created a situation where a few individuals control a disproportionate amount of both monetary and political power.

Let's close with this quote from Piketty:

"The world to come may well combine the worts of two past worlds: both very large inequality of inherited wealth and very high wage inequalities justified in terms of merit and productivity, claims with very little factual basis..."

Welcome to America's new reality.