How Wealth Inequality Spiraled Out of Control | Robert Reich
Jason 0 Comments Retire Wealthy
Elon Musk's wealth has surpassed $200
billion. It would take the median U.S. worker OVER 4 MILLION YEARS to make that much.
Wealth inequality is eating this country alive. We’re now in America’s second Gilded Age, just like the late 19th century when a handful
of robber barons monopolized the economy kept wages down, and bribed lawmakers. While today’s robber barons take joy rides
into space, the distance between their gargantuan wealth and the financial struggles
of working Americans has never been clearer. During the first 19 months of the
pandemic, U.S. billionaires added $2.1 TRILLION dollars to their collective wealth. And the rich have enough political power to cut their taxes to almost nothing
— sometimes literally nothing. In fact, Jeff Bezos paid no federal
income taxes in 2007 or in 2011. By 2018, the 400 richest Americans paid a
lower overall tax rate than almost anyone else. But we can't solve this problem unless we
know how it was created in the first place. Let’s start with the basics. Wealth inequality in America is
far larger than income inequality. "Income" is what you earn each week or month or
year.
"Wealth" refers to the sum total of your assets — your car, home, art — anything else
you own that’s valuable. Valuable not only because there’s
a market for it — a price other people are willing to pay to buy it — but because wealth itself grows. As the population expands and the
nation becomes more productive, the overall economy continues to expand. This
expansion pushes up the values of stocks, bonds, rental property,
homes, and most other assets. Of course recessions and occasional depressions
can reduce the value of such assets. But over the long haul, the value
of almost all wealth INCREASES. Next: personal wealth comes from two sources. The first source is the income you earn
but don’t spend. That’s your savings. When you invest those savings in stocks,
bonds, or real property or other assets, you create your personal wealth, which,
as we’ve seen, grows over time.
The second source of personal wealth is whatever
is handed down to you from your parents, grandparents, and maybe even generations
before them — in other words, what you INHERIT. The wealth gap between the richest
Americans and everyone else is staggering. In the 1970s, the wealthiest 1% owned about
20% of the nation’s total household wealth. Now, they own OVER 35%.
Much of their gains over the last 40 years have come from a dramatic
increase in the value of shares of stock. For example, if someone invested $1,000 in 1978 in
a broad index of stocks — say, the S&P 500 — they would have $31,823 today, adjusted for inflation. Who's benefited from this surge? The richest 1%, who now own
HALF of the entire stock market. But the typical worker’s wages have
barely grown. Most Americans haven’t earned nearly enough to save anything. Before the pandemic, when the economy appeared to be doing well, almost 80% were living paycheck to paycheck. So as income inequality has widened, the
amount that the few high-earning households save — their wealth — has continued to grow.
Their growing wealth has allowed 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 the Forbes billionaires list.
Their children, and other rich
millennials, will soon consolidate even more of the nation’s wealth. America is
now on the cusp of the largest intergenerational transfer of wealth in history.
As wealthy boomers pass on, somewhere between $30 to $70 TRILLION will go
to their children over the next three decades. These children will be able to
live off of this wealth, and then leave the bulk of it — which will continue
growing — 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. Concentrated wealth is already
endangering our democracy. Wealth doesn’t just beget more
wealth — it begets more POWER.
Dynastic wealth concentrates power into
the hands of fewer and fewer people, who can choose what nonprofits and charities
to support, and which politicians to bankroll. This gives an unelected elite enormous sway
over both our economy and our democracy. We might come to resemble the kind of dynasties
common to European aristocracies in the seventeenth, eighteenth, and nineteenth centuries.
Dynastic wealth makes a mockery of the idea that America is a meritocracy, where anyone can
make it on the basis of their own efforts. It also runs counter to the basic economic ideas
that people earn what they’re worth in the market, and that economic gains
should go to those who deserve them.
Finally, wealth concentration magnifies gender and
race disparities because women and people of color tend to make less, save less, and inherit less. The typical single woman owns only 32 cents of wealth for every dollar of wealth owned by a man. The pandemic likely increased this gap. The racial wealth gap is even
starker. The typical Black household owns just 13 cents of wealth for every dollar
of wealth owned by the typical white household. The pandemic likely increased this gap, too.
In all these ways, dynastic wealth creates a self-perpetuating aristocracy that runs
counter to the ideals we claim to live by. The last time America faced anything
comparable to the concentration of wealth we face today was at the turn of the 20th century. That was when President Teddy Roosevelt warned
that “a small class of enormously wealthy and economically powerful men, whose chief
object is to hold and increase their power,” could destroy American democracy.
Roosevelt’s answer then was to tax wealth. Congress enacted two kinds of wealth taxes. The first, in 1916, was the estate tax — a tax on the wealth someone has
accumulated during their lifetime, paid by the heirs who inherit that wealth.
The second tax on wealth, enacted in 1922, was a capital gains tax — a tax on the increased
value of those assets, paid when those assets are sold.
But both of these wealth taxes have shrunk
since then, or become so riddled with loopholes that they haven’t been able to prevent a
new American aristocracy from emerging. The Trump Republican tax cut enabled individuals
to exclude $11.18 million from their estate taxes. That means ONE COUPLE can pass on more
than $22 million to their kids tax-free. Not to mention the very rich often find ways
around this tax entirely. As Trump’s former White House National Economic Council director Gary Cohn
put it, “Only morons pay the estate tax.” What about capital gains on the soaring
values of wealthy people’s stocks, bonds, mansions, and works of art?
Here, the biggest loophole is something called the stepped-up basis.
If the wealthy hold on to their
assets until they die, their heirs inherit them without paying any capital gains taxes whatsoever.
All the increased value of those assets is simply erased, for tax purposes. This loophole
saves heirs an estimated $40 billion a year. This means that huge accumulations of wealth
in the hands of a relatively few households can be passed from generation to generation
untaxed — growing along the way — generating comfortable incomes for rich descendants who
will never have to work a day of their lives. That’s the dynastic class
we’re creating right now. Why have these two wealth taxes eroded?
Because, as America’s wealth has concentrated in fewer and fewer hands, the wealthy have more
capacity to donate to political campaigns and public relations — and they’ve used that
political power to reduce their taxes. It’s exactly what Teddy Roosevelt
feared so many years ago. So what do we do? Follow the wisdom of Teddy
Roosevelt and tax great accumulations of wealth. The ultra-rich have benefited from the American
system — from laws that protect their wealth, and our economy that enabled them to
build their fortunes in the first place. The majority of Americans, both Democrats and Republicans, believe the
ultra-rich should pay higher taxes. There are many ways to make them do so: Closing the stepped up basis loophole, raising
the capital gains tax, and fully funding the Internal Revenue Service so it can properly
audit the wealthiest taxpayers, for starters.
Beyond those fixes, we need a new wealth
tax: a tax of just 2% a year on wealth in excess of $1 million.
That’s hardly a drop in the bucket for centi-billionaires like Jeff Bezos and Elon Musk,
but it would generate plenty of revenue to invest in healthcare and education so that millions
of Americans have a fair shot at making it. One of the most important things you as an
individual can do is take the time to understand the realities of wealth inequality in America
and how the system has become rigged in favor of those at the top — and demand your political
representatives take action to unrig it. Wealth inequality is worse
than it has been in a century. We have to stop this vicious cycle — and demand an
economy that works for the many, not one that concentrates more and more wealth
in the hands of a privileged few.
