Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Inequalities of Wealth and Income Are Poorly Measured and Grossly Overstated
One hears a lot about the inequalities of wealth and income and how immoral and obscene they are. But wealth and income are rewards for what individuals contribute to the economy. The contributions of individuals to the society are grossly unequal. So the rewards should be expected to be unequal. But although they are unequal, they are not nearly as unequal as people believe. In the first place, the inequality of wealth is measured improperly by excluding many forms of wealth such as the value of accumulated social security, annuities, insurance, and pensions. These are largely owned by the middle and working classes. So those who measure wealth inequality are overstating the proportion of wealth owned by the most wealthy. Second, inequality of wealth varies substantially with business fluctuations and interest rates. Inequality of wealth is as great currently as it has ever been but that’s the fault of the Federal Reserve Policy of low interest rates as we shall show below. Third, government taxes wealth at death in the form of estate, gift, and inheritance taxes and this induces the wealthy, in the U.S. at least, to give much of their wealth away, to universities, hospitals, non-profits, and charities during their lifetimes. As for income inequality, it is usually measured before income tax. After tax income is much more equal and a lot income is not counted at all, things like free school, librairies, food stamps, Medicaid, and much else. And those who talk about inequality of wealth and income seldom talk about the relative equality of consumption, or the fact that Americans enjoy the highest standard of living in the world.
Consumption is what individuals take out of the economy. While the rich consume more that the poor and lower middle class, measures of inequality of consumption fail to include not only welfare benefits such as welfare payments, Medicaid, public housing, and food stamps but social security payments, public parks, free schools, public libraries, and much else. Wealth and income are measures of the value that households contributed to the economy whereas consumption measures what households take out of the economy. Inequality of consumption is therefore the only inequality that should be of concern and in the U.S. inequality of consumption is not a problem. The problem that poor are rightly concerned about is their inability to find and hold a job.
Billionaires and multi-millionaires consume more than the rest of us but not at our expense. They may have a luxurious home, more than one home, a yacht, more and more expensive cars, more expensive clothes, and expensive furniture and personal equipment and they buy more expensive food and meals..But this consumption is not at anyone else’s expense. During their lives and upon their deaths, they bequeath or give away much of their wealth to charitable and other non-profit organizations, to hospitals and health research, nearly all of which benefits lower income households and whose benefits are not counted as income to anybody. The remaining balance upon their deaths is subject to the federal estate tax and State estate and inheritance taxes. The current estate tax has an exemption of $5.45 million and a tax rate of 40% on the excess. The state with the highest maximum estate tax rate is Washington (20 percent).
And the ranks of billionaires and millionaires are constantly changing. Gift and estate taxes accounted for 1 percent to 2 percent of total federal revenue in most of the past 60 years. The Congressional Budget Office (CBO) projects that, under current law, federal revenues from estate and gift taxes will be $420 billion, or 1.2 percent of total revenues, over the 2010–2019 period. The reason the percentage appears low is that taxpayers make ton-taxable gifts to charities and non-profits because they know their estates and gifts to persons will be heavily taxed by the federal government. In addition about 20 states levy estate and inheritance taxes.
New York University economist Edward Wolff, found that in 1962, that the top 1% of households held 33.4% of all wealth; in 2013 their share was 36.7%. The biggest increase came in the next-wealthiest tier, representing 4% of households: Their share of wealth rose from 21.2% in 1962 to 28.2% in 2013. As for the bottom 40%? Their share fluctuated between 1.5% and -0.9% (i.e., negative net worth) for the entire five-decade period Wolff studied. But his estimates are not worth the paper they're printed on. Wolff did not consider as personal wealth the ownership of insurance policies, pensions, the value of social security entitlements, public parks, schools, government buildings, roads and bridges, et al. To whom does such wealth belong? All people, of course.
The degree of wealth inequality varies greatly and is not growing as some economists suggest. Profs. Emmanuel Saez (UC Berkeley) and Gabriel Zucman (LSE) studied wealth inequality and show that the share of total household wealth owned by the top 0.1 percent has been rising and falling. It is not constantly rising as leftist propaganda would have you believe. In 1916, it was 25%, then it fell to 15% in 1923, rose to 25% in 1929, then began a downward trend reaching 7 percent in 1978 and rose to 22 percent in 2013. It continued to rise until 2015. It rises and falls in response to changes in stock market values, booms and busts and other economic changes. A French economist, Thomas Piketty in a recent book attempts to prove that “a market economy based on private property, if left to itself, contains powerful forces” that result in increasingly, unequal distribution of income and wealth which is “potentially threatening to democratic societies and to the values of social justice on which they are based”. His conclusion that income or wealth inequality increases constantly is obviously contradicted by the Saez and Zucman data. The degree of inequality depends largely on the level of prices of corporate stock and real estate. The rise since 2009 can be attributed to the Federal Reserve policy of artificially causing low interest rates. The prices of corporate stock and of real estate are determined by the capitalization of their net incomes. Capitalization requires the use of an interest rate, the lower the interest rate, the higher the capitalized value.. And low interest rates were the FED’s policy beginning in 2009, the FED hoping that increased values of real estate and securities would cause their owners to increase consumption and investment. Unfortunately, the FED’s expectations turned out to be wrong; neither consumption nor investment increased as much as they expected, so the recovery languished.
What causes inequality of wealth and income? Almost entirely, what one has contributed to the economy. As of 2015, Bill Gates was the wealthiest person in the world, with a net worth of $79.2 billion. Bill Gates made his fortune in the growth of Microsoft Corporation of which he was the principal stockholder. Warren Buffett is the American billionaire closest to matching Bill Gates wealth, with his own net worth of $72.7 billion. Known as the "Oracle of Omaha," Buffett made his money through investments in companies whose value appreciated greatly. Some of the other top billionaires in the world include innovative and technology giants such as Jeff Bezos, founder of Amazon.com; Larry Ellison, founder of Oracle; Mark Zuckerberg, creator of Facebook; Carlos Slim Helu, a Mexican telecom and electronics investor; Sam Walton who founded Wal-Mart, Evan Spiegel co-founded Snapchat; Larry Page co-founded Google. Their wealth is due to the hugely valuable contributions they made to the economy. The accumulation of great wealth is largely the result of owning the shares of an innovative corporation. The inequality of income is much less than the inequality of household wealth however measured and it is much less after the payment of personal income taxes. Personal income includes wages salaries, rents, interest, profits of unincorporated enterprises, capital gains, pension and annuity payments, and social security income over $32,000. Prof. Saez, cited above, calculated the distribution of income before tax. The percent of income received by the top 1% of income earners in 1920 was about 15%, it rose to approximately 24% in 1928, then fell to less than 10% in 1970, rose to about 23% in 2005 and was at about 22% in 2014. This was before tax. The current income tax rate on incomes over $615,000 is 39.6 percent. Laura Saunders, in the Wall St. Journal, October 15, 2015, in an article entitled “Top 20% of Earners Pay 84% of Income Tax And the bottom 20% get paid by Uncle Sam”, cites a finding by the nonpartisan Tax Policy Center that in 2014, the top 1 percent of income earners whose incomes exceeded $615,000, paid 45.7 percent of total income taxes paid.
It thus appears that so much wealth was not counted in measuring wealth and income and that in any case they are measures, imperfect though they may be, of what individuals have contributed to the economy. In the process they have made the U.S.the most productive in the world and with the highest degree of standard of living in the world. It would appear that inequality of wealth, income and consumption is not a serious moral or economic problem at all in the United States.
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