Wealth: the Grand Divide

When it comes to reducing a deficit, increasing revenues is a damned good idea… along with reducing expenses. Taxing those with the capacity to pay more is not an immoral choice. But it isn’t the 47% that’s causing the problems that plague the American Dream in this country… or even the tax rate being charged to high earners; it’s the 42% of wealth that is concentrated in the hands of 1% of the nation, the greatest economic polarization in the modern developed world. Our allocation of wealth makes us look more like a banana republic than a modern-day superpower. And it isn’t about making being a millionaire or billionaire a dirty word. Where truly valuable new social and economic values are generated, rewards to the risk-takers, the visionary entrepreneurs are most certainly in order. This wealth polarization has taken place in a relatively short span of time, even as the IMF tells us that such polarization can take a very nasty toll on longer-term real growth.

“A common statistical measure of inequality is the Gini coefficient, a number between 0 and 100 that rises with greater disparities. From the late 1970s through the early 1990s, the Census Bureau recorded Gini coefficients for income in the low 40s. Yet by 1992, the Gini coefficient for wealth had risen into the mid-70s, according to data from the Federal Reserve…  Since then, it has risen steadily, to about 80 as of 2010. In 1992, the top tenth of the population controlled 20 times the wealth controlled by the bottom half. By 2010, it was 65 times. Our graduated income-tax system redistributes a small amount of money every year but does little to slow the polarization of wealth…

“The global financial crisis did make a dent in the assets of the wealthiest American families, but its effects for the bottom half were utterly destructive; the number of owner-occupied homes has fallen by more than a million since 2007. People in different socioeconomic strata are living ever more different lives, with dangerous results for society: erosion of empathy, widening of rifts and undermining of meritocracy.” NYU Economist Daniel Altman writing for the November 18^th New York Times.

It’s a vicious cycle where the rich mostly can only get richer, while the rest of us struggle to make ends meet. The issues that make this country rather slant in favor of well-heeled incumbents revolve more around (i) how so much of that wealth was created and (ii) how wealth is preserved with the lowest potential for dilution or reduction.

Too much of what has made the most recent spate of American mega-rich players has been in the financial markets, where packaging complex derivatives and bundling diverse assets and financial instruments, have generated trillions of dollars without much in the way of increasing the underlying economic value of what we manufacture or process. We’ve made billionaires off of the wrapping paper with little thought to what’s actually inside the box. Repackaging with complex mathematical calculations hasn’t really added real economic value to the United States. We’ve just moved money around, leveraged it and manage to delude many into thinking that we have unleashed previously hidden values that only financial geniuses could have found… not exactly finding a cure for cancer or inventing the next energy-efficient car.

We have much lower tax rates (over rates applicable to wage earners) for money earned by: investors in any form of asset, people who earn money from certain financial professions (fund managers) and heirs (minimal if any tax). We have deductions from income generally available only for the wealthiest segments of society, and if they are generating money overseas from corporations they own there are no U.S. taxes on that foreign revenue until that money is repatriated to the U.S. (which probably will never happen). While we have one of the highest stated corporate tax rates, given the deductions and exclusions from income, our biggest corporations pay the lowest effective actual tax rate in the Western world.

In countries like France or Italy, where tax evasion is a national sport, taxing authorities have the right to impose a “lifestyle tax” to the extent that reported taxable income appears to be inconsistent with the lifestyle (possessions, property and observable trappings of wealth) of the relevant subject. Some states have property tax, but the federal government – the biggest taxing authority – doesn’t play in this yard.

And once you have wealth, given how much the law allows wealth to grow with minimal dilution, the excess capital embodied in that wealth can be reinvested in new assets and new opportunities (like buying up houses from foreclosed middle class members at vastly reduced rates) to increase the underlying nest egg… even as the middle class – which have experienced a real reduction in the value of what they make – are struggling to stay alive. So what, Mr. Altman, would our system of taxation look like if we went to a property tax-based collection?

“American household wealth totaled more than $58 trillion in 2010. A flat wealth tax of just 1.5 percent on financial assets and other wealth like housing, cars and business ownership would have been more than enough to replace all the revenue of the income, estate and gift taxes, which amounted to about $833 billion after refunds. Brackets of, say, zero percent up to $500,000 in wealth, 1 percent for wealth between $500,000 and $1 million, and 2 percent for wealth above $1 million would probably have done the trick as well.

“These tax rates would garner a small portion of the extra wealth America’s richest families could expect to accrue simply by investing what they already had. The rates would also be enough to slow — if not reverse — the increase in inequality. To see how the wealth tax would work, consider a family with $500,000 in wealth and $200,000 in annual income. Right now, they might pay $50,000 in federal income tax. With the wealth tax brackets described above, they would pay nothing. On the other hand, a family with $4 million in wealth and $200,000 in annual income would owe $65,000. Most families that depend on their wealth for their income would pay more, and most that depend on their earnings would pay less.” NY Times. But then, you’d have to care about being fair.

I’m Peter Dekom, and if you do not adjust inequality, you are begging for those with little or nothing to lose to adjust it for you… and maybe in some very unpleasant ways.