Wealth and Income Inequality Is Not as Bad as You Think

Sen. Bernie Sanders says, “There is something profoundly wrong when the top one-tenth of one percent owns almost as much wealth as the bottom 90 percent.” He writes: “The issue of wealth and income inequality is the great moral issue of our time, it is the great economic issue of our time, and it is the great political issue of our time.” The trouble is that none of it is true except the fact that it is a political issue because leftists like Sanders make it so. The propaganda is based on calculations of the inequality of wealth which do not tell the whole story. They exclude the value of pensions, annuities, and social security. They also exclude the value of government wealth -- national, state, and city parks, and other land and buildings, including schools, libraries, stadiums, vehicles, streets and roads, and public transit facilities which are owned by everyone equally.

Wealth used in the measure of inequality includes the value of the assets owned by a household such as stocks, bonds, and real estate, including the net value of homes. Income used in measures of equality is defined as the return one receives in the form of wages and salaries, rents, interest, profits, and returns from past savings and investments, including dividends, annuities, pensions, and social security benefits. The income measured is income before income taxes. Income after income tax as we shall note is considerably more equal than income before tax. Moreover, not all income is consumed. Consumption is a measure of what households take out of the economy, whereas income before income tax and wealth are measures of what the household has contributed to the economy. Obviously income after tax and consumption are much more equal that the distribution of household wealth.

One of the myths propagated by the left is that the inequality of wealth and income are constantly rising. In fact, both rise and fall over the decades they have been studied. Profs. Emmanuel Saez (UC Berkeley) and Gabriel Zucman (LSE) studied wealth inequality and produced the graph below which shows that the share of total household wealth owned by the top 0.1 percent was 25% in 1916, 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. The degree of inequality depends largely on the level of prices of corporate stock and real estate.  

Likewise the distribution of income is not as unequal as the propaganda would have you believe. Studies of inequality of income define income as wages salaries, rents, interest, profits of unincorporated enterprises, and capital gains. They often, perhaps usually, exclude 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% on 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 Street 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. Politicians do not mention the inequality of income very much because it is so much less than the inequality of wealth, especially after tax. Household consumption equals income after tax minus savings. Since those with high incomes save more than those with low incomes, who often spend more than their incomes a fact called dissaving, consumption is distributed more equally than income and vastly more equal than the distribution of wealth. Since those at the lowest income levels receive welfare, food stamps, and some public housing, politicians want to avoid talking about the distribution of consumption.

As we pointed out, the estimates of household wealth do not include the value of social security benefits. The Social Security administration reported that in 2015, over 59 million Americans received about $870 billion in Social Security benefits. Capitalizing those benefits by 7%, the average yield on corporate investments historically, which ranges from about 4% in depressions and recessions to 10% in boom years, those benefits are valued at roughly $12 trillion. And each citizen owns the assets of the federal government which owns more than 700 million acres of land whose value of the land itself at only $100 per acre is $70 billion. The mineral rights are worth at least $100 billion. The assets of the state governments must be worth another $5 trillion at least. Since the published measures of wealth equality include only household wealth, they grossly overstate the inequality of wealth. If we were to include the value of social security and government assets in household wealth, inequality of wealth would be substantially less than published estimates indicate.

And here are some other things to keep in mind. The rich cannot take their wealth with them when they die. The 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), followed by eleven states which have a maximum rate of 16 percent. The estate and inheritance taxes do much to reduce great inequalities of wealth, which no politician mentions.

Here are a few instances of the myths of inequality propagated by the left. The French economist and Marxist 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”. Although many economists agree with his conclusion that income or wealth inequality has been increasing, the foregoing evidence shows that they are clearly wrong. Robert Reich, currently a professor of public policy at UC at Berkeley, states that 95% of the economic gains since 2009 went to the top 1% of the wealthiest. He must be criticizing the policies of President Obama, who was in power all that time. Fortune magazine, in an article entitled “America is the richest, and most unequal, country”, by Erik Sherman, reported that the U.S., with $63.5 trillion in total private wealth, has the largest wealth inequality gap of 55 countries studied. It failed to report that the average American had the highest standard of living in the world and that those nations with the least inequality had the lowest standards of living! Prof. John Maynard Keynes in 1920 wrote that you cannot have economic growth without inequality. How right he was!

The inequality of wealth and income is not a serious moral or economic problem at all. It is only a political problem. Democratic and leftist propaganda is widely believed.

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