5 Fixes for Dangerous Wealth Inequality

My last blog was about fixing risky and unsustainable income inequality. Its twin problem is a dangerous wealth chasm between the haves and have-nots. Wealth inequality is related to, but different from, income inequality. Income is what we earn every year; wealth is how much our estate would be worth if we were to die tonight. It’s our net worth, calculated by subtracting our liabilities and debts from our assets. Income inequity is a corporate social responsibility (CSR) issue; the wealth chasm is closely tied to CSR because the super-wealthy are corporate executives.

The ultra-rich are staggeringly wealthy. A recent Oxfam report revealed that the richest 85 people in the world are as wealthy as the poorest half of the world—that is, their $1.8 trillion is equal to the net worth of 3.5 billion people. Further, the wealthiest 1% own $110 trillion, or 65 times as much as the poorest half of the world.

The Canadian Centre for Policy Alternatives (CCPA) “Outrageous Fortune” report reveals that the “Wealthy 86” in Canada are worth more than the bottom 34% of Canadians (11.4 million people) combined?their combined personal net worth is $178 billion. The wealthiest Canadians are the Thompson family with $26.1 billion. As the figure shows, the wealth chasm is also extreme in the U.S where over 75% of the wealth belongs to the wealthiest 10%. The Walton family is worth $89.5 billion, which is equivalent to the wealth of the bottom 41.3% of U.S families combined.

click image to enlarge

Americans know that some people are filthy rich, but they have no idea how skewed wealth is, as illustrated by the adjoining figure. The top bar represents what the actual distribution of wealth is in the U.S.; the middle bar is what Americans think it is, and the bottom bar is what they think it should be. Reality is nowhere close to people’s perceptions or their desires.

click image to enlarge

Instinctively, we think that the super rich are wealthier because they earn more each year. Income inequity helps maintain the wealth disparity, but the wealth gap is actually bigger than the income gap. While the richest 20% of Canadian families capture almost 50% of all in­come, the wealthiest 20% hold almost 70% of all net worth. As the CCPA report says: “What differentiates the Wealthy 86 is that their wealth does not (only) come from a pay cheque; it comes through the building and trading of assets, most­ly companies. In other words, while being part of a wealthy family can land you a top paying CEO job, the reverse is not true. Even the best paid CEO can’t save enough to make it into the Wealthy 86.” Only 10 of the 100 highest paid CEOs in Canada are part of the 86 and all 10 either founded or are related to the founder of the company.”

The disadvantaged are in debt, have no net worth, and have few prospects of this dismal reality improving. It is as if Charlie Brown were playing Monopoly with Richie Rich. As an average American, Charlie Brown starts the game with the usual $1,500; as a member of the top 1%, Richie Rich starts with $432,000 (288 times more wealth). Richie already owns all the best properties on the board, with hotels. Charlie Brown collects the usual $200 when he passes GO; CEO Richie Rich collects $70,800 (354 times the average workers income). Charlie Brown’s best strategy is to pray that he only lands on Community Chest, Chance, or the corners. The alternative is bankruptcy.

Real life is way too much like that game of Monopoly for most people. The rich spend a lot of money shaping the rules of the game in their favor. Economic power tends to beget political power, since big contributions to political campaigns beget privileged access to politicians who make the rules. The super-rich are “rule riggers.” They keep increasing the tilt of the playing field in their favor. And it works. The rich get richer—66% of the increase in wealth in Canada since 1999 has gone to the wealthiest 20% of families, and that unjust trend continues.

click image to enlarge

So what? Wealth inequity and a non-level playing field are the seeds of social instability and backlash. The World Bank says that unchecked growth of the abyss between haves and have-nots undermines democratic capitalism. A 2013 discussion paper by University of Michigan and University of Columbia economics professors showed that the wealth chasm has a negative effect on economic growth, especially if the super-rich acquired wealth through the use of political connections or cronyism. In his book “Capital in the Twenty-First Century,” Thomas Piketty of the Paris School of Economics warns that extreme income and wealth inequalities stir discontent and corrupt the democratic process. They lead to government of the rich, by the richer, for the richest.

Is it possible to close the dangerous wealth chasm? These five steps might avoid social unrest and an economic slowdown, and help the super-rich step up to their personal social responsibility.

1.  Increase the top marginal tax rate. As shown in the figure, it was 91% in 1963 in the U.S. Now it is 39.6% for all income over $225,000. In his book, Piketty recommends a graduated increase in the top marginal income tax to 80% in order to redistribute wealth and avoid the point at which the wealth chasm is morally intolerable.

click image to enlarge

2.  Enforce the estate tax. In the U.S., the value of an estate above $5.25 million is taxed at 40% by the federal government. No tax is payable if the estate is willed to the spouse, and shrewd estate planners use trusts, charitable donations, non-taxable gifts and other techniques to minimize taxes on other heirs’ inheritances. There is no inheritance tax in Canada, although capital gains tax is payable on the deceased person’s final tax return. Close any loopholes used by the ultra-wealthy so that these taxes are actually paid, to help level the playing field and help fund social support programs for the less fortunate.

3.  Crack down on tax havens. As with corporations, the greatest contribution that the wealthy can make to society is to pay their taxes. As explained in a previous blog, the use of tax havens by the ultra-rich is becoming rampant. Money hoarded in tax havens is dead money, doing nothing to stimulate economic activity. Prosecute wealthy tax evaders so that they contribute their fair share of the cost of social supports and vital economic infrastructure which made their wealth possible.

4.  Increase the captital gains tax rate. The wealthy increase their net worth by buying and selling assets. Instead, capital gains should be taxed at the same rate as other income, to slow the rate at which the rich get richer and help close the wealth chasm. In addition, to discourage the speculation game played by wealthy gamblers, place a 100% capital gains surcharge on profit from the sale of assets held less than 1 hour, 80% if less than 1 week, 50% if less than 6 months.

click image to enlarge

5.  Institute a wealth tax. Understandably, this is the most controversial of Piketty’s recommendations. He proposes a global tax on wealth—capital assets such as land, houses, office buildings, factories, stocks, and bonds. His tax would start small but rise to as high as 5% to 10% annually for fortunes in the billions. Paying a wealth tax could be the most effective way for the wealthy to exhibit social responsibility.

The wealthy understandably feel that they have earned their privileged position and will not willingly share their wealth. That could be a risky strategy. The public is fickle. Tolerance of the super-rich may reach a tipping point where they are reviled as exploitive rule-riggers. Let’s hope that risk is mitigated with smart corrective action to close the dangerous wealth chasm.

As usual, the above slides are from my Master Slide Set.

Please feel free to add your comments and questions using the Comment link below. For email subscribers, please click here to visit my site and provide feedback.

Bob