America's Staggering Wealth Divide

One of the Most Unequal Countries in the World

Inequality in America is even worse than it seems, with personal debt papering over the true state of affairs.

December 3, 2012  |  AlterNet  |  By Paul Bucheit

 

Most people associate inequality with the income gap. As distorted as the distribution of income may be, our wealth distribution is even more extreme. Americans are beginning to realize that years of preferential tax treatment for the rich, under the guise of "supply-side job creation" nonsense, have bloated the fortunes of the super-rich to a level that would make Rockefeller and Carnegie envious.

1. We're close to being the most unequal country in the world.

Among countries with at least a quarter-million adults, only Russia, Ukraine, and Lebanon are more unequal, according to the most recent figures ] from Credit Suisse Research .

An earlier report  by the same research team had indicated that Denmark and Switzerland were more unequal than the United States. While Switzerland is still high in the new data listing, ranking 18th, Denmark is actually rather equal relative to other countries, and received its dubious earlier position due to its own accurate reporting of household debt, as will be noted in Fact 5 below.

2. Wealth accumulation has been rigged for the rich.

The richest quintile of Americans owns 93% of non-home wealth. For Americans with incomes over $10 million, nearly half of their income comes from capital gains and dividends, on most of which they pay only a 15% tax. From 2002 to 2007, two-thirds  of all income went to the richest 1%. Then, in the first year after the recession, a startling 93% of all new income went to the richest 1%.

Massive wealth holdings have accumulated for the richest Americans not only because of their appropriation of income, but also because of their manipulation of the tax code. The 15% capital gains tax is their proudest accomplishment. Other ploys include carried interest, performance-related pay, stock options, and deferred compensation.

The imaginary 'work' of financial gain gets taxed at a much lower rate than real work. Through the years, as the rich have fattened up on stocks and other financial assets, the stock market has grown three times faster than the GDP. Yet American workers have not benefited from their own productivity. Their wages have flatlined  while the fruits of their labor have gone to investors.

3. As tax rates have gone down, income for the rich has gone up.

A Business Insider chart depicts the remarkable - yet reasonable - negative correlation between tax rates and the wealth of the super-rich. Over the past hundred years, every time tax rates have been decreased, the income percentage of the richest .01% has increased, and vice versa. Other  sources  confirm that changes in the tax rate have little to do with economic growth, and that the top tax rate can - and should - be much higher, up to 83%.

The Reagan-era myth of "higher taxes, less revenue" has been debunked. It's enough to convince any thinking American outside of Congress that our budget problems are rooted in an extraordinary degree of tax avoidance at the top.

4. "We should all cheer for the stock market" is a big scam.

The mainstream media would have us believe that the whole country depends on a rising stock market. But the lowest-earning three-fifths of Americans -- 60% of the population -- own just .2%  (one-fifth of one percent) of all wealth outside the home.

The Heritage Foundation and the American Enterprise Institute claim that wealth inequality has remained steady over the past century, even in the last 30 years. Both organizations cite a paper by Kopczuk and Saez , which shows that the share of wealth owned by the top 1% has decreased from the early 1900s to the early 2000s, possibly because the "democratization of stock ownership...now spreads stock market gains and losses much more widely than in the past."

While it's true that the percentages of net worth and financial wealth for the top 1% barely budged from 1983 to 2007, the percentages for the rest of the richest 5% increased by almost 20%. And the percentages for the poorest 80% of the population DECREASED by almost 20%.

In other words, the share of wealth owned by the top 1% leveled off because the "democratization of stock ownership" spread the wealth among just 5% of the population, those earning an average of $500,000 per year. A few people -- 5 out of 100 -- got very rich, but everyone else lost ground.

5. Debt has masked wealth inequality for 30 years

The authors of the Global Wealth Report  state: "Rising household debt...began around 1975. Before this date, the ratio of household debt to annual disposable income within countries remained fairly stable over time and rarely rose above 75%." Today, Americans are burdened with over $11 trillion  in consumer debt, including mortgages, student loans, and credit card liabilities. As the very rich have accumulated income and wealth, the middle class has kept up appearances by taking out loans.

However, that's only half the story. Private debt appears to be more manageable when public debt is low. Denmark has the highest household debt to wealth ratio in the world, but its government debt amounts to just 3% of the financial wealth of Danish households. The U.S. is at 32%. And our government debt as a percentage of GDP is 103%, one of the highest percentages in the world.

Conclusion: Where is all the wealth coming from?

According to the authors of the Global Wealth Report , the world's wealth has doubled in ten years, from $113 trillion to $223 trillion, and is expected to reach $330 trillion by 2017.

The UN definition of wealth  includes (1) natural capital: land, forests, fossil fuels, and minerals; (2) physical capital: buildings and infrastructure; and (3) human capital: the population's education and skills.

We need to add a 4th category: the magical creation of wealth by the financial industry.