Wealth Inequality: Its Causes and Cures

The video, Wealth Inequality in America, went viral last Tuesday, scoring more than two million hits in less than a week.

Why the interest? A compelling video to be sure, albeit with data that has been around for awhile. It is the wealth gap that is truly stunning; the gaping chasm in wealth between virtually all Americans and the very richest one percent who control more than a third of all wealth. The wealthiest quintile of Americans owns more than 85% of all wealth. Perhaps the greater surprise is at the other end of the spectrum, with the poorest 80% of Americans (270 million people) owning less than seven percent of the nation's wealth.

The trends are even more sobering (if that were possible): in the last 30 years, the wealthiest five percent of Americans amassed almost three-fourths of all gains, while the bottom 60% of the American people actually lost share (-5.4%).

Last week, Thomas Shapiro and his associates released a study of the causes of the tripling of the black-white racial wealth gap from $85,000 to $236,500 over 25 years. The prime determinants of the increase: duration of homeownership, household income and unemployment over the period.

Why is wealth inequality—and asset poverty—so great, and what should and can be done about it?

It is easier to assert that income inequality is at least somewhat earned—a reflection of work and merit. After all, salaries are reflected here, a clear tie to hours worked, and, arguably, to productivity as well. Earnings disparities due to wealth inequality are harder to justify, let alone explain. Does anyone think that the average billionaire contributes 400 times more to the common good than the average teacher, fire fighter or police officer?

One reason wealth inequality has grown to such an extent is because we fail to tax wealth gains, and we actually penalize low wealth people from pursuing exactly the paths they must to acquire a minimum of wealth: stability and hope.

Last year—like many years before last year—we awarded half a trillion dollars in tax breaks to homeowners, retirement savers and successful investors. Virtually all of these rewarded the richest 40-20-5-1%. At the same time, we denied the 60%--a majority of Americans—any incentive on their savings. In fact, for the poorest Americans, we went the other way, penalizing them for saving for their education, businesses, homes and futures.

There are many policies that have been suggested by New America Foundation newamerica.net, the Brandeis Institute on Assets and Social Policy iasp.brandeis.edu, the Center for Social Development csd.wstl.edu, the Initiative on Financial Security of the Assets Institute aspeninstitute.org, Prosperity Now cfed.org and others. But, since such a large part of current subsidies for wealth inequality pulse through the tax system, and since tax reform still appears on the political horizon, we must not miss the opportunity of tax reform to reduce and rationalize savings and asset-building tax incentives. Most crucial: provide a savings incentive to the poorest 60% of taxpayers who, as has been proven by well-documented demonstrations and history, will save, start businesses, buy and keep homes, go to college, create their futures and ours. This can be done for a fraction of the half-trillion dollars we spend annually with questionable effectiveness to incent saving and asset building by the wealthiest 20% of Americans.

We should encourage saving and asset-building—entrepreneurship, education, homeownership, employment—for many reasons, not just because it is fair and productive, but because it is the key to economic growth that we so need. We know that having even a few hundred dollars in savings makes kids 6-7 times more likely to aspire to and attend college, enables individuals to start their own businesses, allows the ill-housed to enter the ripening homeownership market. Research by John Haltiwanger and his colleagues at the National Bureau of Economic Research has established that almost all job growth in the past 30 years has come from new and young businesses—overwhelmingly businesses less than one year old. But investment in new businesses mostly comes from individual savings and savings of friends, families and associates; savings that have been largely wiped out over the last several years. This decimation of savings is a likely reason why job creation by new businesses has fallen from a high of 3.6 million annually before 2008 to a low of 2.2 million in the years since.

If we want to seed the next economy, lets open its doors to all, enabling them to build the skills, businesses and jobs of our future.

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