Income Inequality and the Billionaire Class
A decade ago, President Barack Obama declared income inequality “the defining challenge of our time.” Obama wasn’t alone in his concern. Over the last fifteen years, many on the left have made this a core focus of their policy agenda. In this battle of ideas, Progressives have benefited from the intellectual ammunition provided by Thomas Piketty and Emmanuel Saez.
In 2003, these two French economists published “Income Inequality in the United States (1913–1998)” in The Quarterly Journal of Economics. Piketty also wrote Capital In the 21st Century, which hit book stores in 2013 and quickly became a New York Times bestseller. Piketty argues that there was a lowering of inequality in the middle of the 20th century thanks to two world wars, which destroyed enormous amounts of wealth and fueled large spikes in taxation, but now wealth disparities have returned to levels not seen since the late 19th century.
Capital in the 21st Century is heavy on graphs and math. I listened to it on Audible seven years ago, but I had a very hard time following along. The only thing that stuck was the equation “r > g”. “R” represents the percentage of income generated by owning assets (e.g. stocks, bonds, real estate), while “G” stands for the rate of economic growth. Piketty argues that, thanks to compound interest, super wealthy individuals accumulate wealth at a faster pace than the overall economy expands.
Piketty took advantage of a huge data set (e.g. tax records, household surveys, estate records, and national income accounts) to analyze trends in wealth and income inequality. Piketty’s research seemed unassailable, as the datasets were so comprehensive and the arguments were so well documented. Recently, however, Gerald Auten of the Treasury Department and David Splinter of the Joint Committee on Taxation at the U.S. Congress presented an alternative view.
While Auten and Splinter agree that income inequality has grown, they argue that the wealth disparities are not as large as Piketty’s research showed. Auten and Splinter estimate that, in 2019, the richest 1 percent of Americans drew roughly 14 percent of the nation’s income, before taxes and transfers from government programs. But after including the effects of government redistribution, their share dropped to 9 percent, just slightly more than it was in 1960. Auten and Splinter argue that Piketty’s measure of income failed to include many federal, state and local transfer payments (e.g. housing assistance, food aid) and employer-funded health insurance benefits as income to the recipients while also failing to include taxes paid as income lost to the taxpayer.
These are complex disagreements over highly technical issues, and I’ll admit that I’m pretty confused about the numbers and the debate. On the one hand, I know that politicians like Bernie Sanders claim, “The top 1% now own more wealth than the bottom 92%, and the 50 wealthiest Americans own more wealth than the bottom half of American society.” On the other hand, I’ve also seen data from the Congressional Budget Office, Office of Management and Budget, National Bureau for Economic Analysis— while the average household in the top 1% retains almost 18 times as much income after taxes and transfer payments as the average bottom-quintile household, the top 1% pays more than 219 times as much in taxes. And while the average household in the top 0.1% has more than 31 times as much income as the average bottom-quintile household, the top 0.1% pays almost 482 times as much in total taxes. I’ve also read an analysis by the Tax Foundation of 2021. Here is the breakdown:
The bottom half of earners, consisting of 76.8 million returns and reporting an adjusted gross income (AGI) of less than $46,500, earned 10.4% of the country’s total income in 2021. They contributed 2.3% of all income taxes.
The group between the bottom half and the top 25%, consisting of 38.4 million returns and reporting an AGI ranging from $46,500 to $94,500, earned 17.5% of the country’s total income. They contributed 8.4% of all income taxes.
The cohort between the top 25% and 10%, consisting of 23 million returns and reporting an AGI between $94,500 and $170,000, earned 19.5% of the country's income. They paid 13.4% of all income taxes.
The group between the top 10% and 5%, comprising 7.7 million returns with an AGI ranging from $170,000 to $253,000, earned 10.6% of the country’s total income. They contributed 10.2% of income taxes.
In the bracket between the top 5% and 1%, consisting of 6.1 million returns reporting an AGI between $253,000 and $682,500, earned 15.7% of the country’s total income. They paid 19.9% of income taxes
The top 1%, consisting of 1.5 million returns with an AGI between $682,500 and $3,775,500, earned 26.3% of the country’s total income. They shouldered a significant tax burden, paying 45.8% of all income taxes.
While the tax code is clearly progressive, it was disappointing to learn from the Tax Foundation that the tippy-top 0.1% have a slightly lower average tax rate (25.7%) than the average tax rate of the top 1% (25.9%). Though it’s a very small difference between the .1 and the top 1%, this isn’t good. The wealthier should always pay more in taxes than those with less money.
While I believe in a progressive tax code, I’m not convinced that income inequality is a bad thing. I don’t care if there are rich people and poor people. What matters to me is that the poor people have an opportunity to get rich because of making good decisions and that the rich can become poor by making bad decisions.
Do we have such a society?
Absolutely not.
But there is more churn in the economy than many people think. Here is an interesting graph that was put together using data from the Pew Charitable Trusts, Harvard’s Raj Chetty, and Michael Strain of American Enterprise Institute. The graph shows relative mobility—the extent to which children reared in families in one income quintile stayed in the same income quintile, rose to a higher quintile, or fell to a lower quintile. There is also some interesting research from Dave Ramsey, who produced a study on wealth found that 79% of millionaires are self-made.
Don’t get me wrong. I want more (much more!) economic mobility. I would like to see more movement between the four income quintiles. But I disagree with the notion that there are only “the rich” and only “the poor” as distinct and rigid classes. I also disagree with people like Farhad Manjoo, who published an op-ed in The New York Times, and other progressives who argue that we should try abolish billionaires.
We should want a country that creates more rich people, not less. The Washington Post editorial board put it well: “The pursuit of individual wealth is not only natural; it is laudable, as a reward for risk-taking, innovation, artistic creativity and efficient production, whose benefits spill over to society as a whole. Throughout history, societies that arbitrarily confiscated property failed while those that lawfully protected it flourished.” I have no problem if the income differences are driven by productivity differences and by the choices people make.
I love that Michael Jordan is a billionaire. He brought joy to billions of fans throughout the world over the course of his career. The same goes for Taylor Swift. She has made her money by putting out amazing music that provided happiness to hundreds of millions of people throughout the world. I love that Howard Schultz built a valuable company from the ground up, giving customers great coffee at a great price. It’s great that Bill Gates gave us a PC operating system and that Michael Dell gave us faster computer chips. It’s cool that Larry Paige and Sergy Brin created fast and effective internet search. It’s terrific that Elon Musk invented Tesla and SpaceX. Although I’m not much an outdoorsman and don’t hunt or fish, I’m happy that John Morris built Bass Pro Shops. And Brian Chesky gave a gift to the world when he cofounded Airbnb.
Of course, there are also many examples of billionaires who inherited all their money and who didn’t add anything to the world. Marijke Mars, Valerie Mars, and Victoria Mars are heirs to the family's giant candy company. Ann Walton Kroenke and Nancy Walton Laurie, two nieces of Sam Walton, have all their money simply because of their uncle built the retail giant. Laurene Powell Jobs inherited her fortune from her late husband, Apple cofounder Steve Jobs, who died in 2011. I could go on and on.
A interesting break down is found in the most recent list of Forbes 400 richest Americans. The magazine looked carefully at these billionaires' upbringings. Here is what they found:
Inherited fortune but not working to increase it: 28 people
Inherited fortune and has a role in managing it: 21 people
Inherited fortune and helping to increase it marginally: 19 people
Inherited fortune and increasing it in a meaningful way: 24 people
Inherited small or medium-size business and made it into a fortune: 29 people
Hired hand who didn’t create the business: 11 people
Self-made who got a head start from wealthy parents: 32 people
Self-made who came from a middle-class/upper-middle-class background: 152 people
Self-made who came from a largely working-class background: 55 people
Self-made who grew up poor but also overcame significant obstacles: 29 people
In short, there are billionaires who didn’t work for a penny, but then there are others who climbed and climbed and overcame adversity. A slim majority of billionaires had to work for their fortune. We should celebrate, not bash, these individuals.
I’ll end with a thought experiment courtesy of Michael Tanner. He asks us to imagine a huge plunge in the stock market that obliterates a good chunk of the wealth of the despised billionaire class. For those who don’t like the fact that there are billionaires, the drop in the stock market should be a good thing. After all, the drop in the market makes the billionaire class much much poorer. As Tanner writes, “If billionaires lose a few billions, economic inequality has decreased. Fewer billionaires exist today than yesterday. Bernie Sanders should be dancing in the street.”
But the economy isn’t some fixed pie. As Michael Tanner writes, “Very few wealthy people stash their money in a vault to swim in, like Scrooge McDuck. Their money is either saved or spent. If saved, it provides a pool of capital that fuels investment and creates jobs and opportunities for the non-rich. And if spent, it increases consumption, likewise providing employment opportunities for American workers.”
I will never become rich. I will be working at a grocery store until I can no longer stand. Still, I don’t resent the wealthy. Quite the opposite. I’m hoping that my brother and my good friend, Dan, both of whom work for start ups in different industries, will strike gold. Or I think of my cousin, Rafi, who has built a company from a few people to 85 staffers. There is my cousin, Melissa, an entrepreneur, who started Tipsy Scoops, a popular alcoholic ice cream chain. I want all these to reap the benefits of their hard work and become billionaires.