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Do too few people own too much of America’s wealth? Many politicans and policy wonks on the left think so. They also worry the gap is getting bigger, and they want Washington to take action. One idea, put forward by Democratic presidential candidate Elizabeth Warren, would hit the superwealthy with an annual wealth tax on fortunes over $50 million and a special extra levy on billionaires. However, maybe the problem isn’t that those at the top have too much, but instead that those at the bottom have too little. That perspective might argue for different policy fixes that focus on wealth creation rather than redistribution.
To discuss wealth inequality from a variety of perspectives, I asked a group of experts to answer the following question:
Some economists estimate that the wealthiest 1 percent of Americans own 40 percent of the nation’s wealth — up from 25-30 percent in the 1980s. Should policymakers react to this apparent increase in inequality, and if so, how?
Eric Zwick, Associate Professor of Finance and Eugene Fama Faculty Fellow, University of Chicago Booth School of Business and NBER
Yes. Policymakers should react to this phenomenon because many of their constituents believe it is a serious problem. If policymakers disagree, they have an obligation to make the case for why. The risk of doing nothing is that a new vintage of policymakers, perhaps with worse ideas, will speak to the problem and gain support they shouldn’t have. So, the case for doing something is quite strong.
The case for any specific response is weaker, simply because we do not yet understand what has happened. Why did wealth inequality increase? And what are the bad consequences (or negative externalities) that merit a policy response? Our knowledge is so incomplete that even substantial disagreement exists across sources and methods about how large the increase in inequality was, when it occurred, and what form it took.
A better understanding of the facts is important because we want to narrow the set of policy instruments to those most likely to work without doing unnecessary harm. The list of potential policies is long and diverse, including those that target the top—such as taxes on wealth and high incomes, regulation of industry, charitable-giving reforms, and restrictions on political contributions and lobbying—and those that target the bottom—such as support for public education, affordable housing policy, and other expansions to the safety net. Whether a particular policy will have the desired effect depends on whether we correctly diagnose the disease, that is, whether we target the root causes and worst consequences of wealth inequality.
My recommendation is a fact-finding mission. Policy makers should convene a commission, hold open hearings, and work to produce a substantive conversation about the following questions. What do we know about wealth inequality and why it has risen? What is the relative importance of multi-generational wealth as opposed to self-made wealth? What role have demographic shifts and changes in the structure of the pension system played in these trends? What are the effects of wealth inequality on the distribution of political power? What are the consequences for disparities in economic opportunity, especially for children? And is wealth inequality related to income inequality, for which human capital plays a significant role, or do wealth inequality trends represent a distinct phenomenon?
A fact-finding mission would serve three purposes. First, it would help inform policymakers and the public, moving us all toward a common set of facts. Second, it would shed light on which policy ideas best suit the problem. Third, it would inject needed humility into the debate, as history is replete with episodes of strong policy responses in uncertain environments, their null results, and their unintended consequences.
Stan Veuger, AEI Resident Scholar and visiting lecturer at Harvard University.
The prompt tells us that economists estimate that the wealthiest 1 percent of Americans own 40 percent of the nation’s wealth — up from 25-30 percent in the 1980s. There are two ways to reduce wealth inequality. One is to make wealthy people less wealthy, the other one is the make people with little wealth wealthier. The first method makes people worse off, while the second one makes people better off, so I prefer the second method.
The easiest way to significantly increase the measured wealth of relatively low-wealth Americans is to convert various social insurance programs from pay-as-you-go programs to prefunded programs with personal accounts. One could adopt reform proposals sketched out by the late Martin Feldstein to do with the Social Security, Medicare, and Unemployment Insurance programs. A back-of-the-envelope calculation suggests that this would raise middle-class wealth by some 150 percent of GDP, or about a third of total societal wealth. This would dramatically reduce the share of the nation’s wealth held by both the top 1% and the top 10% of the wealth distribution, to well below the much-vaunted levels of the 1980s.
It is unlikely to be a coincidence that wealth became more unequally distributed as the federal government removed many of the drivers of private middle-class savings over the past two generations. If one is genuinely concerned about this, the solution is straightforward: the construction of what used to be referred to as the ownership society along the lines sketched above, a better model to strive for than a society that seeks to punish success.
Melissa Kearney, Neil Moskowitz Professor of Economics at the University of Maryland, Director of the Aspen Economic Strategy Group, and Research Associate at NBER.
There is some debate about the number — whether today the top 1 percent holds 40 percent of the nation’s wealth, or some smaller share — but there is little question that the concentration of wealth at the top in the US is large and growing. This reflects an economic system that has yielded wildly disproportionate income growth over recent decades — a system that rewards high-skilled, highly educated workers and offers winner-take-all rewards to those who reach the very top. And it reflects economic policies that have done far too little to help those left behind, including many of our fellow citizens who face a perpetual economic struggle or lead lives of despair.
It cannot go on this way. Our society cannot survive the economic, social, and political fragmentation that is the predictable consequence of this system. The reason to take action is not envy or rage or to punish those at the top, many of whom through brilliance and risk-taking have provided great benefits to humanity. But rather because the marvelous benefits of the modern economy will be for nothing if the system that creates them makes it impossible for so many to flourish and hollows out our common life as Americans.
Policymakers should take dedicated steps to fight the tides of increasing income inequality. The number one policy priority should be a massive investment in education and health so that more Americans can reach their economic potential and earn higher wages. This will require increased spending on and evidence-based reforms to educational institutions, from early childhood through higher education. It will mean maintained spending on Medicaid and health services for children in particular. Policymakers should not spend billions on universal tuition benefits, but rather, offer tuition support for those who need it, and spend billions equipping all educational institutions to be universally of high quality.
Policymakers should also use the tax and transfer system of the United States to transfer more of the tens of trillions of dollars held by the top 1 percent to the millions of children and adults who live in poverty. Again, not because it is desirable to take money from those with great income, but rather because the existence of that income and wealth — and the constitutional power of the government to tax it — gives our nation the means to improve the lives of the millions of Americans who don’t have enough to eat, don’t have a safe and healthful place to live, and don’t have a standard of material well-being that allows them to reach their human potential. Apart from the moral imperative to help our fellow Americans, it is definitively not in the nation’s economic interest that nearly 20 percent of our children are held back by the grips of poverty. Providing additional resources to poor families yields individual and social benefits. Too much human potential is being lost.
To raise the necessary revenue, policymakers should reform the federal individual income tax code and personal estate and gift tax so that higher income households pay higher effective tax rates. Tax experts have identified a number of promising ways to expand the tax base that would likely have limited efficiency losses, for example, through a scaling back of so-called loopholes such as step-up in basis, carried interest, and the more recent reduced tax rate on select pass-through income. Such reforms could raise tens of billions of dollars in annual revenue, and would be much more feasibly implemented and administered than an entirely new wealth tax would be. Any increase in taxes might come with some associated reduction in economic growth, but by using the revenue to make direct investments in human capital, we could expect a positive return on those investments — and the resulting economic growth would serve to build a stronger society where all Americans share in a common prosperity.
Michael Strain, AEI Director of Economic Policy Studies and John G. Searle Scholar.
Let’s step back. What is the problem to which Senator Warren’s wealth tax is the solution?
Is it the government’s need for additional tax revenue? The tax will likely bring in only a fraction of the revenue the senator expects. It will be incredibly difficult to administer, which explains why European countries have been abandoning their own wealth taxes. If finding revenue is your goal, there are clearly better places to look.
The wealth tax targets the 75,000 families with the highest net worth. They represent 0.06 percent of households. That the tax is designed to affect so few tells you that its purpose is much more than revenue generation. Indeed, Senator Warren’s economic advisers argue that the “root justification” for high tax rates “is not about collecting revenue.” Instead, “they aim at preventing an oligarchic drift that, if left unaddressed, will continue undermining the social compact and risk killing democracy.”
This is a bogus rationale. It would benefit from some political science. If anything, taking over 18 percent of the wealth of these families during the tax’s first 10 years — as the senator’s plan would do — would make them more politically active, not less. If they can’t keep all their wealth, they would have a stronger incentive to pump it into politically active organizations.
Besides, these families are not creating “oligarchic drift,” “undermining the social compact,” and threating democracy. It takes a whole lot less than a net worth of $50 million — the amount of wealth where Warren’s tax kicks in — to exercise political influence. And influence is much more diffuse than Warren seems to think. Just take a look at the Forbes 400 and see how effective the wealthiest Americans are at enacting their political agenda. Does Warren Buffett have his preferred tax scheme? Do Mark Zuckerberg and Jeff Bezos feel like they are basking in the warm embrace of US politics and public policy?
Let’s step back again. Why are we treating the wealth of the very wealthy as a problem to be solved? It cannot seriously be argued that the US and the world would be better off without Michael Bloomberg and Bill Gates’ contributions to the economy and to society. We need more brilliant, driven, passionate people, not fewer.
If wealth inequality is a problem, then the solution is in helping all Americans to build wealth. The solution is not to target a small number of wealthy families with the goal of knocking them down a peg to “keep democracy alive.” I’m sure we’d all agree that a tax targeting, say, the ten wealthiest families would be an abuse of government power. I’d argue that targeting the top 0.06 percent of families is a similar abuse. All citizens deserve protection from the tyranny of the majority — even if that tyranny is fueled by populist anger. And even if those citizens are wealthy.
Elizabeth Warren proposed a wealth tax last year in the name of fixing wealth inequality. I asked five experts about how policy makers should react to inequality, as it has become a topic of increasing importance.
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