Wealth inequality: also going up

at 03:18 PM ET, 11/09/2011


(Mother Jones Magazine)
Of late, James Pethokoukis, the American Enterprise Institute’s resident economics blogger, has been attempting to “close the case on the inequality myth.” Wednesday’s edition argues that it doesn’t really matter if income inequality has gone up because wealth inequality fell after World War II. I don’t agree with that, but put it aside for a moment.

The paper Pethokoukis quotes argues that “the first and perhaps most obvious factor is the creation and the development of the progressive income and estate tax.” I note this only because Pethokoukis and the American Enterprise Institute are loud, committed advocates for eliminating the estate tax and moving toward a less progressive tax code. They host events on the subject and praise plans for a flat tax that would make the tax code less progressive and put an end to “the death tax.” Over the last decade, they’ve been winning. And wealth inequality, predictably, has been rising.

Pethokoukis’s numbers stretch from 1916 to 2000. In 2001, of course, the George W. Bush tax cuts were passed. The tax code became significantly less progressive, and the estate tax phased out over the course of the decade. In 2001, estates worth more than $675,000 were taxed at 55 percent. In 2011, estates are tax-free until they hit $5 million, and after that, they’re taxed at 35 percent.

In the paper Pethokoukis quotes, the wealth share of the top one percent was around 23 percent in 2000. That paper also uses estate tax data, which misses, among other things, trust funds. More recent numbers, based on surveys conducted by the Federal Reserve of Washington, are available from New York University economist Edward Wolff. He found that at the end of 2009, the top one percent held 37.1 percent of the nation’s wealth -- and their share appeared to be climbing. (Wolff also found a greater rise in wealth inequality during the post-war period.) If Pethokoukis and AEI get their way on taxes, we can expect that trend to continue.

Notably, one of the arguments that AEI marshals against the estate tax is that polling shows Americans don’t like it. In a recent study, Michael Norton and Dan Ariely asked Americans what they thought the distribution of wealth is in this country and what they thought it should be. “First,” the authors found, “respondents dramatically underestimated the current level of wealth inequality. Second, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution.” You can see their results, graphed by Mother Jones, atop this post.

These trends also suggest the ways in which income inequality can, over time, affect wealth inequality. As a 2005 report from Public Citizen and United for a Fair Economy documented, a handful of super-wealthy families have spent hundreds of millions of dollars lobbying against the estate tax in recent years. Their campaign, as noted above, has been successful, and so they now stand to save billions in future taxes.

Related content:

Capital gains tax policy feeds gap between rich, poor

The rich pull away from the rest of America

Special Report: Breakaway Wealth

 
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