Trying to understand wealth distribution in the US

For some time I’ve been hearing about income and wealth inequality particularly in the United States. I decided to try to better understand the extent and impact of wealth distribution. I also decided to differentiate between income and wealth though they are often closely related. In general, I think of income as predominantly earned income (from wages, self employment, royalties…), retirement income (from social security, pension, IRAs, 401ks etc.), and returns on investment*. In simple terms income is what became available that year to pay bills or to save/invest for the future. Wealth on the other hand is made up of all of ones accumulated assets less any debt. This the value of things you own (car, house, business…), savings, investments, retirement balance less any debts. For most families this is likely primarily made up of the equity in their house, savings account and anything set aside for retirement**. In my studies, for simplicity I came to think of wealth as a family thing, that if liquidated would be the entire bag of money a family would have available (e.g. to address a crisis, start over in another country or in most cases not liquidate but pass on to another generation). I found that wealth is often measured/tracked by household (This can be from census data, IRS data, normalized to family of 4…). To keep things simple I’ll use all these ways of measuring interchangeably since I’m interested in trends and the specific numbers are not critical. That wealth is usually measured by household or family is important because wealth has a major stabilizing impact on families. Wealth can carry a family through a crisis (job loss, major illness…), in can provide opportunities (college education, start a business…), it can provide a source of influence and in many cases provide all these options to another generation. In general income and wealth are correlated as reflected in the charts below but because of the stabilizing impact of wealth I’ll focus on that. For example in times of financial crisis a family with relatively low income that has managed to accumulate some wealth may manage to cope where a higher income family with little or even negative wealth might financially fail. In addition wealth can be used by individuals or small groups to influence financial and political decisions in ways that the average individual cannot. I gathered data from a number of sources*** but essentially all of it is a rebundling of US government data (IRS, census…).

To try to understand how wealth is distributed I used a common approach that divides the country into 5 groups based on household income. The first group is those from the lowest income to the 50th percentile of income (i.e. the income where 50% of the households make less than this amount). This represents half the households in the US ranging from those with no income to those with a solid middle class income (the 50th income percentile in 2023 was about $75,000). The second group is made up of those from the 50th to the 90th income percentiles comprising the “middle to upper middle income” (90th percentile income in 2023 $216,056). The third group is made up of those from the 90th percentile to the 99th percentile or “high income” households (99th percentile income in 2023 was $591,550). The fourth group is the “very high income” group in the 99th to 99.9th percentile range (99.9th percentile income was $2.4 million). The fifth group is the “extremely high income” group in the 99.9th to 100th percentile with income in excess of $2.4 million. These groups are by no means equal in terms of the percentage of the population they represent. The low to middle income group represents half the households, the middle to upper middle income group represents 40 percent, the upper income group represents 9%, the very high income group make up 0.9% and the extremely high income group make up only 0.1% of households (i.e. 1 in 1000). To put a little perspective on the current state of wealth distribution I made the illustration below from 1990 data. It shows the size of each group on the left and the percent of the nation’s total wealth each group holds. It surprised me that the first group representing the lowest income half of the country only controlled 4% of the nation’s wealth given the number of households in that group and that the upper threshold (by definition the middle) are not households one normally considers poor. The middle to upper middle group representing 40% of households and controlling 36% of wealth seemed more in keeping with what I might have expected. The high income group representing 9% of households controlling more wealth than the 40% of middle and upper middle income households was also unexpected. The last two groups clearly show the extreme concentration of wealth (25%) controlled by the 1% of households with the highest incomes. Perhaps most startling to me was that the last group of extremely high income individuals representing only 0.1% of households control more than twice as much of the nation’s wealth as the lowest income half of households taken together. To help visualize all this I made up the charts below where the number of stick figures (or fraction of a stick figure) is proportional to the number of households in the group and the number of $ signs is proportional to the percent of wealth the group controls.

Next I wanted to look to see if anything had changed in the last 30+ years. The figure below shows an illustration of the same groups and how wealth was distributed in 2023. The first thing that struck me was that the share of wealth controlled by the lowest income half of households had shrunk by half to only 2% of the nations wealth. The middle income groups share of wealth also shrunk considerably while the higher income groups share remained at about the same high proportion. All of the loss in the share of wealth in the lower and middle income 90% of households was shifted to the households with the top 1% of income. This 1% of households (top two categories) control more wealth than the 90% of the nation’s households making up the low to upper middle income groups. Indeed the extremely high income 0.1% of households now control more than 6 times the wealth than is controlled by the 50% of households with low to middle incomes.

Some level of wealth inequality is certainly to be expected. Yet for the top 1% to hold 23% of wealth in 1990 seemed high and for that 1% to have increased their share to 32% in 2023 seemed extremely high and a movement in the wrong direction. In looking at what policies encouraged these changes the Reagan, Bush 2 and Trump tax cuts that cut income taxes, capital gains/dividend taxes and estate taxes appear to have disproportionately impacted the wealthy. Indeed the rapid increase in the exemption threshold for who must pay estate taxes means that less than 0.1% of estates pay estate taxes# letting many of the rich pass all their estate including massive capital gains on to their heirs tax free. It appears that we are creating an aristocracy of wealth of such staggering amounts that it can persist with no effort by the heirs for many generations. What is worse is that much of this growth in wealth is not because the pie is getting bigger (total wealth of country is growing) but because the share of wealth is shifting dramatically from the bottom up.

Because so much of the wealth of low and middle income households is in the form of home equity and it seems that passing on that equity is one of the ways low wealth households can give a start to the next generation I thought it interesting to look at home ownership. I found two apparently contradictory things. The first which is encouraging is that the number of homeowners (different than households) who own homes debt free has been rising for some time and is at a high of nearly 40%##. These owner occupied houses represent about 65% of households. A number that has gone up and down a bit but is at about the same level as it was 40 years ago. The other 35% of households live in rentals so don’t even factor in to the calculation. The other thing I found that is perhaps a more complete way to look at this (i.e. at least includes all households) is a look at home equity wealth in a study of 28 OECD countries showing that the US had the third lowest percentage of households who owned their homes outright (23%). This is particularly bad when compared to a number of European countries with debt free percentages in the 60s for households who owned their homes outright###. This reminds me of my father’s adage that ‘figures don’t lie but liars figure”. You have to look carefully at what the data says and where it comes from. This brings me back to one of the many things that concerns me about the concentration and growth of wealth at the top. Wealth has always been a source of power for the few who possessed it and chose to exercise that power. That use of power has always been at least somewhat held in check by a free and trusted press. The growth of wealth at the top puts extreme wealth in more hands (more individuals likely to use it inappropriately) and the ability to use wealth to manipulate media in an era where main stream media is a shrinking source of news and information is troublesome.

It is important to note that the US population has grown over time and the average wealth has grown over time so on average we are all better off. However, the number of people living in poverty is about the same today as in the early 1960s though the percentage of the population they represent is lower^. What is perhaps more disconcerting is that until about 1980 the increase in family income (and by correlation wealth) after the second world war impacted low (20th percentile), middle (50 percentile), and high (95th percentile) income families similarly (the rising tide floated all the boats). This trend ended after 1980 with real income growth nearly stagnant for the low income group, slow for the middle and continued at a good clip for the high income groups^^. There are of course a number of economic factors that contribute to these changes but government policies are likely significant.

*https://www.irs.gov/e-file-providers/definition-of-adjusted-gross-income

**https://www.census.gov/content/dam/Census/library/publications/2023/demo/p70br-183.pdf

***The FED (https://fred.stlouisfed.org/series/WFRBST01134) and Statista (https://www.statista.com/statistics/299460/distribution-of-wealth-in-the-united-states/

#https://www.taxpolicycenter.org/briefing-book/how-many-people-pay-estate-tax

##https://www.axios.com/2023/12/12/mortgage-free-homes

###households who owned their homes outright

^https://www.census.gov/content/dam/Census/library/visualizations/2023/demo/p60-280/figure1.pdf

^^https://www.cbpp.org/research/a-guide-to-statistics-on-historical-trends-in-income-inequality

4/25/2024

On a related topic my youngest son asked “how do you weigh the rising debt vs. the increased wealth disparity in term of priorities?”

Relative to Jack’s question of National Debt vs. growing wealth disparity, I think the interest on the debt is a major issue. It represents about 1 of every 10 dollars expended by the government at the moment. That’s already devastating and ongoing deficits and high interest rates could have it explode. That 10% represents more than all the truly discretionary spending in the budget. It is approaching the 13% spent annually on defense. There are two fixes here that I know of. Reduce spending and channel surplus into buying down the debt but congress only seems to know how to spend so this has rarely happened. The second is regrettably similar in that it requires less spending. In this case though you only have to eliminate the deficit (i.e. don’t spend more than you take in in taxes). Then the debt doesn’t grow and over time it effectively shrinks due to inflation. This second option has been the effective though unstated policy for years but it has rarely been achieved. (Note the US came close to balancing the budget most years (other than during WW2) until the early 70’s and then actually ran a surplus for a few years 1998-2001). Clearly any answer will involve controlling spending and likely raising taxes. Could we balance the budget and cut defense spending by 0.1% per year for 10 years and use $ to buy down the debt? Easy to say, hard to sell!! Clearly any spending needs compensating cuts or taxes to balance the budget. I have to say I’m a fiscal conservative and generally go along with this.

The wealth disparity issue has two obvious sides. First, how do you slow the rapid funneling of wealth to the few wealthiest at the top. Second, how do you provide a means to grow the opportunities for the poorest nearly 90% of the country whose reduced wealth has been funding the increased wealth of the top 1% (see above https://www.johnrschott.com/blog/wealth2023). As I said above, first you have to identify ways to cut spending or raise money. Lets focus on raising money. The truly wealthy use a host of ways to accumulate and pass on passive income. I think we need estate taxes for the government to recoup some of the staggering amount of wealth accumulated by taking advantage of the success of the American system. This means lowering the estate tax exemptions from the 11+million (effectively 22 million for a couple) to something more reasonable (6-7 million with more restrictive pass through to spouse). As part of this we need to close all the loop holes (trusts etc.) that the wealthy use to dodge these taxes. (note at the moment almost no one pays estate taxes). We need to reinstate taxes on most forms of passive income (i.e. real estate trusts, capital gains, investment income…) to closer to earned income levels. We also need to fund the IRS to enforce existing laws and identify and recommend solutions to close loop holes. Raise taxes on very high income earners (yes they pay a lion’s share already but they benefit a pride’s share from the health of the American system and should support it). All that generates money to run a balanced budget or hopefully a surplus. Then you have to look to gently start cutting so as not to shock the system (I’d start by dramatically restricting pork, and look to a more realistic defense budget). We also need a global engagement policy that more effectively involves our allies in our mutual defense.

When it comes to how to move the bottom and middle up, I’d start with education, as I alluded to in earlier discussions, with a strong focus on vocational as well as college prep but starting at grammar school and middle school. Many of the other policy proposals Galloway (https://www.profgalloway.com/war-on-the-young/) throws out might help but unless they are in a nourishing environment they are, in and of themselves, likely to fail. This leads to a really tough one. I think we need to figure out how to restart/reinvigorate nourishing communities. I’m not sure I’ve seen good models/policies for this but the small close knit communities (rural, urban and dense suburban) which dominated our culture through at least the 1960s tended to help keep youngsters and young adults focused on paths that led to some form of success (i.e. to grow wealth at the bottom and middle we have to figure out how to make youth successful) and provided guidelines, support and safety nets as needed. This often came from large families, churches and/or close neighborhoods. I honestly don’t know if the digital world can provide this, it offers so much potential for connection but it is so easy to hide/lie/avoid those connections. I also don’t know how to use funds to initiate movement in this direction. I do think finding ways to motivate smaller culturally and economically mixed yet interdependent neighborhoods would be a start.

Back to Jack’s question of priorities. I don’t think it is one or the other. We have to control the debt, in part by using tax policy to stop the upward flow of wealth and increase federal revenue and use policy and revenue to assist the success of youth and young adults.