Sunday, October 9, 2011

EXCERPTS FROM: Wealth, Income, and Power

EXCERPTS FROM: Wealth, Income, and Power

by G. William Domhoff

September 2005 (updated July 2011)

Excerpts prepared by Brian Lynch at
Read it all at the URL below

[When considering the top 1% of the wealthiest Americans] it is also important to realize that the lower half of that top 1% has far less than those in the top half; in fact, both wealth and income are super-concentrated in the top 0.1%, which is just one in a thousand.[i]

The Lower Half of the Top 1%

The 99th to 99.5th percentiles largely include physicians, attorneys, upper middle management, and small business people who have done well.  [Taxes paid] in this group [may be] around 25% to 30% of total pre-tax income [snip] leaving them with around $250k to $300k post tax. Typical [retirement investment contributions for this group would be] in the $50k to $100k range, leaving our elite working group with yearly cash flows of $175k to $250k after taxes, or about $15k to $20k per month.  Data on net worth distributions within the top 1% indicate that one enters the top 0.5% with about $1.8M, the top 0.25% with $3.1M, the top 0.10% with $5.5M and the top 0.01% with $24.4M. wealth distribution is highly skewed towards the top 0.01%, increasing the overall average for this group.[ii] 
Since the majority of those in this group actually earned their money from professions and smaller businesses, they generally don't participate in the benefits big money enjoys. Those in the 99th to 99.5th percentile lack access to power.  [The] lower half of the top 1% lives well but has some financial worries.

The Upper Half of the Top 1%

Unlike those in the lower half of the top 1%, those in the top half and, particularly, top 0.1%, can often borrow for almost nothing, keep profits and production overseas, hold personal assets in tax havens, ride out down markets and economies, and influence legislation in the U.S. They have access to the very best in accounting firms, tax and other attorneys, numerous consultants, private wealth managers, a network of other wealthy and powerful friends, lucrative business opportunities, and many other benefits.

Membership in this elite group is likely to come from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting. Some hard working and clever physicians and attorneys can acquire as much as $15M-$20M before retirement but they are rare. Those in the top 0.5% have incomes over $500k if working and a net worth over $1.8M if retired. The higher we go up into the top 0.5% the more likely it is that their wealth is in some way tied to the investment industry and borrowed money. [snip] Folks in the top 0.1% come from many backgrounds but it's infrequent to meet one whose wealth wasn't acquired through direct or indirect participation in the financial and banking industries. [snip]… one of the dangers of wealth concentration: irresponsibility about the wider economic consequences of their actions by those at the top. Wall Street created the investment products that produced gross economic imbalances and the 2008 credit crisis. It wasn't the hard-working 99.5%. Average people could only destroy themselves financially, not the economic system.[iii]

The Wealth Distribution

In the United States, wealth is highly concentrated in a relatively few hands. As of 2007, the top 1% of households (the upper class) owned 34.6% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 50.5%, which means that just 20% of the people owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage and salary workers).
Table 1: Distribution of net worth and financial wealth in the United States, 1983-2007

Total Net Worth
Top 1 percent
Next 19 percent
Bottom 80 percent

Financial Wealth
Top 1 percent
Next 19 percent
Bottom 80 percent

[EDITORS  COMMENT:  You will notice that there is little change in wealth distribution ratios over this 24 year period.  However a review of tax rates over this same period will show a truly dramatic decrease in tax rates for the wealthiest Americans.  Government military spending during this time also increased significantly.  Federal tax rates are now lower now than during the Eisenhower Administration. This suggests we have both a federal revenue problem and a military spending problem.]

In terms of types of financial wealth, the top one percent of households have 38.3% of all privately held stock, 60.6% of financial securities, and 62.4% of business equity. The top 10% have 80% to 90% of stocks, bonds, trust funds, and business equity, and over 75% of non-home real estate. Since financial wealth is what counts as far as the control of income-producing assets, we can say that just 10% of the people own the United States of America.

Inheritance and estate taxes

Figures on inheritance tell much the same story. According to a study published by the Federal Reserve Bank of Cleveland, only 1.6% of Americans receive $100,000 or more in inheritance. Another 1.1% receive $50,000 to $100,000. On the other hand, 91.9% receive nothing (Kotlikoff & Gokhale, 2000). [snip] A study (Kenny et al., 2006) of the financial support for eliminating inheritance taxes discovered that 18 super-rich families (mostly Republican financial donors, but a few who support Democrats) provide the anti-government activists with most of the money for [the effort to repeal inheritance and estate taxes.] 

Home ownership & wealth

For the vast majority of Americans, their homes are by far the most significant wealth they possess. Figure 3 comes from the Federal Reserve Board's Survey of Consumer Finances(via Wolff, 2010) and compares the median income, total wealth (net worth, which is marketable assets minus debt), and non-home wealth (which earlier we called financial wealth) of White, Black, and Hispanic households in the U.S.

 See figure 3: Income and wealth by race in the U.S. at the Original Document

And for all Americans, things are getting worse: as the projections to July 2009 by Wolff (2010) make clear, the last few years have seen a huge loss in housing wealth for most families, making the gap between the rich and the rest of America even greater, and increasing the number of households with no marketable assets from 18.6% to 24.1%.

Do Americans know their country's wealth distribution?

A remarkable study (Norton & Ariely, 2010) reveals that Americans have no idea that thewealth distribution (defined for them in terms of "net worth") is as concentrated as it is. When shown three pie charts representing possible wealth distributions, 90% or more of the 5,522 respondents -- whatever their gender, age, income level, or party affiliation -- thought that the American wealth distribution most resembled one in which the top 20% has about 60% of the wealth. In fact, of course, the top 20% control about 85% of the wealth (refer back to Table 1 and Figure 1 in this document for a more detailed breakdown of the numbers).
Even more striking, they did not come close on the amount of wealth held by the bottom 40% of the population. [snip] It's shocking: the lowest [50%] hold just 0.3% of the wealth in the United States. Most people in the survey guessed the figure to be between 8% and 10% [snip].

Do Taxes Redistribute Income?

It is widely believed that taxes are highly progressive and, furthermore, that the top several percent of income earners pay most of the taxes received by the federal government. Both ideas are wrong because they focus on official, rather than "effective" tax rates and ignorepayroll taxes, which are mostly paid by those with incomes below $100,000 per year.

Citizens for Tax Justice, a research group that's been studying tax issues from its offices in Washington since 1979, provides the information we need. When all taxes (not just income taxes) are taken into account, the lowest 20% of earners (who average about $12,400 per year), paid 16.0% of their income to taxes in 2009; and the next 20% (about $25,000/year), paid 20.5% in taxes. So if we only examine these first two steps, the tax system looks like it is going to be progressive.
And it keeps looking progressive as we move further up the ladder: the middle 20% (about $33,400/year) give 25.3% of their income to various forms of taxation, and the next 20% (about $66,000/year) pay 28.5%. So taxes are progressive for the bottom 80%. But if we break the top 20% down into smaller chunks, we find that progressivity starts to slow down, then it stops, and then it slips backwards for the top 1%.
Specifically, the next 10% (about $100,000/year) pay 30.2% of their income as taxes; the next 5% ($141,000/year) dole out 31.2% of their earnings for taxes; and the next 4% ($245,000/year) pay 31.6% to taxes. You'll note that the progressivity is slowing down. As for the top 1% -- those who take in $1.3 million per year on average -- they pay 30.8% of their income to taxes, which is a little less than what the 9% just below them pay, and only a tiny bit more than what the segment between the 80th and 90th percentile pays.
What I've just explained with words can be seen more clearly in Figure 6.

See figure 6: Share of income paid as tax, including local and state tax at the Original Document

Source: Citizens for Tax Justice (2010a).

Income Ratios and Power: Executives vs. Laborers

Another way that income can be used as a power indicator is by comparing average CEO annual pay to average factory worker pay, something that has been done for many years byBusiness Week and, later, the Associated Press. The ratio of CEO pay to factory worker pay rose from 42:1 in 1960 to as high as 531:1 in 2000, at the height of the stock market bubble, when CEOs were cashing in big stock options. It was at 411:1 in 2005 and 344:1 in 2007, according to research by United for a Fair Economy. By way of comparison, the same ratio is about 25:1 in Europe. [snip]

It's even more revealing to compare the actual rates of increase of the salaries of CEOs and ordinary workers; from 1990 to 2005, CEOs' pay increased almost 300% (adjusted for inflation), while production workers gained a scant 4.3%. The purchasing power of the federal minimum wage actually declined by 9.3%, when inflation is taken into account. These startling results are illustrated in Figure 9.

See figure 9: CEOs' average pay, production workers' average pay, the S&P 500 Index,corporate profits, and the federal minimum wage, 1990-2005(all figures adjusted for inflation) at the Original Document

Source: Executive Excess 2006, the 13th Annual CEO Compensation Survey from the Institute for Policy Studies and United for a Fair Economy.

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