We hear and read about a wealth disparity in the US. I was skeptical, so decided to do some of my own research.

I realize this is different than my normal newsletter or blog entry, but it really interested me and I thought that you might want to read what I found. I hope you’ll find it worth reading.

About the wealth disparity

In 1980, the highest federal tax rate was 70% and the highest tax rate on capital gains (investment income on profits) was 28%. At that time, the wealthiest 1/10 of 1% of the population owned 7.7% of the wealth in the country, the top 1% owned 22%, the top 10% owned 64.6% and the bottom 90% (the rest of us) owned 35.4%.

Ronald Reagan won the presidency with an economic policy based on “trickle down” economics. The premise was that if we lowered the tax rates and helped the wealthiest accumulate more wealth, they would use that money so that the benefits would trickle down to everyone.

For all intents and purposes, for the last 45 years, under both parties, the government has continued to pursue that policy. What is the situation today?

Table 1: Wealth Distribution

	1980	Today
Top 0.1%	7.7%	14.5%
Top 1%	22.0%	41.7%
Top 10%	64.6%	73.1%
Bottom 90%	35.4%	26.9%

During these last forty five years. The top 0.1% has seen their ownership share almost double; whereas they owned 7.7% of the country in 1980, today they own 14.5%.

The top 1% has seen 80% increases. The chart makes it look as if the top 10% have seen increases of 12%, but the 90-99% have seen their share decrease from 42.6% to 31.4%.

And the rest of us, we have seen our share decrease by just under a quarter. We used to own over 35% of the country, but today we own just under 27%. Only the top 1% have seen their share of the wealth increase.

This isn’t to say that we own less than we did in 1980. I also checked growth in wealth for different groups. Everyone’s total assets grew, as the economy (in constant dollars) tripled. But whereas the average person’s wealth almost kept pace with the economy (growing by 2 and a half times), the wealthiest grew their wealth much faster. The wealth of someone in the top 1% increased by over five times (from $4.5 million to $30 million) and the wealth of someone in the top 0.1% increased about eight times (from $17.8 million to $160 million).

Shouldn’t growth proportionately benefit all income groups? Why was it that the poor fell further behind, the middle class barely kept up with the economy, but the wealthy grew their money at double the rate that the economy grew?

Is there a tax disparity?

I was curious to see if tax policy might be a cause.

I decided to do my own calculation on what wealthy people might pay in taxes versus the average person. Today, the highest federal ordinary income tax rate is 37% (down from 70% in 1980) and the highest federal capital gains rate is 23.8% (down from 28%).

I looked at the taxes and after-tax earnings for people who primarily earn their money through investing (probably the top 5%) versus those who primarily work for a living (and hopefully find a way to save as well).

I decided to base my analysis on New York State. If you live in a lower tax state, you are a little better off, but not so much that it’s work celebrating.

The median household income is $86,000 in New York. I chose to look at a couple with a household income of $125,000. They would expect to pay about $26,000 in income taxes annually (Income Tax, FICA, and New York State) or about 21% of their income.

If they did well, and eventually rose to $500,000 in annual income, they would pay about $172,000 in taxes (federal, FICA, state, and real estate on their house) or about 24%. That’s their total or aggregate rate, but on that $375,000 increase (what would be called marginal income), they would be paying almost 40% taxes or $146,000.

As my father-in-law used to say, “It’s a privilege to pay taxes, and the more you earn, the more taxes you should pay to support the rest of society.”

But compare this to someone who is wealthy, how much would they pay?

If that same couple did not work, but had investments of $5 million dollars, they would be in the top 5% of the country. Over the last 50 years, returns averaged 11% a year, so they might expect a 10% return or about $500,000 a year (the same as the second household who were working). But most of their gains would only be taxable if they sold them. Of course, they probably own a home and would pay real estate taxes, which are especially high in New York. I calculated that they might pay $80,000 in taxes for an effective tax rate of 16%. That’s a lot less than the working couple, and a lot lot less than the 40% taxes a you would be paying on any salary increases.

And let’s look at a really wealthy couple worth $100 million; they would be in the top 0.01%. They might also expect a 10% return, earning $10 million a year, but again, they only pay taxes on those gains if they sold (plus they probably own a house or two, so they’d be paying real estate taxes). This couple might expect to pay $1.3 million in taxes, but that’s a tax rate of 13% on their earnings.

Let’s do a comparison table on these figures.

	Earnings	Taxes	Tax Rate
Working couple earning $125,000	125,000	26,000	21%
Working couple earning $500,000	500,000	172,000	24%
Marginal Tax Rate for worker	Increases		40%
Couple living off $5 million investments	500,000	80,000	16%
Couple worth $100 million	10,000,000	1,300,000	13%

Notice how much higher the taxes are if you are working rather than living off of your wealth and how the taxes are even higher on your marginal earnings.

These calculations involved a lot of assumptions, but it became clear to me how badly working people are being raked over. If you are earning a salary, it’s hard to save, it’s hard to move up, If you have over $5 million in assets, you have a tremendous advantage, and the more wealth you have, the bigger your advantage. I want my elected leaders to support working people.

Neither party has done that for over forty five years.

What are your thoughts and what are you thinking about doing?