WEALTH INEQUALITY IN THE US SINCE 1913
To come up with a wealth estimate, this paper capitalizes on incomes as reported by each taxpayer and giving an account of each asset that fails to generate taxable income. To effectively test the capitalization method, three micro data sets are employed in order to adequately enable the observers to come up with parameters that would ensure clear observation of both individual wealth and income. Notably, the concentration of wealth was considerably high at the beginning of the 20th Century and saw a remarkable fall from 1929 to late 1978. Since then, there has been a continual increase in wealth. Wealth shares have increased from 7 % to 22 % in 1978 and 2012 respectively, a perfect case as witnessed in 1929. Comparatively, the top wealth holders United States are younger than the lot of 1960s.
Economic inequalities in any given country come from over-concentrations of power and wealth. Distribution of power imbalances can result in lack of representation in governments for some people, emergence of power elites, loss of personal liberty and freedom, and abuse of governance. This can lead to one obvious spell, genocide and civil unrest, which are two extreme examples. Imbalances and inequality in wealth distribution can result in loss of social mobility and economic opportunity, emergence of permanent lower or underclass, unemployment, homelessness, diseases and hunger plus illiteracy conditions. The social concerns that are caused by the economic and wealth inequality are a sure threat to the global peace and security (Saez 56).
Wealth is current value of the market of all assets that are owned by households. Assets herein include all the financial and the non-financial assets over which certain ownership rights can have an enforcement and which provide solid economic benefits to their owners. The wealth concept excludes human capital, which interestingly and contrary to non-human resource, can’t be sold in the market. This is based on the fact that both non-human and human capital are defined by dissimilar economic forces, notably, inheritance, savings and rates of returns work in favor of non-human wealth or capital while education and technology works in favor of the human wealth (Lindert 23).
Wealth inequality has remarkably increased in the US, a trend that can be traced back to as late as 1970s. Currently, there are a number of available materials that offer conflicting information on wealth inequality. As per the Survey of Consumer Finances, concentration of wealth is high and continues to grow. The 1% wealthiest households had 36 % of wealth at their disposal in 2013. This was an increment up from 30% nine years down the memory lane (Bricker, 2014).
Basically, in the developed countries such the US, the inequality gap tends to be higher than their respective developing countries. Based on their lowest income plus per capita income being less than $ 1000, developing countries have low incomes making their inequality gaps to be lower. The wealth disparity in the United States has hit record high, with the high-income earners attracting salaries that are seven times higher than the middle class earners.
Essentially, the high wealth inequality gap in the United States should be tamed as this may lead to certain factions holding the other inferior counterparts at ransom. In as much as there needs to be inherent wealth inequality in a market based economy so as to be able to shape the trends in the market, it is important to see to it that the gap is reduced to considerable levels. If left, things would get out of control as the magnitude of the salary and wealth inequality among the US citizens reflects the broader trends geared towards the ever increasing unequal wealth distribution across the world (Lindert 23).
According to estimates drawn from estate tax returns, the United States wealth inequality seems low and stable at the same time. This paper finds it useful to shed light on long-run wealth inequality through capitalization of the income tax data. Firstly, this paper looks at the capital income as reported by the tax payers to the IRS that is further broken down to interests, profits, rents and dividends among others. For these sets, capitalization factor is computed so as to map total tax income flow and also be able to correlate the same with the quantity of wealth that is recorded in the balance sheet obtained from the household as reflected in the United States’ Financial Accounts. Wealth is then obtained through the multiplication of each component of individual income by the corresponding factors of capitalization. For instance, stock of a fixed income claim, say deposits and bonds as recorded in the household balance sheet equals 50 times the interest income flow in the tax data. As such, $50,000 is attributed to fixed income of tax unit claim with a realization of $1,000 as interest (Lindert 23).
It is documented that the United State has a high wealth concentration that is way beyond international standards. This has even seen considerable increase in the recent past. Through estimates, shares of wealth that are owned by 1 % top families has seen a remarkable growth since late 1970s. It reached 42% by 2012. Most of the increments are attributed to the fact that the top 1% wealth holders whose wealth share have seen immense growth from 7 %in 1978 all through to 22 % in the year 2012 (Piketty 11).
The public seems to express concern with regard to economic resource distribution. This is driven by the fact that wealth is much more concentrated ( even higher than the labor income) as a result of the dynamic processes that define the accumulation of wealth, ensuring that the reliable estimates are produced, taking note that careful attention is paid in the process. Many income capitalization methods have been employed in the past, for instance, Stewart (1939), King (1927) and Wolff (1980) in the US, and Harrison (1978) and Atkinson (1978) in the UK. The notable feature about these literature materials is that they only bear information for just a few years and are so done in isolation. As such they do not make us of micro-data. This also prompts the possibility of offering limited capital breakdown through asset class (Saez 56).
The capitalization approach has to main potential bottlenecks. The very first obstacle is the fact that not all assets can generate income that is taxable, that is, pensions and main homes fail to address such issues. The said assets enjoy adequate cover through a number of sources and thus accounted for by the combination of available information- paid property taxes, reported wages on tax returns, surveys and pension distributions. All this is done systematically. Secondly, within the asset class, the rates of tax returns may vary considerably with wealth. For example, wealthy households report little capital gains and dividends that is relative to the amount of wealth at their disposal particularly so because of their tax evasion tendencies (Saez 56).
Well-off-families on the other hand, can easily access the higher yielding opportunities in terms of investments than others. He analyses into wealth distribution since 1913 gives two main findings; wealth inequality is on the rise and has since made a comeback. In 2012 for example, the wealth shares were three times as high as the one in 1978. This increase is attributed to the key driver of rapid wealth increase at the top, ensuring an upsurge in the top incomes. Income and wealth inequality is a state with snowballing effects on wealth distribution (Piketty 11).
The other key factor focuses on the dynamics of bottom 90% wealth and economic share. There is a general perception that the widespread improvement in the US economy is by virtue of the elevated livelihoods of the wealth of the middle class citizens. This is supported by the claim that there are increase in rates of pensions and homeownership. The pension wealth has strived to increase but it has not been able to compensate for the surge that exists in mortgages, student debts and consumer credits.
The key factor behind the decline in bottom 90% is the plummeting of the middle class saving as designed by their new dynamics in planning. The capital income gives the starting point of the individual tax returns. For the after years of the 1962 period, the public us of micro-files which were available at NBER provided information for many taxpayers having detailed income generating categories (Saez 56).
Even though the rate within an asset class may be flat for bigger foundations, they tend to differ among households due to tax evasion. People might own asserts that might generate other sources and bring forth, the income tax.
The new wealth distribution series has three trends; wealth inequality is rising at an alarming rate in the United Sates. The wealth share of those in the middle class have embraced an inverted- U advancement in the past few years: it is not higher than it was in the year 1940. Of course there are plenty of factor that contribute to the gap between the rich and the poor nations and almost complicates the possibilities of the positive world economies generating highly and in good strength. The gap between the rich and the poor should surely be bridged so that there is fair distribution of wealth amongst the others.
Piketty, Thomas, and Emmanuel Saez. Income Inequality in the United States, 1913-1998 (series updated to 2000 available). No. w8467. National bureau of economic research, 2001.
Lindert, Peter H. “When did inequality rise in Britain and America?.” Journal of Income Distribution 9.1 (2000): 11-25.
Saez, Emmanuel, and Gabriel Zucman. Wealth inequality in the United States since 1913: Evidence from capitalized income tax data. No. w20625. National Bureau of Economic Research, 2014.
Piketty, Thomas, and Emmanuel Saez. The evolution of top incomes: a historical and international perspective. No. w11955. National Bureau of Economic Research, 2006.
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