Wealth Distribution in Our Country

Personal or Family Wealth (as defined by total assets minus total debt) has an interesting distribution as can be seen in the following chart:

Wealthiest 1% control almost 1/3 of the wealth, the wealthiest 5% almost 58%, and the wealthiest 10% 70%. In our capitalistic system, the remaining 90% seem to have limited access to capital. Does this mean that the wealthiest 10% have just worked harder and or smarter to “earn” their financial positions? From an income standpoint all of the “middle class” falls in the 90% category. Are there factors that act as a barrier to wealth accumulation?

I suspect there are. In our system, most wealth is either inherited, gained through intelligent capital investments, or via business ownership. Any of these requires a least a modicum of “seed” capital to get started.

Let’s take a look at the average middle-class family of 3.4 persons.  Their pretax income was just over $87,000 with about 1 ½ wage earners.  In addition to subsistence issues like food, clothing, taxes, and housing costs (which typically can consume 40% of gross income there are two extremely significant costs that are out of control. The costliest healthcare. If this family had to pay for their fair share at the current per-person cost of over $11,000 it would take about 40% of gross income. Does the family want any portion of their 1.4 children to obtain an advanced education? If so they will need to start saving soon as the average (all-in) cost can easily exceed $30,000 per year. Healthcare & Advanced Education costs have outpaced the rest of the economy by over 2.5 times over the past 25 years.

Does the family need an occasional vacation? I guess they can max out a credit card.

What is a fair distribution of future income? Over the past 20 years, our country’s income as expressed in GDP has more than doubled. At the same time, average middle-class wages have only risen by about 8%. Where did the balance go?

Here’s the point. The vast majority of families have very little or no “discretionary” income. It makes it difficult to save “seed” money. About the best they can dabble in the stock market or buy a few CDs. How do we allow the majority of our citizens to participate in our capitalistic mecca?

While like most of my thinking what I see will not ever become law. However, this solution will work over time. It has to do with income taxes. My solution would only retain the income tax for families with income below a certain level. Let’s assume $300,000 per year for this example and married filing jointly. This would include over 95% of all families.

Income tax would be factored in adjusted taxable (as now) but only the standard deduction would apply. No itemized deductions. Allowances for children would be limited to two. There would be no income tax for zero to $30,000. 10% on income from $30,000 to $60,000, 12% on income from $60,000 – $125,00, and 15% on amounts over $125,000.

The wealthiest 5% would not pay “income” tax, but rather pay an annual wealth tax as follows:

1.5% on the first $5 million, 2.0% on the next $5 million, 2.5% on the next $95 million, 3.0% on the next $900 million, and 3.5% on any amount over $1 Billion. No capital gains tax on holdings for a year or more. No corporate income tax and no dividend tax. The current tax system is only providing about $4.4 trillion with over $1.6 trillion in the budget deficit. This system will produce at least $5.5 trillion in revenue and reduce the burden on the middle class and greatly simplify tax filing. 

Admittedly my math is just a “ballpark” calculation and the actual rates will need to be determined by actuaries, but you get the idea.

Why no Long-Term Capital Gains Tax? A couple of factors. This tax is often double taxation when the investment is funds that have already been taxed. Also, all that is happening are assets changing hands. In addition, current transactions are difficult for the IRS to monitor.

Why no corporate income tax? There are numerous reasons. Our economy functions in a Global Economy. We need to support our companies vs. the companies in other countries. No tax will create a cost-competitive advantage. Today, most companies play accounting games to minimize tax payments. The amount of tax revenue that comes from this source is very small (about 7% of the total) and will be more than made up by the system I am proposing.