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The Wealth Gap

The wealth gap represents the disparity in net worth between wealthy Americans and low-income Americans. The gap today has reached levels not seen since the Great Depression. So what is wealth and how did the wealth gap get so big?

Wealth is the assets a person or household owns minus their debt. Assets can include salary, savings, investments, and property (personal or real estate). Whatever value these items have over and above a person’s debt (mortgage, loans, credit cards, etc.) is their net worth, or wealth. Before the Great Depression in the 1930s, wealth and income inequality were similar to today, with the very top owning much of the wealth in the U.S.

The graph at right shows the share of national income the top ten percent have garnered over time (and remember that income is just one aspect of wealth). Before the Great Depression, the wealthiest ten percent of Americans garnered nearly half of all U.S. income. The Depression had a balancing effect and their share of national income started to drop in the late 1930s and 1940s and remained fairly consistent for the next 30 years. Then around 1980, their share of income began to grow again, reaching pre-Depression levels by 2007.

What was the result of this increased income share by a small number of Americans? A vast accumulation of wealth. In 2009, the top ten percent owned over 75 percent of all U.S. wealth. Even more startling, the top one percent, whose average income is about $1.3 million in 2011, own 35 percent of all U.S. wealth. This means that the bottom ninety percent of the population owned just one quarter of all U.S. wealth.

Closing the Gap

Fortunately, the wealth gap is not inevitable. It was created or exacerbated by government policies, which can be changed. RESULTS supports several ways to help narrow the wealth gap with both short and long-term strategies.

  1. Protect and expand the Earned Income Tax Credit (ETIC) and Child Tax Credit (CTC). These low-income tax credits are essential in providing income support to low-income working families, which help keep them above the poverty line. Cuts to these programs would be devastating to millions of low-income families and further widen the wealth gap. See our EITC and CTC pages for details.
  2. Ensure that the U.S. tax code remains fair and progressive. This means letting the Bush tax cuts for the wealthy to expire and to close costly tax loopholes for wealthy individuals and corporations. See our Tax Fairness and the Wealth Gap page for details.
  3. Support low-income asset development policies like the Saver’s Bonus. Helping low-income Americans create wealth is a clear pathway out of poverty. Investing in policies that help low-income household build savings and assets will also help narrow the wealth gap over the long term. See our Building Savings and Assets and Saver’s Bonus pages for more details.

How Did the Wealth Gap Get So Large?

While there are many factors that have contributed to the wealth gap in the U.S. (globalization, decline of unions, stagnant wages for the bottom 90 percent), tax policy has been a significant factor in the redistribution of wealth upward the last three decades. For the decades following World War II, the U.S. tax code remained very progressive. During that time, the income tax rate for the wealthiest individuals ranged between 70 and 90 percent. That started to change under President Ronald Reagan. During his presidency, the top marginal rate was slashed from nearly 70 percent down to 28 percent, where it stayed until the 1990s. In addition, payroll taxes were increased. This meant a huge income tax cut for the wealthy but higher overall taxes for middle class and low-income Americans. The top income tax rate was raised to nearly 40 percent under President Clinton, it was again cut to 35 percent by President George W. Bush in 2001, where it remains today (it is currently scheduled to return to the Clinton levels at the end of 2012).

Cuts in taxes on capital gains and dividend income have also had an enormous impact on the wealth gap. Capital gains are income generated from the sale of investments, whether property, stocks, or bonds. These assets make up the bulk of income for people at the very top, who rely less on salary income than working individuals and families. Since 1997, Congress has cut the capital gains tax rate in half, from 28 percent to 15 percent. This means that billions of dollars in investment income each year are taxed at rates lower than what many middle class taxpayers pay on their ordinary income. We can see the result in this chart from the Institute for Policy Studies. In 2007, the top 1 percent owned half of all stocks, bonds and mutual funds. The bottom 50 percent of Americans owned less than one percent of this wealth.

Because of these changes, the effective tax rate for America’s wealthy (the amount they actually pay in taxes) is at its lowest in decades. For example, a billionaire in the top 400 wealthiest Americans pays an effective tax rate of 17 percent. In addition, cuts to the federal estate tax, a tax on inherited wealth which affects less than one percent of the population, have further helped concentrate wealth at the very top.

Impacts of the Wealth Gap

The wealth gap has real world implications on all Americans, especially those at the bottom of the economic ladder. Here are just a few effects of policies that have helped widen the wealth gap:

  • The Corporation for Enterprise Development (CFED), an organization dedicated to expanding economic opportunity, estimates that more than one out of every five American households is asset poor, i.e. if faced with a loss of income, the household would have insufficient savings and assets to live more than three months at the poverty level.
  • In a May 2010 report, CFED shows that for households with children, the asset gap is even worse: 27 percent of households with children are asset poor, and 16.6 are extremely asset poor; 49 percent of African-American households with children and 39 percent of Latino households with children are asset poor; between 2004 and 2006, the median net worth for the bottom twenty percent of families dropped by 27 percent.
  • In households of color, one in four is in extreme asset poverty, meaning they have no savings or assets at all. According to United for Fair Economy, African-Americans are 2.7 times as likely as Whites to have zero or negative net worth; Latinos are two times as likely.
  • A 2011 MarketWatch article reported that in 2001, African-American families had a median net worth of $12,500, while white families had a median net worth of $124,600. During the stock market rally and the housing bubble in 2007, that number for white families jumped to $143,600, but African-American net worth dropped to $9,300. To put it more starkly, for every dollar of capital a white family owned in 2007, an African American family owned 6 cents; in 2009, it dropped to two cents.
  • A 2011 Pew Research report shows that white households now own twenty times the wealth compared to African-American households and eighteen times the wealth compared to Latino households. From 2005 to 2009, Latino households saw their median wealth drop 66 percent and African-American households saw theirs drop 53 percent, compared to just 16 percent for white households.
  • An Insight Center for Community Economic Development report shows that the racial wealth gap has a significant impact on the development of young children. The data shows that at nine months, all children start out with similar results on a standard child development test. However by age two, children in African American and Latino households, which hold only a fraction of the assets possessed by white households, begin to lag way behind their white counterparts; this gap becomes even more stark when these children enter kindergarten.

Wealth disparities are no accident; the government has long encouraged asset development (i.e. wealth accumulation) for the middle and upper income Americans through tax incentives. A March 2009 report from CFED, Return on Investment?, shows that a full 45 percent of the benefits from the three largest “asset development” policies in the tax code — the mortgage interest deduction, the property tax deduction, and preferential rates on capital gains and dividends over — went to the top 1 percent of households (average income exceeds $1.3 million). Meanwhile, the bottom 60 percent of households receive only 3 percent of the benefits. The Economic Policy Institute reports that in 2009, the wealthiest one percent of Americans had a net worth 225 times larger than the median family net worth, nearly double the gap in 1962.

And these disparities don’t just affect individuals; they also have lasting impacts on society as a whole. A 2009 book, The Spirit Level: Why Greater Equality Makes Societies Stronger by British researchers Richard Wilkinson and Kate Pickett, demonstrated just how damaging income inequality (and by implication, wealth inequality) can be for society. Looking at data from countries around the world and all 50 U.S. states, the authors discovered that overall societal wealth (at the national or state level) had little relation to the likelihood of certain “societal ills” occurring (poor social relations, mental health and drug use, adult and child obesity, poor educational performance, crime, and poor social mobility, among others), By contrast, income inequality in a country or state had direct relation to these problems. The data showed that as income inequality increases, so does the frequency of these societal problems. In other words, income and wealth inequality not only makes it harder for middle and low-income households to move up the economic ladder, it presents a danger to our society through greater social challenges and to our democracy through greater concentrated wealth and power.

In addition, income and wealth inequality is linked to poor economic growth. Such big differences between the haves and have-nots can retard economic recoveries and also shorten economic expansions. Inequality can lead to cut backs in essential services such as education, which hampers the workforce, and also political instability which deters investment.

Resources

RESULTS’ Tax Fairness and the Wealth Gap page

NETWORK’s Mind the Gap Campaign

The National Priorities Project’s Cost of Tax Cuts website

The Growing Divide from United for a Fair Economy