Registered users can save articles to their personal articles list. Login here or sign up here

How rich are the rich?

Income inequality, the most common way to measure the gap between the rich and the poor, only tells part of the story. Wealth inequality tells the rest.

“If poor people knew how rich rich people are, there would be riots in the streets.”

Actor and comedian Chris Rock made this astute statement during a 2014 interview with New York magazine, referring to the yawning gap between rich and poor. In so doing, he stumbled upon a key challenge in the study of inequality.

What’s the best way to measure it?

Most inequality studies have focused on income – measures of which are widely available. However, being rich is not about a single year of earnings but rather about the accumulation of wealth over time. In the past, quantifying that has been tricky.

The wealthy would probably prefer we stay in the dark about how rich they are, presumably to avoid the aforementioned riots. People like me who study the topic, however, are always looking for more data and better and more accurate ways to measure the rich-poor gap. And while I’m not one to promote violence in the streets, I do believe it’s important for citizens to be fully aware of the levels of disparity in their society.

The most revealing way to do this, in my view, is by looking at wealth inequality.

Chris Rock cited the free food, drinks and massages at the Virgin upper-class lounge at Heathrow Airport in his comments about inequality. Faruk Ateş, CC BY-NC


Measuring the rich-poor gap

There are several ways to measure inequality.

One of the most popular is by income. That’s largely because there’s more data, and it’s a lot easier to measure. But this measure is a snapshot.

Wealth, on the other hand, is an aggregation, affected not only by current income but earnings accumulated in previous years and by previous generations. Only by studying wealth inequality do scholars, policymakers and others get the deepest and broadest measure of the gap between the rich and everyone else.

How much wealth someone has is also a better measure of their quality of life and opportunities. It determines the ability to invest in education, financial assets and the comfort and security of one’s retirement. Wealth also mitigates worries about pay cheque variability or unexpected expenses. If you have wealth, the sudden cost of replacing a broken water heater or paying a medical bill doesn’t cause nearly as much stress as if you’re poor.

Most of the gains from the recent tax package will accrue to the richest Americans. AP Photo/Jacquelyn Martin


American ‘exceptionalism’

When we do look at the data on wealth inequality in the US, it’s stark and dwarfs that of the rest of the developed world.

The conservative Hudson Institute in 2017 reported that the wealthiest 5% of American households held 62.5% of all assets in the US in 2013, up from 54.1% 30 years earlier. As a consequence, the wealth of the other 95% declined from 45.9% to 37.5%.

As a result, the median wealth of upper-income families (earning US$639 400 on average) was nearly seven times that of middle-income households ($96 500) in 2013, the widest gap in at least 30 years.

More notably, inequality scholars Emmanuel Saez and Gabriel Zucman found that the top 0.01% controlled 22% of all wealth in 2012, up from just 7% in 1979.

If you only looked at data on income inequality, however, you’d see a different picture. In 2013, for example, the top 5% of households earned just 30% of all US income (compared with possessing nearly 63% of all wealth).

While the US is not the only developed country that has seen wealth inequality rise over the past three decades, it is an outlier. The wealthiest 5% of households in the US have almost 91 times more wealth than the median American household, the widest gap among 18 of the world’s most developed countries. The next highest is the Netherlands, which has a ratio less than half that.

Lifting all boats?

The recently passed Tax Cuts and Jobs Act will make this problem a whole lot worse.

The main features of the law include doubling the standard deduction for individual taxpayers, a temporary reduction in the top marginal tax rate from 39.6% to 37%, a significant reduction of the number of families subject to the estate tax and slashing the top corporate rate from 35% to 21%.

The main impact, however, is skewed to the wealthy. For example, the bottom 20% of households will see a lower tax bill of about $40 on average, compared with $5 420 for those in the top quintile. The richest 0.1%, meanwhile, will save $61 920. By 2025, the richest will see their benefit grow to $152 200, while everyone else won’t see much of a change. All the individual cuts are set to expire in 2026.

Wealthier taxpayers will also gain from the other main features of the new law. For example, research shows most benefits of lowering business taxes go to the rich, and fewer estates subject to the inheritance tax means more wealth accumulation across generations.

The tax law’s proponents claim that it won’t increase levels of inequality because the money that the rich will save will “trickle down” to other American households and lift their boats too.

Empirical evidence, however, suggests otherwise. Specifically, channeling more money to the rich, via tax cuts, does not improve economic growth, worsens educational opportunities for poorer Americans and even reduces life expectancy, which declined for a second year in a row in 2017.

How rich are the rich? Chris Rock knows. mpi04/MediaPunch/IPX

 

Learning the facts

So is Chris Rock right that Americans just aren’t aware of the levels of disparity in their society?

Surveys suggest he is. Respondents to a 2011 national survey, for example, “dramatically underestimated” levels of wealth inequality in the US

The survey, and other research, also partially affirmed the other half of his quote by showing that by and large Americans do care about wealth inequality and would prefer it to be lower.

Whether existing wealth inequality in the US is socially or morally sustainable – or might lead to the riots envisioned by Chris Rock – is an open question.

The ConversationWhatever happens, first things first, we need to know and understand just how bad wealth inequality in the US has become. What we then choose to do about it is up to all of us.

Gil B. Manzon Jr, Associate Professor of Accounting, Boston College

This article was originally published on The Conversation. Read the original article.

COMMENTS   15

To comment, you must be registered and logged in.

LOGIN HERE

Don't have an account?
Sign up for FREE

All the money that you have is not yours. It is only when you spend it, that it is yours. What is left, when you die, you leave behind for others to spend.

Not sure how money only becomes yours after it is spent?

See my response lower down in chat.

So one can safely save that the situation in SA does not differ very much from the USA, however I fail to see the relevance of this article in a SA context

People don’t seem to understand how money works.

If you have R1m in the bank, it means you gave R1m worth of value to the world, and you received the R1m in exchange for the value you gave. You haven’t received the R1m in value back yet. It is only when you spend the R1m, that you get the value back.

So, wealthy people give more than they take. People who are in debt take more than they give.

Take Steve Jobs for example, the man died with billions in the bank. That is value he gave to the world and never claimed back.

We should be celebrating wealthy people for giving more than they take, not demonizing them.

What a load of crap.

Your short sentence is not exactly a counterargument.

I understand what you’re trying to say, MC.

On the slightly different note, economist Dawie Roodt in his book “Tax, Lies & Red Tape” mentioned that “South Africa does not have an unemployment problem. No. We simply don’t have enough wealthy people in SA.”

Indeed, we could do with a wealthy person like Elon Musk in South Africa.

There is a key factor in the wealth advantage : the ability to leverage, created by that wealth.

If Joe Average wants to start a business, his ability to raise project / capital / bridging finance is severely limited. With the Basel rules, bank credit committees are tighter than a frog’s arse.

If Joe Trust Baby wants to start a business, he has a handy full recourse surety backed by massive capital.

Joe Average never climbs because he never gets a foot on the ladder.

It is high time we attach a taxable benefit to the free use of trust assets (like a fringe benefit of employment). I regularly see cases where two youngsters in the same starting job have vastly different hurdles. Joe Trust Baby also earns R300k per year as a starting engineer, but he lives rent free in the SeaPoint flat that belongs to GrandPa’s trust, drives a new Golf owned by the Trust. Since the Trust did not legally distribute a benefit there is no tax benefit, and to make matters worse the Tryst probably deducts the costs of the flat and Golf from its investment income.

That deserves a Red Card.

Red card to whom? The government for not giving tax incentives for avg joe or the avg joe who did proper tax planning for the benefit of his decendants?

One can only play the game within the rules given to us. Getting upset with Mr Golf hardly seems fair

Mountainboy

Did you read the article?

Wealth perpetuates wealth through easy access to capital: if Joe Average and Joe Trust Baby are in all respects equally capable of making a success of the business they each seek funding for, Joe Average is disadvantaged.

Get used to the concept of trust assets being targeted. If Grandpa’s trust declares cash benefit to you, you are in terms of the law earning a taxable benefit. There is no rational argument to say the SeaPoint flat and the car are not distributed benefits.

@ Johan. I assume in your “Joe Trust Baby” example, the wealthy’s accountants/lawyer (possibly KPMG for all we know!) has set up such tax structure. So it must be above board √

So long “Mr New Golf” go and spend his money on his expensive lifestyle (hence support other businesses), the State collects VAT on his expediture. The less you & me need to pay….

Yes, he’ll beat me hands down in his new Golf GTi, but his fuel bill (which is 40% made up of tax) is a good thing…the more Mr Golf pays tax, the less I need to in my little Italian car 😉

The richness of this country is what really counts inspite of us being a shithole African country…Check this out
– the worlds greatest statesman _ Nelson Mandela’s
– the worlds best surgeon – Christian Barnard
– the worlds best hotelier and casino operator – Sol Kerzner ( sorry For you Donald Trump)
– the worlds best golfer – Gary Player
– the worlds best entrepreneur – Elon Musk
– the worlds first para Olympian ( and most infamous sportsman) – Oscar Pretorius
– the worlds largest diamond – The Cullinan Diamond in the Crown Jewels
– more Nobel Peace Prizewinners than any other country based on size
and the worlds biggest asshole for President….or is that the second biggest one – Jury still out on that one!
Not bad for a shithole African country ne? Add to the list if you can, we’re an amazingly rich country…

Load All 15 Comments
No more Comments, leave a reply.

LATEST CURRENCIES  

ZAR / USD
ZAR / GBP
ZAR / Euro

Podcasts

GO TO SHOP CART

Follow us:

Search Articles:Advanced Search
Click a Company:
server: 172.17.0.2