As the financial divide between the rich and everyone else deepens, a new study shows how the wealthiest Americans build their wealth versus everyone else.
From 2001 to 2016, average wealth for the bottom 90% grew by 17%, rising from $120,000 to $140,000. Over the same period, the top 1% of households saw their wealth balloon 49%, from $7.7 million to $11.5 million, the authors said. The top 1% has as much wealth as the bottom 90%, they added.
That’s according to a study released Monday by the National Bureau of Economic Research, a nonprofit research organization based in Cambridge, Mass.
For people perched at the top of the income ladder, the 0.01% of America’s households, 40% of their wealth flows from equity in corporations while 29% comes from the pass-through businesses that include partnerships, limited liability companies and sole proprietors.
In the absence of corporate income tax, the tax bill on these types of entities pass right through to its owners or members.
“From 2001 to 2006, the top 1% of households saw their wealth balloon 49% — from $7.7 million to $11.5 million.”
The NBER-distributed study was written by researchers at the Treasury Department’s Office of Tax Analysis, the University of Chicago Booth School of Business and Princeton University’s Department of Economics and School of International and Public Affairs.
And the bottom 90% of households? Pensions constitute nearly two-thirds (63%) of their wealth, as well as almost one-quarter (23%) from housing.
For example, most of the interest income for those lower on the income scale derives from money inside banks. Savings bonds make about 20% of the taxable interest for this slice of the population, they said.
At the higher end of the income scale, partnerships and private loans make up a large share of the interest income — and typically at higher interest rates, according to the authors, who analyzed years of federal tax data.
The authors acknowledged their methods for estimating how the wealthiest Americans earn their money vary slightly from other research, but they all arrive at the common point of massive wealth accumulating at the top in recent years.
Rates of growth
That trend has continued right though the pandemic, other research suggests. From 2019’s fourth quarter to 2021’s first quarter, household net worth increased 16%, according to Oxford Economics — with roughly one quarter of that going to the top 1%.
Earlier this month, a cache of almost 12 million leaked documents showed the strategies billionaires in America and elsewhere employ to keep building their portfolio while shrinking their tax bill.
The findings comes as Democratic lawmakers keep wrangling over the contents and price tag of a social safety-net package that would be funded by tax hikes on wealthy taxpayers.
The debate is about the shape of the plan, and also the particular tax hikes and tax rules that should be used.
The debate over capital-gains tax
Long before Monday’s research on the pools of corporate equity held by the rich, the Biden administration has been trying to figure out the ways to tax this wealth source. The top capital gains rate now is 20% and there’s some evidence rich taxpayers want to take advantage of the rate before any further hike.
The Biden administration has proposed a 39.6% capital gains rate for millionaires and above, which actually comes to 43.4% when tacking on a pre-existing 3.8% net investment income tax. The Ways and Means Committee has offered a 25% capital gains tax, but kicking in at a lower point, above an annual income of $400,000.
The Biden administration also wants better information on the money coming to wealthy people from the pass-through entities that researchers Monday said are a bigtime wealth source.
A Biden administration proposal has called for banks to report aggregated ‘inflows’ and ‘outflows’ above $600. Pass-through entities currently don’t have the same kinds of tax information reporting, Treasury Department officials have said.
But the $600 reporting idea is unnecessary and an invasion of privacy, critics add.
When it comes to gauging the true scale of wealth sitting in pass-through entities, the researchers on Monday acknowledged they have limitations. For one thing, “estimates depend on information reported to the IRS, but underreported income for pass-throughs amount of hundreds of billions of dollars,” they wrote.