A Wealth Tax to Eliminate Poverty
Think really big. A wealth tax could be the best thing for working Americans since social security or the 40 hour week. We presently have two wealth taxes ---the property and the inheritance taxes --- and we need a third, a tax on financial assets. Five European nations (and it once was twelve) have a wealth tax. If it were linked to the Earned Income Tax Credit (EITC) and to Individual Development Accounts (IDA) it would dramatically improve the quality of life in the U.S.A. It would provide the simplest and most straight forward solution to inequality and poverty.
Inequality and poverty are our economy’s, and global capitalism’s, greatest enemy and problem. According to The State of Working America, 2006/2007, 24.7% (1 of 4) jobs pay an income below the poverty line1, 13.5% (1 of 8) US households live in poverty2, 17.6% (1 of 6) children live in poverty3 (for children under 5 years old it is 1 in 5),one in six (15.9%) people have no health insurance4, private or public, or primary care physician. Among families with children below 12 years old 29% are unable to achieve the “basic family budget.”5 In 2005 the rate of nonmarital births was 37%,6 (3 of 8) or 1,470,189 nonmarital births. This rate has doubled in the past 25 years. Nonmarital births are highly correlated with poverty. The unemployment rate has oscillated between 4% and 8% since 1982.
The income of the top one percent exceeds the combined incomes of the lowest 40%7 (the incomes of 1.4 million exceeds the incomes of 54 million workers); and the top one percent of households own more than the lowest 91%8 (the wealth of 1.1 million households is greater than the wealth of 99 million households.) The top one percent own 33% of all wealth, and the top ten percent own 70%. The lowest 50% own 2.5% of all wealth. Some 17% have no assets at all; 29.6% of households own less than $10,000. The median personal income for workers over 25 is $32,140 annually.9 But the mean average individual income is over $60,000.
Inequality sounds like this quote from the Congressional Budget Office report of December, 2006, “The new CBO data document that income inequality continued to widen in 2004. The average after-tax income of the richest one percent of households rose from $722,000 in 2003 to $868,000 in 2004, after adjusting for inflation, a one-year increase of nearly $146,000 or 20 percent. This increase was the largest increase in 15 years, measured both in percentage terms and in real dollars.”10 This occurred at a time when 80% of the nation’s households experienced a drop in annual income.
If you were to convert the wealth of half of the US households’ average assets into $100 bills ($25,000 each in 55 million stacks) and stack them in neat piles of $100 bills, each stack would rise one inch high. If you stacked the average wealth of the top one percent of households, each of the 1,100,000 stacks would rise up almost 60 feet. The stack of Bill Gates wealth would rise to 30 miles high. See the Web page Lcurve.org for a graphic of this slope.
This recital is to emphasize the alarming disparities in the allocation of one of life’s and society’s essentials: money. And to draw another red line below the basic facts: a good many Americans compete with their labor against hundreds of millions in foreign nations who actually work for about $5 a day and send their products to the US for sale in our marketplace.11
Wealth Distribution, U.S.A., 200612
Percentile Percentage Total Amount average wealth per household
0 to 50 2.5% 1.278.6 billion $25,560
50 to 90 27.9% 14,045.9 billion $351,148
90 to 99 36.1% 18,151.0 billion $2,044,800
top one percent
33.4% 16,774.4 billion $16,774,400
Distribution of Income, U.S.A., 2005, Source: US Census Bureau,
80 to 100 = 50.4% Selected Measures of Household Income
60 to 80 = 23.0% Dispersion: 1965 - 2005
40 to 60 = 14.6% Table A-3
20 to 40 = 8.6 %
0 to 20 = 3.4 %
Escaping poverty in the US is becoming harder, not easier. The median wages of male workers has declined 5.3% since 1979, while since 1973 productivity has risen 75.7%.13 The difference is a value that has gone into the accounts of the wealthiest. According to Professor Edward Wolff in the period between 1983 and 1998 more than half of all gains went to the top one percent.14 The measure of absolute poverty, those living with an income 50% below the poverty level, is at 43%, the greatest rate since recording began in 1975.15 This picture shows polarization at the top and bottom.
The Solution to Inequality
The most straight forward solution is to tax wealth and to combine this with an asset growth policy for the working poor. Redistribute wealth, and aim for a permanent wealth distribution slope.
Individual Development Accounts is a relatively new policy measure and it could be expanded to create a vehicle for this transfer. The many scholars and foundations that have worked to promote the IDA policy have no connection to a wealth tax proposal. One redistribution plan would increase by ten times the wealth of half the American population, or 55 million households, raising their net worth from $25,000 on average to $250,000 per household over a 12 to 20 year period. This would entail a decrease in the average wealth of the top one percent by seventy-five percent, from $16,000,000 to $4,000,000 per household. The redistribution numbers are accurate and commensurate. Of course, any slope or distribution ratio is possible, in theory. At first glance this example slope may probably be viewed alarmingly as too level. But, the stacks of $100 bills looks like this: half of them are now ten inches high, not one inch high, and the top one percent are 144 inches high (12 feet), not 60 feet. American society should begin to set limits on wealth disparity. Maybe that slope is still too steep?
Taxing wealth is the law of the land. We have the property tax in every state that supports schools, water treatment facilities, and public transportation. We have the inheritance tax that effects less than 1% of households; its threshold is $1.5 million, and its nominal rate is 47%, but its effective rate is 18%.16 Expanding or creating a direct wealth tax is doable. The greater challenge is combining it with the Earned Income Tax Credit and IDAs.
The concept of Individual Development Accounts has been advocated since 1991 beginning with the work of Michael Sherraden, professor of at Washington University in St. Louis, Missouri. The IDA plan is a work-based incentive plan that rewards disciplined savings by low-income workers. It has had pilot funding since 1997, supported by 14 foundation grants including the Ford Foundation and the MacArthur Foundation. It was piloted by 13 regional organizations in 11 states nationwide for 4 and a half years, from July, 1997 to December, 2001. Currently it is state policy in 37 states. Congress passed the Assets for Independence Act of 1998 that authorized $250 million for IDAs between 1999 -2009. A subsequent Savings for Working Families Act -- if passed --- would authorize another $450 million for 300,000 IDAs over ten years.17 The Web page sfearn.org describes successes of the IDA plan.
In his book The Squandering of America, Robert Kuttner reports, page 286, that "Sherraden's 1991 blueprint put the first-year cost of his IDA program at about $28 billion, or about $45 billion in today's dollars. . . The program was funded at $80 million a year, one quarter of 1 percent of what Sherraden had proposed --- enough to help just a few thousand poor families acquire assets. The appropriations were further cut under Bush." He describes the Democratic Party's effort as "tokenism . . . proposals funded at so a puny a level that they will not transform anybody's life, imagination, or political allegiance; and on the Republican side, a happy-sounding politics of bait and switch."
Asset building subsidies are not new; the Federal Government’s subsidies reached the level of $335 billion in 2003. A study by the Corporation for Enterprise Development concluded that “Federal asset policies cost $335 billion (conservatively measured). Federal policies disproportionately benefit those who already have assets. Analysis of the largest spending categories shows that over a third of the benefits go to the wealthiest 1% of Americans --- those who typically earn over $1 million per pear. In contrast, less than 5% of the benefits go to the bottom 60% of taxpayers.”18
We can contrast this $335 billion “hidden in plain sight” subsidy with federal expenditures for the safety net (the EITC is a $36 billion expense), unemployment, Medicaid and SCHIP, all totaling $464 billion (16% of federal spending in 2006).
According to the authors of Can the Poor Save? Saving and Asset Building in Individual Development Accounts, the “United States in 2003 provided more than $100 billion in subsidies for home ownership. . . A rich person with a million-dollar mortgage would receive annual subsidies of $20,000 or more, while a poor person would receive nothing unless he or she owns a home, has a mortgage, and has tax liability. The rationale for tying housing subsidies to income, debt, assets, and tax rates seems to be based more on political and administrative expediency than on the principles of efficiency, equity, and inclusive development. The current policy is no different than collecting all taxes with no mortgage-interest deduction and then sending $20,000 checks to some of the wealthiest people and no checks to millions of the poor. . . . If policy aims to support home ownership, then it would be fairer and more effective to focus almost all subsidies where the likely impact is greatest, that is, on the poorest half of households (or individuals). At the least, the poorest half of households should get half the subsidies. . . . an important principle of good government is fairness in public benefits. A healthy democracy requires a reasonable attempt to treat everyone the same.”19
The IDA policy plan changes this inequity. The Wealth Tax-EITC-IDA plan accelerates the savings. A viable democracy finds decisive solutions to problems as important as poverty and inequality. An economic system that favors only a minority is not self-sustaining, and is incompatible with democracy.
by Ben Leet,
1997 words without footnotes
October 20, 2007 e-mail author for pdf version with pie charts