Mother Jones: It's the Wealth Gap, Stupid

[City Lights]

Why the truly alarming economic trend is not income inequality.

—By Reid Cramer
Mon Feb. 13, 2012 3:00 AM PST

When Mitt Romney bowed to political pressure and released his 2010 tax return, it showed, to no one's great surprise, that the Romneys are rich. Really, really rich. They reported income of more than $21 million, itemized deductions of over $4.5 million, and a total tax bill of just over $3 million. They made charitable contributions of almost $3 million, although more than half of that went to their church.

But what really stood out in the tax return—beyond the presidential candidate's 13.9 percent tax rate—is not that Mitt makes a lot of money, it's that he has a lot of money. Romney's finances are illustrative of the growing gulf between haves and have-nots. It's not about income equality; it's about the widening wealth gap.

In recent years, the fortunes of the Romneys and others in their cohort have continued to grow, notably diverging from the majority of Americans still struggling to deal with a slow economic recovery. The Occupy Wall Street protestors stole the media spotlight this past fall by creatively highlighting these discrepancies. President Obama has taken notice and, as reflected in his State of the Union address, is teeing up inequality as a major a campaign theme for the fall. But it is not enough to highlight the gap between incomes of the top 1 percent and the bottom 99. What’s more alarming—and consequential over the long haul—is the growing concentration of wealth.

Recent estimates indicate that the while the top 1 percent earn 21 percent of the nation's income, they possess 36 percent of total wealth. This is especially troubling because while income dictates how well you’re doing today, it is access to wealth (the stock of resources) that creates opportunities down the line. Wealth is the bundle of assets, investments, and savings that can be tapped at will and strategically deployed. Or it can be used to generate passive income, as it does for the likes of Warren Buffett and Mitt Romney. There certainly is an issue of fairness to consider. As long as we tax capital gains and dividends well below the tax rate on earnings gained through work, the rich will have much lower marginal tax rates than the rest of us.

Read the entire piece at MotherJones.com

[CAPHAVOC]

1. I had a taxable income of 14k and paid 13% of it in income tax. Plus 15% of it in SS and MC.

Plus sales taxes, Tags, Gas, Fishing Lic., Fees, Etc. Am I missing something here? Something is rotten in the USA.

[City Lights]

4. You got it...

Something is rotten in the USA.

[Ian62]

2. Some history

The wealth gap is now the largest in US history - wealth concentrated in the fewest number of people.
The greatest recent period of American wealth creation and living standards improvements was in the 1950's, when the wealth gap was about the smallest.

There have been social studies done, which demonstrate that countries with greater social justice (e.g. a relatively low wealth gap) prosper more than countries with low social justice.

One of the largest problems in the creation of the current large wealth gap is executive remuneration and bonuses.
Now I got no problem with someone like Steve Jobs becoming very wealthy, due to being innovative and turning ideas into paying commercial enterprises and providing services to the benefit of all.

I do have a problem with CEO's getting awarded $12m bonuses, when the value and profits of their company has halved in the last year.

It comes back to accountability.
Nowadays large companies have remuneration committees which decide executive pay.
The CEO of one company will sit on the remuneration committee of another.
The CEO of the original company will have a remuneration committee mostly made up of CEO's and execs from other large companies.

Most large companies are majority owned by insurance companies and investment funds.
They do not rock the boat very often. If they did, the pay of their CEO and execs would likely be reduced.
It is a huge gravy chain.

In years gone by, most companies were owned by a relatively small number of shareholders.
They demanded value for money and executive pay was far lower.

You can also look at the ratio of executive pay to average employee pay of that company.
It is at it's highest ever level.

[City Lights]

5. I agree...it's all about accountability.

Todays CEO's are accountable to each other.

Edited for grammar.

[Ian62]

3. Distribution of Wealth

You can think of America as a room. In this room are 100 people who collectively own $100.

In our little room, one person owns 33 of those dollars. Some analysts put this figure at $38, and they may be right, but let’s just say $33. Either way, it’s quite a lot.

The next 19 wealthiest people get to share 51 more of those precious dollars. That’s $2.68 each. It doesn’t seem like much compared to our fellow at the top, but it’s quite good compared with the remaining 80 people.

That is because there’s now only $16 left. In fact, 18 of these people get nothing at all. The other 62 people get to keep some small change, averaging about twenty-five cents each.

Aside from the issue of whether such a breakdown is fair – you can leave that to your private ethical ruminations – remember that this room has many interesting things that make it go. For instance, it has a legal system, an economy, a political system, and so on.

We may ask, who is in the best position to manipulate these things for his own benefit? The question answers itself: that person with the $33, whom we may with full justice label as the practical "owner" of the society.

The owner likes his position, but can’t run things entirely by himself, so he enlists allies. These are in the top quintile. They are the managers. They supervise the great many people who have a few pennies to their name – the worker bees.

At the bottom are those 18 with nothing – absolutely no net worth at all. These are the expendables. As far as the guy at the top are concerned, they could drop dead and he wouldn’t care, except that their presence helps to keep the worker bees nervously occupied and distracted from that most fundamental of all social and political questions: Who Owns What.

Actually, if you look at the numbers more precisely, you can break down the social groups more accurately. The expendables remain at the bottom, of course. Then, up to around the 60th percentile of the population, you have essentially the lower half of the worker bee population. Then, from the 60th to approximately the 90th percentile, you still have worker bees, but they’re better off. Many would call this the American middle class. So in fact, the American management class comprises not the top 20 percent, but more like the top 10 percent of the population. This also conforms more closely with the observed reality of most workplaces.



Things become interesting starting at around the 90th percentile. A dramatic expansion of wealth begins at this point, and you can discern roughly two stratifications within the 90th to 99th percentiles. Of course the Fat Guy at the top percent still sits happily above the rest. (And to go even further, if you were to break down that top 1% of wealth owners you would find the same continued levels of stratification continuing within it).

[City Lights]

6. Thanks for the chart and example.

Breaking it down into a room of 100 people makes things crystal clear.