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June 14, 2012 8:38 AM Inequality: It’s Even Worse Than We Thought

By Michael Kinsley

The current debate about rich and poor — the 1 percent versus the 99 percent — is a bit misleading because the evidence usually is data about income, not wealth. Looking at wealth would make the comparison even starker.

There are some nice deals to be had in the income tax code these days, but most wealth accumulates and passes from generation to generation with no tax at all. Warren Buffett (who has selflessly taken on the role of all-purpose tape measure in these matters) is worth $45 billion or so. Do you think that all of that $45 billion, or even most of it, has appeared on any Form 1040 on its way to the cookie jar? Even at the special, low 15 percent rate the U.S. insanely confers on capital gains?

Unlikely. Much of that $45 billion is unrealized capital gains — increases in the value of Buffett’s stock that have never been cashed in, and therefore have never been taxed. I’m not saying that unrealized capital gains should be taxed (although it’s a thought). I’m just noting that you only pay income tax when an investment is liquidated, and very wealthy people don’t have to liquidate until they actually need to spend the money.

For most of the very rich, this time is never. When you die, any unrealized capital gains disappear for tax purposes. Your heirs, if and when they sell, pay taxes only on any increase in value since they got the money. And there is no estate tax at the moment on estates of $5.12 million or less.

Really Skewed

The Federal Reserve released new numbers on Monday. Unsurprisingly, wealth distribution is even more skewed than income distribution. In 2010, the median family had assets (including their house but subtracting their mortgage) of $77,300. The top 10 percent had almost $1.2 million, or more than 15 times as much.

But the headlines — and rightly so — went to the dismal fact that household wealth has been sinking for all categories of Americans. As I said, the net worth of the median family in 2010 was $77,300. In 2007, the net worth of the median family was $126,400. That’s a drop of almost 40 percent in just three years. (All these numbers are corrected for inflation.)

Characteristically taking the longer view, the New York Times led with the fact that household savings were back to where they had been in the early 1990s, “erasing almost two decades of accumulated prosperity.”

Most of the lost household net worth of recent years is due to the drop in housing prices. This is comforting, in a way, because the price of land and things built on land — and what, ultimately, is not? — are different from the price of other goods and services.

Let me tell you about my favorite economist, an indulgence I allow myself every couple of decades. (The last time was 1989, pre-hyperlink, unfortunately.) He was an American named Henry George, who died in 1897 at the age of 58. If you took economics in college, there might have been one sentence about him in your textbook. He once ran for mayor of New York. (Fancy that. He lost.)

George would look at our present situation and ask: In what sense were we richer three or four years ago, when the exact same housing stock sold for up to twice as much? In what sense are we poorer now? Land is special because, as Realtors like to remind us, they aren’t making any more of it. This means that you can get rich owning land without doing anything productive with it. (Henry George: “You may sit down and smoke your pipe; you may lie around like the lazzaroni of Naples or the leperos of Mexico; you may go up in a balloon, or down a hole in the ground. …”) The natural increase in population will do the trick.

Tuna Fish

This is also true, to varying degrees, of other investments. It is true to some extent of any product that can’t be easily and quickly reproduced. It is somewhat true of houses, once they are built. (As Tolstoy didn’t write, “Cans of tuna fish are all alike, but every house is a house in its own way.”) But it is especially true of land.

My colleague Clive Crook claimed recently to be a “supply-side liberal.” So was Henry George. He was as concerned about income equality as the most bleeding-heart liberal and as concerned about economic growth as the noisiest supply-side conservative.

George’s solution to everything was to eliminate all taxes on working, saving and investing, and to put the entire tax burden on unproductive land, which can’t escape the tax by moving. There are problems with this idea. But it’s provocative.

I don’t have room to do George justice, but take a look at his masterwork, “Progress and Poverty.” For an economics tract, it’s actually a fun read. And, yes, you’re responsible for it on the final exam.

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Comments

  • Robert on June 15, 2012 8:59 AM:

    The problem with a tax on "unproductive land" or any real property is valuation. This is caused by the very same factor that upon which George focused: all land is unique and any valuation method other than an actual market transaction for each unique piece of land is inherently erroneous. Taxing the income from land by marking the value to the income appears to avoid the problem, but it is notably corrupt in practice, at least it is in New York.

  • Rich on June 15, 2012 1:33 PM:

    The point about wealth is well taken but for less esoteric reasons. The change to 401k like instruments has made wealth more important than ever for retirement. The lack of savings, including 401s, IRAs, etc creates a yawning gap. Even someone with a "very good" income who has done all the things that are usually advised and has gotten out of the stock market at the right time can still have worries, and people with smaller incomes and less opportunity to build wealth (i.e., most people) are in far worse shape.

  • paul on June 15, 2012 3:45 PM:

    Yet another untaxed perk of wealth: you can borrow money at rates only a touch above what the banks pay each other, instead of the usury that credit-card companies charge. So if it's inconvenient to liquidate your some tiny portion of your holdings and pay that onerous 15% tax on your capital gains, you can just borrow against them at 2% until some new administration reduces the capital gains rate again.

  • puckett on June 16, 2012 10:42 PM:

    On my portfolio I pay a percentage of all my income to taxes because my husband is over 71 1/2 and it is required by law. I presume they have tax defered income that comes into play at that age. Doesn't Mr Buffett and other have to pay that too? if not how do they get out of it?

  • Orwin O'Dowd on July 03, 2012 9:28 AM:

    Why not peg the top rate of income tax to the state's share of GDP? That would create a permanent incentive to efficient government.