If the answer is $2.3 trillion, can you guess the question?
Just how large is the gap between the wealthiest Americans and the typical U.S. family? Here’s one way to think about it: the richest 400 people in the United States together possess more wealth than over 60 percent of the country, a striking 194 million people and more than the populations of Mexico and Canada combined.
A new report that I co-authored, Billionaire Bonanza: The Forbes 400 and the Rest of Us, provides a window into the world of the uber-wealthy and explores the widening gap. I propose a bold set of policies to reduce this gap, both by taxing the top and investing in broader opportunity for the rest of the country.
The Forbes 400 members have a combined fortune of $2.3 trillion. This is more than the gross domestic product of India, a country with more than a billion people. By comparison, the typical American family has about $81,000 in wealth — their total combined assets minus their debt. The combined wealth of 36 million such typical families is equal to the wealth of the Forbes 400.
The wealth gap in America is especially startling for people of color. Median household wealth for African-Americans is just $11,000 and for Latinos is $13,700. Together the members of the Forbes 400 possess more wealth than the entire African-American population plus one-third of the entire Latino population.
This rising inequality, which has accelerated in the last decade, has devastating implications. Extreme inequality has been linked to negative health effects like heart disease, asthma, mental illness, and cancer for everyone in these unequal societies, not just those at the bottom. In fact, according to British public health researcher Richard Wilkinson, we are better off living in a community with a lower standard of living but greater equality than living in a community with a higher income, but more extreme inequality. One explanation is the increased “social cohesion” that exists in more equal societies: greater networks of mutual aid and caring across society, and less hyper-individualism. Put differently, greater inequality tears the social fabric of society — we care less for each other and collectively suffer as a result.
High levels of inequality also erode social mobility — the ability of those born into poverty to climb the economic ladder into the ranks of the middle class. This is the result of a now-broken ladder of opportunity — the public investments in things like housing, education, and healthcare for those at the bottom and middle required to help people build wealth. Today, the United States is among the least socially mobile OECD countries in terms of earnings: children are less likely to earn more in real terms than their parents did.
So what can be done to reduce this skyrocketing concentration of wealth?
While there are venerable efforts from billionaires like Mark Zuckerberg, who this week announced he is giving away 99 percent of his wealth over his lifetime, these efforts won’t truly reverse the growing concentration of wealth.
From a policy perspective, reducing the wealth gap is quite simple. For those at the very top of the wealth spectrum, the federal government should institute a modest wealth tax in addition to the standard federal taxes on income and capital gains. For instance, a 1 percent tax on this year’s Forbes 400 members, those with assets above $1.7 billion, would raise $23.4 billion annually. For context, that amount of money could fund a year of Head Start — which provides early childhood education to over a million low-income children — as well as a year of the Women, Infant, and Children (WIC) program, which provides nutrition assistance to over half of all infants born in the United States — with over $8 billion to spare.
An even simpler way to reduce inequality through the tax code would be to ensure the wealthy paid an effective tax rate (the average rate at which their earned income is taxed) equal to the highest marginal tax rate (the amount of tax paid on an additional dollar of income), currently about 40 percent. According to the Tax Policy Center, the top 1 percent of Americans pay just 33 percent of their income in federal taxes, including income tax, excise tax, and payroll tax. Increasing this effective rate to 40 percent would raise $157 billion in just the first year.
This new revenue should be directed to public investments that create opportunities for broader wealth creation. Debt-free higher education would be a strong step in this direction, enabling students from any background to get a college degree without the burden of decades of student debt.
Instituting a wealth tax or any other policy that strikes at the growing wealth divide is unthinkable in our current Congress, which has shown little interest in serious discussion about tax reform, especially before the presidential election. But a generation ago, the thought that Americans would be experiencing such massive inequality seemed similarly unlikely. If we fail to take bold action, wealth will continue to concentrate into fewer and fewer hands.