The slippery slope - distribution of wealth

National Review, August 28, 1995 by Ed Rubenstein

THE Left has come up with a good story. The widening income gap between the rich and the middle-class has produced an even wider chasm in total wealth -- the ``Widest in the West,'' says the New York Times. Today, as in the 1980s, Republicans aim to perpetuate, if not widen, economic inequality with tax cuts for the wealthy. Actual data tell a very different tale.

Families with annual incomes of $50,000 and over (the richest 20 per cent) saw their real net worth grow by just 6.6 per cent between 1983 and 1989, according to the Federal Reserve. That was a fraction of the 19 to 29 per cent hikes enjoyed by middle- and lower-middle-class families over the same period. Admittedly, the average net worth of the poorest group appears to have stagnated at about $30,000. In tallying wealth, however, the Fed counted things like real estate, stocks, and bonds, but excluded the item that looms largest for many low-income families: Social Security. When a poor person retires, Social Security will replace about 90 per cent of his income, compared to only 29 per cent for those at the top. One reason that low-income households have accumulated so little private wealth is that public programs have weakened their incentive to do so, while payroll taxes have weakened their ability to.

It's absurd, of course, to assume that people in a given wealth bracket one year will still be there the following year. When the Joint Economic Committee studied IRS returns it found that fully 86 per cent of taxpayers in the lowest income quintile in 1979 had moved to higher brackets by 1988. About 15 per cent had climbed all the way to the top quintile.

Similarly, the 1987 stock-market ``correction,'' combined with collapsing real-estate prices, played hob with the portfolios of many rich people during the 1980s. As a result, more than half the people in 1979's richest 1 per cent were not found among 1988's richest 1 per cent.

Still, many believe that ``old money'' -- vast pools of inherited wealth -- lies behind the widening economic disparities in this country. This perception has fueled calls for higher estate taxes. While seemingly plausible, it turns out that inheritance plays a trivial role, even among the wealthy. A recent Rand Corporation study found that in the wealthiest 5 per cent of households, assets totaled $843,598 when inheritances were included. Without inheritances, these assets totaled $780,641. James P. Smith, the economist author of the Rand study, says two-thirds of all white households and 90 per cent of minority ones have never inherited any financial assets. Even if you taxed away 100 per cent of all inheritances, more than 90 per cent of the disparities in wealth would remain, according to Smith.

Income differences explain most of the wealth gap, especially among different racial groups. Health also matters. Households of average wealth, but reporting a decline in health, had about $40,000 less wealth after one year than those in the same category whose health remained the same. Those with improved health had $80,000 more wealth. In general, households in excellent health had more than four times as much wealth as those in poor health.Family values also affect the distribution of wealth. The average accumulated wealth for married couples in the 51 to 61 age group is $132,200. That's 15 times larger than the average wealth of households headed by a separated person in this age range, and 4 times the average wealth of divorced households. The decline of marriage has played a role -- largely unappreciated -- in the long-term fall of our national savings rate.