Wealth Inequality In The United States

I’m showing you this video not for the editorial content—one of the deep flaws in arguments about wealth is that, when someone is making \$1,000,000 compared to someone making \$50,000, the rhetorical question “Does that person really work 20x as hard as the other?” usually follows. The problem with that question is that it equates effort with value.

Imagine someone owns 3.65 million shares, or about 1%, of the Kellogg’s corporation. Because of what he owns, he is delivering \$18 million in profitable value to people across the world each year because those people are choosing to take their scarce dollars (which they acquired through work, investing, inheritance, etc.) and buy Rice Krisipies, Frosted Flakes, Fruit Loops, Pop-Tarts, Eggo-Waffles, and so on. A little less than half of that \$18 million will show up in the form of \$8-\$9 million worth of dividend checks that are paid out every ninety days in \$2.25 million (or thereabouts) installments.

The guy with 1% of Kellogg is not more honorable, respectable, or “better” than the person hauling trash making \$50,000 per year. Those qualities are something you have to possess, and are not measured by wealth. But in terms of value delivered to society.

A lot of times, particularly during political seasons, people say, “the rich get richer” as if it is a pejorative. Instead, it’s just a basic function of mathematics—compounding. When General Electric goes from \$12.50 per share to \$25 per share, someone owning 100 shares is only going to make a little over \$1,000. Yet someone with 10,000 shares is going to be able to pay for a starter home in cash by the same General Electric change in price. The reason this is “fair” is because the person with the 10,000 shares had to do something to acquire all that money to invest in the first place (at least, that’s true 90% of the time according to Dr. Stanley’s research, with the other 10% coming from inheritance), and of course, if GE’s business were to fall apart, the person with 10,000 shares is going to lose a lot more money than the person with 100 shares.

Inequality is a function of value created—it’s not something that should be considered immoral unless the wealth was created by lying, cheating, stealing, or some form of oppression. If you try to create extra profits by paying your employees less than promised, than equality is a big problem because it’s theft. If someone turned \$10,000 in Coca-Cola stock in 1970 into over \$1.8 million today, then he deserves to be richer than his neighbors because he acted prudently, patiently, and delivered value to others in the form of soda enjoyment, and it is a fair and just incentive structure that he be rewarded.

Rather, the reason why I bring this video to your attention is because I want you to pay attention to the clear and lucid presentation—it’s very persuasive. By using easy visual signals to juxtapose how things should be, how people think things are, with how they really are, the creators of this video series make their case very clearly. If you remove yourself from getting caught up in it and step back and analyze what tools they’re using to be persuasive, there is a lot to learn here.

Originally posted 2014-02-16 14:53:15.

16 thoughts on “Wealth Inequality In The United States”

1. matthewriedle says:

Well said. They also always infer that the wealthy and the poor are the same people over the period in time that they measure. I have gone from low income to upper middle income over the past 20 years and I would imagine this would be more of the norm than exception yest these claims infer the poor stay poor and the rich stay rich, which is just not the case.

2. Joe_G from Seeking Alpha says:

Tim, I think you oversimplify the argument about income inequality.  The problem isn’t that some people make more money than others, the problem is that the rules of the game (tax laws, bankruptcy laws, labor laws) have been changed in such a way as to give an unfair advantage to those who already have great wealth.  Taxing capital gains at a lower rate than salary income is an example of a rule that has been changed to give a perk to investors that workers don’t enjoy.  It has nothing to do with who earned what, and everything to do with fairness, income is income and one shouldn’t enjoy a lower tax rate simply based on how you made your money.  There are tons of examples of legal and tax perks that some people get (usually those who already have great wealth) that most others don’t enjoy, and these special perks do play a large part in driving income inequality.

3. ronrph says:

I don’t agree with you assessment of taxing capital gains being a perk to investors that workers don’t enjoy. I consider myself a ‘worker’ as my income is derived from w-2 salary. No stock options or any other perk. Just money I get paid per hour for the work I do.
Now with this money I can take advantage of the capital gains taxes as I can invest via trade king, loyal3, vanguard, or Scott trade. Any low or no cost broker and get the same deal anyone else in the US of A can get. No inequality.
Bankruptcy laws tend to favor people who don’t or won’t or can’t control their budget/spending. I know many people who have used that avenue as a magical reset button every couple of years. Then we get to pay for it in the form of higher prices for goods and services.

4. scchan_2009 says:

On the The Economist (the political newspaper), there have been some commentary that US social mobility, by some measures, has seen no declines:

Anyway, there are also counter arguments and other commentary about is the rich getting richer especially on the issue with taxes – nevertheless by rich folks themselves:

And we do know about Warren B’s view on taxes (aka the Buffett rule). Anyway, I am just trying to pose different views on the issue. One thing Gross and Buffett all agree is that tax on rich is not high enough – this is not necessary a social mobility issue, but poorer people do pay more taxes then their richer counter part (so this creates a disadvantage to the poor to climb the ladder). Both Gross and Buffett on the side that “the gap is widening”.
Anyway, as Jimmy Carter always ask the common folks – spend less, save more. People just buy too much Walmart/Target/your-choice-of-retailer junk, and don’t save/invest too much – a sure way to stay poor for long time.

5. Joe_G from Seeking Alpha says:

ronrph Bankruptcy laws should be the same for everyone. My point is that they are not the same, and therefore unfair.  If a business takes risks and then fails they can declare bankruptcy and start over, but if an individual tries to do the same thing they can’t do that because the personal bankruptcy laws have become more strict while corporate bankruptcy laws have not.  You can’t have lax rules for one set of people and tougher laws for everyone else, and that is the heart of the debate over income inequality as these differences in treatment represent a structural cause of inequality.

6. Joe_G from Seeking Alpha says:

scchan_2009 It’s easy to blame the poor for being foolish with money.  It gets tougher when you realize that most personal bankruptcies are caused by unexpected things like medical emergencies that can bankrupt an otherwise frugal family.  And as those bankruptcy laws get more strict it becomes harder to start over and families get trapped into perpetual indebtedness.

7. UScott says:

Joe_G from Seeking Alpha Instead of talking about the uber rich, lets talk about the middle class and capital gains.  I make slightly over the median income in my hometown, I pay taxes per tax laws.  If capital gains/Interest were taxed in the same way that my standard income was taxed it decreases the incentive for me to save and invest, as a larger portion of that increased future income is going to be taxed away from me.  Right now I save and invest a decent portion of my salary by living below my means (no new cars, no fancy cable packages, eat at home most nights, etc).  Part of the reason that I do this is because there is an incentive to do this, lower tax rates on secondary income.  Remember that I have paid tax already on this income once, and if in the case of dividend payments to me, in most cases the company paying the dividends has also already been taxed.
When people talk about income inequality they really like to talk about the people at the very top of the income pyramid and those at the bottom.  When discussions occur about how to change this, they stick to discussing those two groups.  When decisions are made, the unintended consequences tend to hit those in between those two extremes while having little to no effect on those at the extremes.

8. scchan_2009 says:

Joe_G from Seeking Alpha scchan_2009 I am not trying to blame people being foolish, in fact there are plenty of foolish people in the rich, but they get away with the money buffer.
Healthcare is broken in the US. I think “Obama Care” is a step toward that, and I am not a Democrat. I lived large fraction of my life outside US (UK, Hong Kong, and Canada); public healthcare option in pretty much standard for other advanced economies. I do not understand the deep opposition to such a system in the US.
And yes, I had to pay 200 bucks per month to BCBS for my health insurance when I lived in Florida (laugh)! And I am reasonably healthy, but may be a bit overweight. And just a bit of humour :-):

The tax and bankruptcy system is also broken. That is why I highlight the wiser folks appear to be able to climb the social ladder by making better decisions (for all practical purpose, Jobs + Wozinak, Gates, Zuckerberg are all self-made) – that is why social mobility has not been reduced. However, we cannot assume everyone are smart – for every Bill Gates that are probably one hundred thousand Forrest Gumps. In general most people (rich or poor) are foolish, but the current system seems to let the foolish rich get away from bad decisions than the poor. That is what I think the problem is.

9. Joe_G from Seeking Alpha says:

UScott Joe_G from Seeking Alpha You say that if your investment income was taxed at the same rate as your salary income that you’d have less of an incentive to invest.  By that logic you should be working less because of the higher relative tax rate on your salary income.  Yet I doubt you’ve deliberately cut back your hours in response to your higher tax rate on your salary.  If you’re like most people with full time jobs your working hours are not impacted by your tax rate, and I suspect that you’d still invest your money even if the capital gains tax rate were to be increased to match your ordinary income tax rate.  Your argument is similar to the one used by people who threaten to leave high-tax states like NY or CA in favor of FL or AZ.  Most people don’t decide their residence based on their tax rate, they decide for unrelated reasons like job availability, proximity to family and friends, or other factors that won’t be overridden by marginal tax rates.

10. Joe_G from Seeking Alpha says:

scchan_2009 Joe_G from Seeking Alpha I suspect most of the opposition to the ACA (“Obamacare”) is about politics rather than the substance of the law.  If the other side supports something then your side is automatically against it, with little attention paid to what is being opposed.  That’s the nature of zero-sum American politics.

11. UScott says:

Joe_G from Seeking Alpha UScott Ahhh, the if that were true you’d apply it elsewhere straw man argument.  I’ve missed it so. If tax laws changed to tax investment income the same way ordinary income is taxed I would absolutely change my investment strategy.  It might not be a massive shift, but I would definately move towards different tax advantaged strategies or more towards investments that I control the taxation on, than just keeping with income paying stallwarts like I do today.

If tax rates changed, would I work less?  No.  But I’m a salaried employee, and one that knows what my MAGI is.  Within a year i would know what the actual effect was on any tax changes (and realistically I would know much before this because the calcs aren’t that difficult).  But changing my secondary income source marginal rate from 15% to 28% would have an effect on how I would invest, to say its not is foolish.  Note, I don’t actually expect any of these tax rates to take effect as the ones writing the laws, have ample incentive to not hurt themselves.

12. Joe_G from Seeking Alpha says:

UScott Joe_G from Seeking Alpha Straw man argument?  Hardly.  It’s actually a good illustration of behavioral economics at work.  People save and invest to get ready for retirement, or to pay for college, or to buy a house or any number of reasons that will not be deterred by tinkering with marginal tax rates.  To say that raising the capital gains tax to match the tax rate on ordinary income will somehow act as a disincentive to save and invest doesn’t make any sense.  You’re not going to stop saving for retirement or not send your kid to college just cause the taxes you pay on your investment gains went up.  You might adjust your strategy by allocating your investments across different types of tax shelters or investment vehicles, but that’s not a disincentive to invest.  That’s just the sort of tax planning that accountants have been doing since forever.

And all of this is beside the point.  Your incentive or desire to save or not save does not provide a sound argument for why your investments should be treated differently than your labor.  A gain from your stock portfolio is income, a paycheck from your employer is income.  Why does the tax code want to reward one over the other with preferential treatment?  The only reason is that the wealthiest members of society make most of their income from investments rather than labor, so they lobbied hard enough to win this plum tax treatment, which gets us back to my original point about income inequality being largely a function of legal and tax manipulation designed to benefit those who have the means to change the rules in their favor.

13. matthewriedle says:

That is absurd, of course. Taxes on dividends are lower because they have already been taxed at the source, the corporation. Instead of arguing for higher taxes on dividend and capital gains, why not argue for lower taxes on labour?
That you do not belies your partisanship and your comments should be treated for what they are, partisan rhetoric.

14. scchan_2009 says:

Joe_G from Seeking Alpha scchan_2009 Politics is of course big in the opposition of ACA. In fact, most of ACA derived from the Massachusetts health care system which was designed by Romney. The thing about politics is – facts don’t matter nowadays if it wins vote. If Romney was president, Democrats would probably at least try to find some way to change a Romney bill just to pretend to be doing something and show supporters that we were punting the big elephant.
It is even party vs party politics, sometimes intra-party politics matter too. The current opposition to free trade bill by Democrats may cost US in medium/long term dearly too.

15. scchan_2009 says:

Joe_G from Seeking Alpha UScott There are only very few ways to tax shelter your investment outside a IRA or ROTH IRA.
Master limited partnerships: however, not everyone are comfortable with how MLPs play with your 1040
Muni bonds: Oh do you mean Detroit or Stockton? (I am just teasing, but many muni bonds do carry hidden credit risk; Warren Buffett had talked about this) Yields also may not be as good as corporate bond, and exact tax benefit depends on your income level.

I do think Treasury saving bonds are not bad for saving for college. For tax purposes, they do act like IRA.

16. UScott says:

matthewriedle Sums it up perfectly.