Merriott column: Wealth disparity and income inequality
To find an outlandish and somewhat gaudy example of wealth disparity and income inequality we need only gaze up the Roaring Fork Valley to our good neighbors in Aspen.
In the proverbial shadow of Red Mountain, 270 hopeful (some would say desperate) residents just put in their names for 11 affordable rental units at Park Circle. The Aspen Pitkin County Housing Authority will conduct four lotteries to see which 11 of the 270 applicants gets to rent one of these 11 units for as little as $1,112 a month.
Seven are reserved basically for folks making $100,600 or less. Meanwhile, Red Mountain Zillow shows 11 homes for sale starting from the top at $49.5 million (recently discounted by $5 million).
Disparity and inequality on steroids.
It has been getting worse for decades, but never more prevalent than during the recession of 2008 and COVID-19. American capitalism once the economic envy of the world economy now seems responsible for this growing inequality/disparity. It also is a big part of the reason the country is so galvanized. Some would even say capitalism is in crisis.
I got my first CPA job in Houston in the early 1970s, and the maximum tax rate on ordinary income was 70%. What is it today? Well, after the Tax Cuts and Jobs Act of 2017, which seemed to mainly benefit the wealthy, it is now down to 37%, so roughly half.
That said, I do not consider the reduction of the ordinary income tax rate as the main contributor to the disparity/inequality. One must factor in the tax on capital, which we in the industry refer to as the capital gain rates. These are now basically down to 15% on dividend income and sales of assets (particularly stocks). As recently as 1986, this rate was 28%. So, again, we are roughly down by half. Capital gain taxes are paid disproportionately by high-income households, as they are more likely to own assets (stocks) that generate capital gains.
The institute for Policy Studies and Americans for Tax Fairness study found that U. S. billionaires total net worth rose to $3.88 trillion by Oct. 13, 2020 from March 18, 2020, nearly double the total wealth held by the bottom half of the entire U.S. population.
This, while 10 million Americans are still claiming unemployment benefits and 98,000 businesses have permanently closed. My sense is most of this wealth came from corporate tax savings from the last Tax Act. They used the tax savings to buy back their own stock and pay dividends instead of giving employees raises and investing in technology to create jobs, which is the way it was sold to get it passed.
The buying back of stock means there is less of it and the price can go up dramatically. This is great if you are invested in the market, but as we know only about 50% of American families presently own stock.
So, here is my idea.
Expand the Earned Income Tax Credit for people under a certain level of income. Let’s just arbitrarily say $200,000 for a family of four is the cut off. The credit would be tiered — higher if you made less money, less at the $200K level.
Here is the kicker.
Let us say, at the $200,000 level you received a $5K “credit.” It would not be against your tax bill, it would be invested for you in a $5,000 Mutual Fund which would contain large holdings in Amazon, Facebook, Apple, Chevron, Disney, and other stocks in the S&P index.
The Mutual Fund would be restricted and could not be sold for at least 10 years? It would be incentivized such that if you invested more it could/would be matched the following year by your “credit.” This would bring more people into the stock market and provide them ownership of the future of our economy and country.
This, of course, would have to be funded by a wealth tax of some type. I am sorry, but fundamentally, at this point, our capitalistic experiment is failing. Philosophically I do not think people should be worth a billion dollars without paying disproportionately more in taxes, especially when we can’t take care of our veterans or provide health care for our citizens.
The devil would be in the details, but it is broke and we have to fix it.
Frosty Merriott is a CPA in Carbondale and serves on the Chamber of Commerce Ex Board and the Environmental Board. He does not have any billionaires as clients but did have one worth well over $150 million. He can be reached at firstname.lastname@example.org
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