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Kinsley: The wealth gap

Op-Ed

For the very rich, income is only a small piece of the equation.

June 14, 2012|By Michael Kinsley
  • A "For Sale" sign hangs outside a home in the Brooklyn borough of New York City. According to a triennial study released Monday by the Federal Reserve, the average American family's net worth dropped almost 40% between 2007 and 2010.
A "For Sale" sign hangs outside a home in the Brooklyn borough… (Spencer Platt / Getty Images )

The current debate about rich and poor — the 1% vs. the 99% — 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% 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 stocks that have never been cashed in, and therefore never 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 income tax purposes. Your heirs, if and when they sell, pay capital gains taxes only on any increase in value since they got the money. There might be estate taxes, but only if the estate is worth $5.12 million or more.

The Federal Reserve released new numbers 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% 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 shrinking for all categories of Americans. In 2007, the net worth of the median family was $126,400. That's a drop of almost 40% in just three years. (All these numbers have been adjusted 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 than those 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 ever 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.

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 Bloomberg 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-hearted 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 putting the entire tax burden on 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 in the final exam.

Michael Kinsley, a former editorial page editor of The Times, is a Bloomberg View columnist.

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