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ROBBER BARONS - For decades now, the growth rate of America’s largest fortunes has dwarfed the growth rate of our total national wealth. The political power those massive fortunes can now buy has pushed us perilously close to oligarchy. Billionaires, as we now see, are dominating the new Trump administration.
America’s total household wealth, since 2014, has roughly doubled, increasing from about $80 trillion in 2014 to about $160 trillion today. Over that same period, the wealth of America’s eight richest individuals—average net worth, over $200 billion—has more than quadrupled, jumping from $390 billion in 2014 to $1.7 trillion today.
In other words, over just the last decade, the ultra-billionaire share of our nation’s wealth has more than doubled. If you’re an American citizen, your chance of becoming a billionaire? Less than 1 in 42 million.
The gains flowing to the holders of these assets—billionaires like Jeff Bezos and Elon Musk—currently enjoy some of our tax system’s lowest tax rates.
Back in 1982, the year the annual Forbes list of America’s 400 richest made its debut, the entire 400 did not hold, collectively, even a full 1% of the nation’s wealth. Today just our top eight richest alone now hold that 1%.
At the root of this march to oligarchy sit two factors. The first, the simple formula the French economist Thomas Piketty made famous a decade ago in his masterworkCapital in the 21st Century: r > g. The basic truth here: The rate of return on the investments of our richest, Piketty’s r, regularly runs greater than the rate of overall economic growth, his g.
The second factor: A gaping U.S. tax loophole I like to refer to as “buy-hold for decades-sell” allows the investment gains of the ultra-rich to compound for decades without facing taxation.
Let’s put these two factors together. The reality of r > g means that if our taxes don’t adequately trim the rate of growth in the wealth of the richest Americans, their share of the nation’s wealth will inevitably increase, with no upper limit to that increase. Left unchecked by taxation and other policy choices we might choose to make as a nation, the share of our wealth that America’s top 1% hold—currently about 34%—could easily reach 50%.
That 50% happens to be the share of our nation’s wealth that our top 1% held on the eve of the Great Depression way back in 1929.
To prevent undue wealth concentration, stats like these make clear, our tax system must operate to reduce the pre-tax rate of return on capital to an after-tax rate of return that doesn’t cause wealth to concentrate. But unless we close the buy-hold for decades-sell loophole, that will be next to impossible.
Why? America’s largest fortunes rest on assets that have appreciated over time at a rapid clip. The gains flowing to the holders of these assets—billionaires like Jeff Bezos and Elon Musk—currently enjoy some of our tax system’s lowest tax rates.
How could that be? Consider an investor who purchased $100,000 of Microsoft shares in 1986, after the company went public. That investment would be worth about $430 million today. The ample return on that investment would be nowhere near the return flowing to Bill Gates and his pals who received Microsoft stock before the company went public. But that $100,000 investment would still show an awesome rate of return, some 23.9% per year, compounded annually.
So, for that lucky investor holding those Microsoft shares from 39 years ago, Piketty’s “r”—before tax—would be over 23%.
Over that same period from 1986 to today, our nation’s total household wealth, adjusted for population growth, has increased at a rate of between 5 and 6% per year. This growth rate—calculated after taxes—doesn’t quite give us an exact apples-to-apples comparison with that Microsoft investor’s 23.9% wealth growth rate. To make the comparison apples-to-apples, we would need to account for our investor’s tax liability.
How impactful would that tax liability turn out to be? A lot less than you might think.
Take the absolute worst-case scenario, tax-wise, for the investor: a sale today of the entire holding of Microsoft shares purchased way back in 1986. That would trigger a federal income tax liability of 23.8% on the investor’s $429,900,000 gain, about $102 million in total tax. That tax would reduce our investor’s annual rate of return to about 23.1%.
Wait, what? The income tax on a long-held, highly profitable investment only reduces the pre-tax rate of return by a single percentage point?
Yup. Think about our investor’s situation this way. If the growth in the value of the investor’s shares faced an annual tax of just 3.3%, and the investor sold 0.65% of the shares each year to pay the tax, the investor would be in the same exact position at the end of the 39 years. Put another way, that 23.8% tax at the end of a 39-year holding period translates to an effective annual tax rate of 3.3%.
Over 39 years, to put things in still another way, our investor’s share of the nation’s wealth would have increased over 300-fold.
Now consider what would happen if we increased the tax rate applicable to long-term capital gains to the maximum rate applicable to ordinary income, currently 40.8%. That one-time tax at the end of 39 years would leave our investor with an after-tax return on investment of 22 %.
What does this still quite robust 22% return tell us? Simply this: We need to look elsewhere for the biggest weakness in our tax system. So let’s try considering the tax end-game if our hypothetical Microsoft investor faced an annual tax rate of 23.8% on the increased value of his investment. That would leave him with an after-tax wealth pile at the end of the 39 years totaling about $68 million . To achieve the same result with a one-time tax on the gain from the sale of the shares at the end of 39 years would require a tax rate of 84.2%.
Few investors ever achieve an annual 23.9% growth rate over the long-term. But the wealth of some American billionaires has actually grown at twice that rate. These billionaires are achieving enormous rates of growth in their wealth, a growth that goes untaxed for decades. The tax they eventually do pay—when they sell their assets—translates into a minuscule effective annual rate of tax on their investment gains.
We can and we should do away with the current preferential rate of tax applicable to investment gains. But unless we close the buy-hold for decades-sell loophole, the wealth of our nation’s billionaires and their political power will both continue to metastasize—and obliterate our pretensions to democracy.
(Bob Lord is Senior Advisor, Tax Policy at Patriotic Millionaires and an Institute for Policy Studies associate fellow. This article was first featured in CommonDreams.org.)
