Wealth Inequality by the Numbers

Not since the Gilded Age has this country seen such a yawning gap between the very rich and those with little wealth. Wealth concentration has spiked since the 1970s: whereas in 1971, the top 1% of households held less than 20% of total household wealth, by 1998 the top percent owned 38%. According to the most recent Survey of Consumer Finances, the bottom 50% of the U.S. population claimed just 2.8% of total private wealth in 2001, while the top 5% held 58%.

The racial wealth gap persists (it far exceeds the racial income gap), evidence of the country’s long legacy of discrimination. Data show that African-American wealth holdings actually fell during the boom years of the 1990s, even while the black-white income gap closed a bit.

Few other periods have reached such extremes of wealth inequality. Those that have include the Gilded Age and the years preceding the Great Depression. Inequalities not only undermine opportunity—they fuel economic and political instability.

http://www.dollarsandsense.org/archives/2004/0104inequality.pdf

"Death Tax" Deception
Who's behind the movement to repeal the nation's only tax on inherited wealth?

ROSIE HUNTER AND CHUCK COLLINS

This article is from the January/February 2003 issue of Dollars & Sense magazine.

The federal estate tax, or "death tax," isn't dead yet, but a powerful clique of wealthy families and interest groups will stop at nothing to kill it. Their movement makes small business owners and family farmers its poster boys. But those who stand to gain the most from repeal are a few thousand very wealthy households. The effort to turn the public against the estate tax, and ultimately abolish it, is a case study in conservative movement tactics—the campaign uses distorted facts, dirty tricks, and front groups, and it's bent on repealing the nation's only tax on inherited wealth.

The decade-long public relations and lobbying campaign seemed to pay off when President George W. Bush signed his $1.35 trillion tax cut into law in 2001. The bill included a gradual phase-out of the estate tax over ten years (see sidebar). But because the tax bill—a bizarre assortment of delayed activation dates and gimmicks that money guru Jane Bryant Quinn called "a contemptible piece of consumer fraud"—was structured to "sunset" at the end of 2010, the estate tax will be fully repealed for only one year, after which tax rules revert back to what they were before passage of the bill.

The anti-estate tax lobby is now pushing hard to make repeal permanent. With Republicans back in control of both houses of Congress, repeal proponents on both sides of the aisle are emboldened. And they understand that they must move quickly because as the budget deficit grows, permanent repeal will become politically more difficult to justify.

Can this juggernaut be stopped? Perhaps, but only if progressives take a hard look at the anti-estate tax campaign, debunk its claims—and its "grassroots" façade—and then organize like never before.

The Estate Tax: The Basics
The federal estate tax is the only tax on accumulated wealth in the United States. It is a transfer tax, levied at the time of death when assets transfer to heirs. It falls on the country's wealthiest households—less than 2% of all estates—but still generates significant revenue (currently $30 billion annually, or about 9% of the non-military discretionary budget).

Under the 2001 tax cut, the amount of wealth exempted from the estate tax rises from $1 million ($2 million for a couple) to $3.5 million in 2009 ($7 million for a couple). As a result, the number of households subject to the estate tax will shrink from 50,000 to about 6,000 a year.

Even at its current level, the estate tax affects only a small percentage of businesses and farms. This is in part because family-owned businesses and small farms receive special treatment under the tax, including large deductions when the business or farm represents at least 50% of the estate, and assessments that reduce the estimated value of assets. These special rules frequently allow family-owned businesses and farms to pass on $5 to $8 million, tax-free, to heirs.

Those family-owned businesses that are subject to the estate tax rarely pay the top marginal rate, and are given a generous 14-year payment schedule. The estate tax is a graduated tax with a rate structure that starts at 32% and increases to a top rate of 55% on estates exceeding $3 million. The 2001 tax bill reduces the top rate to 45% between now and 2009. The "effective rate," the percentage of the total value of the estate actually paid in taxes, averages about 30%.

The Case for Preserving an Estate Tax
Abolishing the estate tax would further concentrate the nation's wealth in the hands of the super-rich at a time when the distribution of wealth is already more unequal than at any point since the 1920s. It would also drain resources from strapped states and charities. Among the pressing budgetary reasons to preserve the tax are these:

Making the repeal of the estate tax permanent would contribute to a fiscal train wreck, draining government coffers of $850 billion between 2011 and 2021.
Repeal would eliminate one of the few progressive taxes in our federal system, resulting in the transfer of hundreds of billions of dollars to the trust funds of the nation's wealthiest families while shifting the burden of taxation (or cuts in services) onto those less able to pay.
States—already straining to balance their budgets—stand to lose $9 billion a year in state-linked revenue by 2010 as a result of the planned estate tax phase out.
Estate tax repeal would also shrink charitable giving and bequests, particularly from estates in excess of $20 million. Without the incentives provided by the estate tax (which encourages charitable bequests during life, in anticipation of the tax, as well as at death), the Treasury Department estimates that charitable giving may decline as much as $6 billion a year.
But the estate tax was meant to do more than bolster budgets and aid charities. From its inception, it was meant to ward off the emergence of a hereditary aristocracy in the United States. Established in 1916, the tax was a populist response to the excesses of the Gilded Age. President Theodore Roosevelt justified it by arguing that society has a claim upon the fortunes of its wealthy. Roosevelt pointed out that "most great civilized countries have an income tax and an inheritance tax. In my judgment both should be part of our system of federal taxation." Such taxation, he noted, should "be aimed merely at the inheritance or transmission in their entirety of those fortunes swollen beyond all healthy limits."

A number of modern-day millionaires—who are themselves subject to the tax—understand its historical importance. As part of the opposition to repeal, over 1,200 wealthy individuals signed a petition calling for preserving—but reforming—the tax. The signers (who include William H. Gates, Sr., George Soros, and Ted Turner) argue that the tax is an essential means to moderate the excessive build-up of hereditary wealth and power. Investor Warren Buffett argued in the New York Times that repealing the estate tax would be comparable to "choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 OlympicsÉWithout the estate tax, you in effect will have an aristocracy of wealth, which means you pass down the ability to command the resources of the nation based on heredity rather than merit." Petition-signers and other activists say they support raising the cap on exemptions to further reduce the already-miniscule number of small businesses and farms affected by the tax. For some, the call to raise exemption levels is in part tactical—a means to gain congressional support for tax preservation.

The Push for Repeal
How did legislation benefiting only a narrow slice of the wealthiest Americans advance so far? Who is behind the push to abolish the estate tax?

Repeal backers describe their movement as "grassroots," but peek behind the curtain and you find a well-funded public relations, lobbying, media, and research apparatus (led by sophisticated operatives, many with deep connections to the Republican Party).

In the early 1990s, a group including the heirs to the Mars and Gallo family fortunes embarked on a long-term effort to eliminate the tax. They enlisted the help of Patricia Soldano, an Orange County, California, advisor to wealthy families. She formed a lobbying organization (the "Policy and Taxation Group") to provide an "outlet" for wealthy families "interested in communicating their concerns to members of Congress." Soldano channeled funds to congressional backers of repeal and hired the powerful lobbying firm Patton Boggs.

By the mid-1990s, Soldano's outfit and other early pro-repeal groups had joined together with a veritable anti-tax industry of think tanks, lobbying firms, and interest groups in Washington, D.C. to form a powerful "death tax elimination" lobby. Conservative think tanks, including the Heritage Foundation and the libertarian National Center for Policy Analysis, produced "policy backgrounders" criticizing the estate tax, and made the requisite op-eds and TV appearances as well. The anti-government group Citizens for a Sound Economy encouraged its members to lobby their senators and representatives against the tax. Other groups involved in the anti-estate tax crusade include the private campaign organization Club for Growth; the political arm of the libertarian Cato Institute; the American Conservative Union; Grover Norquist's Americans for Tax Reform; and the 60 Plus Association, a self-styled conservative alternative to the American Association of Retired Persons. At the center of the lobbying effort is the National Federation of Independent Businesses (NFIB), a business trade association and one of the most influential organizations in Washington. The NFIB's lobbying web site www.YesToGrammKyl.com sends faxes to Congress urging estate tax repeal.

In 1993, U.S. Representative Christopher Cox (R-Calif.) introduced the first repeal legislation with just 29 co-sponsors. Soon, Sen. Jon Kyl (R-Ariz.) became a chief ally, along with Reps. Jennifer Dunn (R-Wash.) and John Tanner (D-Tenn.). Within a year, elimination of the "death tax" occupied a central plank of the G.O.P.'s 1994 "Contract with America." By 1998, repeal legislation had over 206 House sponsors including the entire Republican leadership.

At NFIB's 2002 Small Business Summit, Bush strategist Karl Rove said "the NFIB and the Bush administration work hand-in-hand because we see eye-to-eye." Referring to NFIB's failed effort in June 2002 to make the repeal of the estate tax permanent, Rove assured his audience, "Don't look at it as a defeat. This is a war, and we need to make an ongoing commitment to winning the effort to repeal the death tax."

Death Tax Lingo
In perhaps its greatest public relations feat, the pro-repeal lobby has managed to portray the estate tax as a "death tax" on most Americans. The phrase suggests a tax imposed upon death itself, although over 98% of those who die go untaxed. The "death tax" label has proven a major asset to the campaign, yet its authorship is disputed. James L. Martin, president of the 60 Plus Association and Bush family friend, credits himself. Rep. Dunn credits Seattle Times publisher Frank Blethen.

Whatever the origin of the tag, Republican pollster Frank Luntz masterminded its widespread use. Luntz urged conservative legislators and candidates to exclusively call the estate tax a "death tax," and in a 1994 memo he suggested legislators hold anti-estate tax press conferences at local funeral homes. Republicans employ the "death tax" label so effectively that the term is now used in the mainstream press.

Martin has thought up plenty of other labels for the tax as well, including "grim-reaper's tax," "grave robber's tax," "cruelest tax," "pine-box tax," and "success tax." Martin travels the country to spread the word that "taxing cadavers is gross public policy," and to ask the public, "Should Uncle Sam, rather than a blood relative, be the first in line when you die?" At one point Martin ran a contest to generate new catch phrases; the winner—"last-grasp tax"—got $100. Martin, Luntz, and other Republican spin-doctors recognize that success hinges on how the debate is framed. Martin told The American Prospect, "it's all a matter of marketing."

Deception Down on the Farm
Pro-repeal literature is packed with claims that the estate tax forces working farmers to sell their farms. When Congress passed legislation to repeal the tax in 2000, it delivered the bill to President Bill Clinton on a tractor to symbolize the "down on the farm" effects of the bill. On the campaign trail later that year, George W. Bush declared, "To keep farms in the family, we are going to get rid of the death tax!"

Starting in the spring of 2001, a number of investigative reports began to question the veracity of these claims. They found that stories of farmers losing the farm to the estate tax are so rare that experts and investigators have been unable to find any real examples. Neil Harl, an Iowa State University economist whose tax advice has made him a household name among Midwest farmers, said he searched far and wide but never found a case in which a farm was lost because of estate taxes. "It's a myth," said Mr. Harl, "M-Y-T-H."

The New York Times reported that when the pro-repeal American Farm Bureau Foundation was challenged to produce one real case of a farm that was lost because of the estate tax, it could not cite a single example. In April 2001, the Bureau's president sent an urgent memo to its affiliates stating, "it is crucial for us to be able to provide Congress with examples of farmers and ranchers who have lost farmsÉ due to the death tax." Still, no examples were forthcoming.

Disabled Americans Against the Death Tax?
In early 2001, Responsible Wealth (a project of the popular education organization United for a Fair Economy) initiated the petition of wealthy individuals calling for preservation of the tax. The petition prompted a swift counterattack by the pro-repeal lobby, which issued a barrage of advertising and media events to undermine the Responsible Wealth effort. One example provides an illustration of pro-repeal tactics.

In March of 2001, full-page advertisements appeared in several daily newspapers around the country including the Wall Street Journal and the Washington Times. The advertisements were produced by a new organization, dubbed "Disabled Americans for Death Tax Relief." Its leader, a young woman from Austin, Texas, named Erin O'Leary, claimed she had just formed the organization two weeks earlier and already had over 1,000 members.

O'Leary was "deeply offended by the callous and heartless comments made by 125 so-called Ômillionaire' signers of the Responsible Wealth ad that appeared in the New York Times." She alleged that there are "2.5 million disabled people who are family members of millionaires, a number that would grow to 8 million over the next thirty years," and that with rising medical costs, these individuals needed their inheritances. The text of the advertisement continued:

In order to live a full life, these Americans may require medical help, nursing and living assistance far beyond that which is covered by medical insurance. Warren Buffet, Bill Gates, Sr. and George Soros believe that these people should be denied full financial help from their parents.

The "Disabled Americans" stunt was the creation of conservative communications maven Craig Shirley (whose public relations firm represents the National Rifle Association, the Heritage Foundation, and the Republican National Committee). Fox News and several conservative talk shows kept O'Leary busy with interviews, but most other news media recognized O'Leary's advertisement for the charade that it was.

Disabilities experts responded, including author Marta Russell, who felt that "using disabled people to front for the interests of the wealthiest members of our society is an outrage and a disgrace." Russell disputed the claim that millions of disabled people could be adversely affected by the tax. O'Leary's figures made no sense given the economic profile of the disabled population in this country. The disabled are one of this country's poorest groups, and highly dependent on the very tax-funded social services that repeal of the estate tax could put at risk.

Shaping Public Perception
Print and radio advertisements are key weapons both in molding public perception and attacking members of Congress who vote against full repeal. The owner of the Seattle Times, Frank Blethen, sees estate tax repeal as his personal crusade. (Blethen believes that the estate tax is responsible for the decline of family-owned newspapers.) He started a website www.deathtax.com and organizes an annual "Death Tax Summit" in Washington, D.C., to mobilize other independent newspapers and business groups to lobby Congress.

Blethen has used the Seattle Times as a vehicle for his anti-estate tax cause, both on the editorial page and through advertisements, stirring concerns from the paper's editors about his lack of impartiality. Further, he circulated the anti-death tax ads he developed to other newspaper owners; they were published in over one hundred independent newspapers nation-wide.

The estate tax is also a favorite issue for conservative groups seeking to exercise political influence through issue ads. In the months prior to the 2002 election, pro-repeal organizations ran estate tax issue ads in South Dakota, Missouri, Minnesota, Iowa, and Arkansas. In Missouri, the United Seniors Association and Americans for Job Security (phony grassroots organizations fronting for corporate interests) targeted former Senator Jean Carnahan's position on the estate tax. In Minnesota, Americans for Job Security ran full-page newspaper ads attacking the late Senator Paul Wellstone for voting against full repeal, and flew a banner at the Minnesota state fair: "Wellstone Quit Taxing the Dead!"

Dividing Diverse Constituencies
Another pro-repeal strategy has been to thwart progressive and diverse groups that might be inclined to preserve the estate tax. Over the past five years, pro-repeal forces worked to convince the public that the estate tax is particularly detrimental to women and people of color as well as farmers. In doing so, they spin an illusion of a rainbow coalition in opposition to the tax.

For example, the NFIB and front group called the Small Business Survival Coalition recently organized press conferences with women business owners and alleged that "women—not men—are the chief victims of the tax" because women generally outlive men. They mobilized women's business organizations including Women Impacting Public Policy and the National Association of Women Business Owners in support of repeal.

But claims that the estate tax burdens women business owners are misleading. The great majority of all businesses fall below the taxable level (see sidebar). Relatively few businesses of any kind face the tax, and because women-owned (and minority-owned) businesses are smaller than average, they are affected even more rarely. As for the argument that women outlive men, the only families subject to the tax are those who own assets at least 20 times greater than the net worth of the median family. Therefore few widows lose any inheritance to the estate tax. And those who do are among the wealthiest 2% of households, not hard luck cases. On the other hand, women—and people of color—benefit disproportionately from social programs (including small business loans and education spending) funded by the tax.

Anti-estate tax groups have similarly put forward minority business groups, such as the Hispanic Business Roundtable and the National Black Chamber of Commerce, as visible allies. Frank Blethen enlists minority-owned newspapers in opposing the tax. He tells readers of the www.deathtax.com newsletter that it is important to "educate" members of Congress that the estate tax is "a minority and female-owned business issue and an environmental issue."

In April 2001, billionaire Robert Johnson of Black Entertainment Television and a group of other African-American business people ran ads in the New York Times and the Washington Post. Johnson invoked race in his ads, claiming to speak for African Americans broadly. The ads asserted that the estate tax unfairly takes wealth away from the black community and that repeal would help African Americans gain economic power. Although there are no statistics available on the number of African Americans subject to the estate tax, African Americans are clearly far less likely than white people to inherit fortunes large enough to face taxation. The median net worth for African-American households (excluding homeownership) is $1,200, compared to $37,600 for white households. (The median Hispanic household is lower still, with zero net worth.) One in four African-American households own no positive wealth at all, compared with one in seven white households. And there are only two African Americans on the Forbes 400: Oprah Winfrey and Robert Johnson himself.

Nevertheless, President Bush moved quickly to quote Johnson in his speech to the Council of Mayors, saying "as Robert Johnson of Black Entertainment Television argues, the death tax...weighs heavily on minorities."

Soon after, Bush tried to convince the members of the National Council of La Raza, a major Latino advocacy group, to join him in supporting estate tax repeal. Bush described a Mexican-American taco-shop owner who said he wanted "to get rid of the death tax so I can pass my business from one generation to the next." It turned out, as even the Wall Street Journal noted, the taco shop Bush described was valued at $300,000, far below the over $1 million exemption the current law allows owners of businesses. George W. got it wrong. The taco shop would pass to heirs untaxed, just as the vast majority of small businesses do.

Like the allegations about small farms and family enterprises, pro-repeal forces repeat these allegations about women and people of color over and over through their media work and lobbying efforts. A principal tactic of the campaign has been to get the minnows to front for the whales.

But the truth is, few or no folks are losing their taco shops—or their farms—to the estate tax. In fact, in 1998, only 776 estates where family-owned business assets represented over half the value of the estate were "taxable" under estate tax rules, out of 47,482 total taxable estates, and 2.3 million individual deaths. So the great majority of estates taxed under the estate tax are not estates built on family-owned businesses and farms, but other forms accumulated wealth—stock investments, nonproductive assets, fourth homes, art collections, luxury items, etc.

All or Nothing Repeal
The architects of the repeal effort are zealots. They advocate nothing short of complete repeal and consistently oppose any reform or compromise. They understand that partial reform will not benefit the principal patrons of the repeal effort—the very wealthy interests who bankroll the campaign would not be covered by exemptions. (Their wealth is so great it would exceed even a very high cap.)

But this strategy may backfire when the groups that have bought into the misrepresentations realize that, rather than family farmers or small business owners, the vast majority of whom will never owe any estate tax, the windfall of estate tax repeal will go to the heirs and heiresses of the country's 3,000 wealthiest estates. This elite group will inherit billions in appreciated stock and real estate, enormous capital gains that have never been subject to taxation. The Wall Street Journal has estimated that George W. Bush's heirs alone would stand to gain from $6 to $12 million if the tax is repealed, assuming his estate remains the same size up to his death. Cheney's heirs would save between $10 and $45 million. And the heirs of the Gallos and Marses stand to make even more.

Conclusion
In the bid to eliminate the estate tax, anti-repeal forces have used slick advertising, explicit falsehoods and deception. But we should not have to endure the triple whammy of lost federal revenue, state revenue and charitable giving in order to give a handful of millionaires and billionaires a tax break, no matter how well disguised in a misinformation campaign.

With Republicans back in control of the U.S. Senate, the push is already on to permanently repeal the federal estate tax. For now, even with their new majority and Democratic party supporters, repeal proponents fall short of the 60 votes they need under budget rules that expire in April 2003. If the budget rules are not extended, however, they will be able to advance their anti-estate tax agenda with only a simple majority. This juggernaut can be stopped, but time is running out.

Rosie Hunter is a researcher with United for a Fair Economy in Boston. Chuck Collins is the Program Director at United for a Fair Economy and co-author, with William H. Gates, Sr., of Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes (Beacon Press, January 2003). For information on how to get involved in efforts to preserve the estate tax, go to www.faireconomy.org.

Balancing State Budgets: Who Will Pay?
How can states solve their fiscal dilemmas? By shifting the tax burden onto the well-to-do.

This article is from the March/April 2002 issue of Dollars & Sense magazine.

In this time of war and recession, state budgets across the country are plunging into a sea of red ink. Who will be making the greatest sacrifice? Many state legislatures have already begun to answer that question, by reflexively cutting health, education, and other social programs aimed at those in need.

But the burden doesn't have to fall on low-income people. With the tax season approaching, the alternative is obvious: increase revenue by shifting the tax burden to those who can afford to pay.

In a dizzying turnabout from the flush years of the late 1990s, at least 43 states are anticipating that their 2002 revenues will fall below what they budgeted, according to the National Conference of State Legislatures. The National Governors Association is forecasting state deficits totaling $50 billion and rising. The California legislature is staring down a $12 billion revenue shortfall, and New York, Washington, and Massachusetts contemplate deficits of over $2 billion each in the next two years.

While the immediate cause of the fiscal distress is the drop in revenue resulting from the recession, there are other contributing factors as well. Between 1993 and 1999, states cut taxes by $35 billion, in part because of sustained organizing by anti-tax and limited-government groups and politicians eager to cut taxes. Along with implementing a wide range of cuts in income and sales taxes, politicians offered generous tax incentives and subsidies to corporations.

But even before the recession—and even before the notorious Bush tax cut—state budgets were already in trouble, facing structural deficits (deficits not tied to economic conditions) that were masked by the late 1990s revenue boom. For example, states have been losing sales tax revenue for the last ten years. On average, states depend on sales taxes for about 40% of their revenue. But in the past decade, internet sales have skyrocketed, and state economies have become more service-oriented. Since most sales taxes are levied on goods (buckets, cars, ovens) but not services (lawyers, stockbrokers, office cleaners), sales tax revenue has steadily declined.

States are also facing runaway Medicaid expenses, the fastest growing line item in most state budgets. In addition, many states took on new obligations to ensure that more children have health insurance. In 2001, Medicaid expenses rose by 14%, primarily as the result of escalating prescription drug prices and rising overall medical costs.

Another factor clouding the fiscal future of states is federal tax cuts. The Bush tax cut, passed in June 2001, will begin to slice into state revenue this year. For example, even though the federal estate tax won't be fully repealed until 2010, the majority of states will lose all of their "pick-up" revenue by 2004. (Instead of states having their own estate taxes, they "piggyback" on the federal tax and share in its proceeds.) This will be a big blow to states like California, which will lose $1 billion a year in revenue, and New Hampshire, which will lose 4% of its annual revenue.

Even as the federal government pulls the revenue carpet out from under states, it is simultaneously shifting more expenses to the states. The federal government still provides a significant amount of revenue to states, in the form of block grants, but the overall pie is shrinking. As a result, state legislatures now have more responsibility for children's health, mass transit, highways, and welfare reform. New federal mandates for education testing and national security also loom on the horizon, and states will have to pick up the tab.

So what's a state to do? Unlike the federal government, every state (except Vermont) is required by its state constitution to have a balanced budget. And because so many of the problems in state budgets are structural, even an economic rebound won't pull the states out of the red in the short term.

Some states did plan for lean years and natural disasters by setting aside money from budget surpluses for "rainy-day" reserve funds during the 1990s. These rainy-day funds grew from $7 billion in 1995 to $23 billion in 2001. But a fiscal monsoon has hit, and the rapidly declining fortunes of most states will quickly deplete whatever reserves there might be.

That leaves states with two ways to balance their budgets: cut programs or raise taxes.

In almost every state in the land, major budget cuts are looming. Many states have immediately turned to cuts in spending for Medicaid services that are not federally mandated, such as dental benefits and health care for immigrant mothers. Others are slowing or cutting education spending and beginning to cut human services programs for the most disadvantaged, including poor children, new immigrants, and people with mental and physical disabilities.

Of course, as unemployment rises, this is exactly the moment when these safety nets are needed most. Yet many states would rather trim their nets than reevaluate some of the tax cuts and giveaways of the last decade. In this pervasive anti-tax climate, discussions of raising revenue are usually the last consideration—and many politicians facing reelection will be wary of raising taxes in an election year.

Only a handful of states are dealing with this new fiscal reality by delaying anticipated tax cuts. Last November in Florida, a GOP-controlled legislature postponed by 18 months a scheduled phase-out of the "intangible property tax," saving $128 million. (The tax applies to "intangibles" like stocks, as opposed to real estate or goods.) And in January 2002, the state of Virginia, facing a $892 million shortfall, voted to freeze a phase-out of the sales tax on food.

So far, only one state has had the temerity to actually raise taxes. North Carolina temporarily increased its sales tax—and introduced a new state income tax rate for the top 2% of taxpayers. The Indiana legislature is considering a tax increase on cigarettes, and a few other states may adopt tax increases as well.

But these actions do not mean that the tax burden is being distributed more fairly across class and income lines. For example, sales taxes—on food, clothing, and other items—fall disproportionately on poor and low-income people. Graduated income taxes, on the other hand, fall more heavily on the well-to-do.

This means that activists need to fight for tax equity, not just more taxes. And they are. But they have a tough battle on their hands, because most politicians aren't willing to support a shift in the tax burden from the poor to the rich.

For example, in 2000, Massachusetts voters approved an initiative to cut the state's income tax rate, assured at the time that this would not lead to cuts in services. Governor Jane Swift defiantly declared that the "tax cut would stand," even as the referendum's original business backers urged her in January 2002 to freeze its implementation in the face of a $2 billion shortfall projected for 2003. In response to the dire fiscal situation, a Massachusetts coalition of labor and community organizations is pressing for the freeze, along with reinstatement of a state capital gains tax.

A similar campaign is developing in Washington State. Washington, which has no state income tax, has one of the most regressive tax systems in the nation. The lowest-income fifth of taxpayers pay over 15% of their income in state and local taxes (such as sales and property taxes), while the top 1% of households pay less than 5% of their income. The Washington Association of Churches has convened a broad-based coalition of labor, religious, and community groups to address both the immediate budget crisis and the long-term tax equity problems that result from not having a state income tax. Its proposals for easing the short-term crunch include eliminating corporate tax loopholes. The coalition is also mounting a statewide educational campaign about the budget crisis —and about how five tax cuts over the last decade have gutted state revenue.

In Texas, a new coalition, ProTex, has also decided to make tax fairness a major focus on its work. Like Washington State, Texas has no income tax, and its tax burden is highly regressive. ProTex has launched an educational campaign to lay the groundwork for next year's legislative session. Elsewhere, Tennesseans for Tax Fairness are working to stop expansion of a state sales tax, which includes a tax on food. As an alternative, they have joined up with their Republican governor to call for the establishment of a state income tax.

These statewide organizations are not simply working to plug a fiscal gap. They are also mobilizing to make sure that, during this time of war and recession, it is not the most vulnerable and disadvantaged who will be paying the price.

Chuck Collins is Program Director of United for a Fair Economy in Boston, Massachusetts www.faireconomy.org, co-author of Economic Apartheid in America: A Primer on Economic Inequality and Insecurity (New Press, 2000), and a member of the Dollars & Sense collective.

Resources: National Association of Governors; National Conference of State Legislatures; Center on Budget and Policy Priorities (and State Fiscal Analysis Initiative) www.cbpp.org.

The Wealth Gap Widens

Dollars and Sense Magazine, Issue #225, September-October 1999

During the 1920s, the wealthy accumulated such exorbitant stocks of cash, they couldn’t spend it all. Instead, they played the stock market, fueling a rapid run-up in stock prices. Lower and middle income households, on the other hand, lacked wealth enough to meet their needs and were forced to borrow heavily.

Many historians believe that this combination of growing personal debt and a widening wealth gap destabilized the economy and precipitated the Great Depression. A similar fault line underlies today’s economy.

While the media trumpets rising economic growth and soaring Dow Jones, signs are emerging that the current boom, like that of the 1920s, is founded on vast inequities of wealth and is financed by growing consumer debt.

From 1983 to 1998, stock prices rose 13-fold, so that $100 invested in stocks in 1983 would be worth $1300 today. Conventional wisdom has it that everyone benefits from a rising market. After all, nearly half the population now owns some stocks, a much higher proportion than two decades ago.

However, very few have sizable stock holdings. In 1995, the most recent year for which detailed data is available, nearly three-quarters of stock-holders held less than $5,000 worth, including stock in retirement plans and mutual funds. Wealth in the United States is now as maldistributed as it was in 1929. Financial assets like stocks and bonds remain concentrated in relatively few hands, with the richest 10% of the population owning 88% of stocks and 90% of bonds. The personal wealth of Bill Gates alone exceeds the combined holdings of 40% of the U.S. population. Consequently, when the stock market climbs, a relatively few wealthy households reap most of the gains.

Even among the top 10%, wealth is highly concentrated. A mere 1% of households, each with at least $2.4 million in net worth (assets minus debts), now own 40% of the nation’s wealth, twice the share they claimed two decades ago. According to economist Edward Wolff of New York University, the concentration of wealth is even more dizzying if home equity is taken out of the equation (wealth in housing is the most widely-dispersed of assets). Excluding equity in homes, the richest 1/2 of 1% together (about 450,000 households) now own 42% of the nation’s financial wealth.

Thanks to a combination of rising profits, high real interest rates, skyrocketing CEO pay, and a booming stock market, the inflation-adjusted net worth of the richest 1% swelled by 17%, between 1983 and 1995. For others, the boom has been a bust. Thanks to falling wages, low savings levels to begin with, and rapidly rising personal debts, the poorest 40% of households lost an astounding 80% of their net worth.

While the rich racked up gains measured in the millions, the 40% at the bottom saw their average net worth shrink from $4,400 to a meager $900. And despite endless media cheerleading about the rising Dow making millionaires of the middle-class, the middle fifth of American households have actually lost 11% of their net worth since 1983.

Falling Wages increase the Wealth Gap

Behind the wealth gap lurks the wage gap, the fact that wages have fallen short of inflation for the past two decades. Although wages rose in 1997 and 1998, real weekly earnings for average workers are still lower than they were in the 1970s. Had wages risen at the same rate as productivity, hourly workers would today earn an additional $5.33 an hour or $11,000 a year — that could be used to purchase assets.

Instead, households are borrowing heavily to make up for stagnant wages. The U.S. savings rate — the percentage of personal income not spent each year — is less than zero, meaning that the typical U.S. household spends more than it earns. Debt service now eats up 17% of consumer income, a heavy and potentially insupportable burden. As a result, nearly one in five households has negative net worth, and bankruptcy filings have doubled since 1990.

Consumer advocates also worry about the large numbers of homeowners taking out home-equity loans on the basis of what may be speculative increases in their homes’ value. In an economic downturn, with a rise in unemployment, home prices could drop precipitously, putting more middle-class households into bankruptcy and sparking a wave of home foreclosures.

The Racial Wealth Gap

The wealth gap is particularly stark for blacks and Latinos. In 1995, the median black household had a net worth of just $7,400, (compared to $61,000 for whites). Median net worth excluding home equity was only $200 for blacks (compared to $18,000 for whites). Nearly one in three black households had zero or negative wealth. Latino households are even worse off — their median net worth was $5,000 including home equity and zero otherwise. Half the Latino population in the United States have more debts than assets.

The racial wealth gap reflects the reality that wealth accumulation occurs over generations, as parents pass on assets to their children in the form of homeownership, savings and estates. Past and present racial discrimination in asset-building, including slavery, Jim Crow laws, discriminatory employment, insurance and bank lending practices, have kept many people of color from getting on the asset-building train.

The maldistribution of wealth in the United States jeopardizes both our economy and our democracy. To close the wealth gap, we need policies that raise wages and equalize earnings. Higher minimum wages and stronger state and local living wage ordinances are a first step. But workers aren’t likely to share in growth and productivity gains without increased unionization and tougher state regulations that limit overtime and outsourcing.

The Wealth Gap: A Political Issue

With personal savings rates at an all-time low and with the proportion of workers covered by private pension plans declining, it is likely that many Americans will retire with little or no personal savings. In response to public anxiety about the asset gap, a few Democrats have made modest efforts to address the issue.

President Clinton in January proposed expanding individual savings through the establishment of "USA Accounts." These would function like Individual Retirement Accounts except that lower-income taxpayers would receive federal matching funds for any savings that they put aside. Funds could be withdrawn before retirement for asset-building activities, like purchasing a home.

Senator Robert Kerrey (D-NE) introduced legislation to create what he calls "KidSave Accounts." The federal government, under this plan, would provide $3000 to every child, which, if invested at 7% per year (an ambitious goal) could increase in value to $175,000 by age 65. Funds would be available for retirement and would, hopefully, reduce the numbers of households with zero net worth.

Two Yale professors, Anne Alstott and Bruce Ackerman, proposed a more ambitious asset-building program in their book, The Stakeholder Society. Under this scheme, each American upon reaching his or her 20s, would receive $80,000 — a "stake" to invest in business start-ups, education, or other asset-building activities. Financed initially by progressive taxation, the idea is to level the wealth-building playing field, though $80,000 is still a far cry from the $100 billion that Bill Gates’ heirs stand to inherit.

These proposals, with their focus on individual security and market-based solutions, fail to address the political and economic dangers of the over-concentration of wealth. Moreover, they are offered in the context of privatizing social security and dismantling social safety nets. Progressive reforms must address those structures of the economy that foster great inequality rather than shoehorning people into individual wealth-building schemes. A bolder program would include wealth taxation, fairer income taxation, broader worker ownership, and the accumulation of public and community-owned assets. n

Resources: Chuck Collins, Holly Sklar and Betsy Leondar-Wright, Shifting Fortunes: The Perils of the American Wealth Gap. To order, call 877-JOIN-UFE.

Chuck Collins is codirector of United for a Fair Economy in Boston. He is coauthor with Holly Sklar and Betsy Leondar-Wright of Shifting Fortunes: The Perils of the American Wealth Gap.

Issue #225, September-October 1999