Income and Wealth Disparity Measures--are the richest of the rich hiding their wealth abroad?

In the US today, the maldistribution of resources continues unabated.  The wealthy take in a larger and larger share of the income, while the rest stagnate or sink into poverty. See, e.g.,  Dave Gilson & Carolyn Perot, It’s the Inequality, Stupid, Mother Jones (March/April 2011) (a great set of charts illustrating the income and wealth disparity in America).   As studies by Piketty and Saez (mentioned here in earlier posts on income inequality) indicate, the income for the top 1 percent more than doubled between 1980 and 2010.  See Piketty & Saez, Income Inequality in the United States, 1913-1998, 118 Quarterly Journal of Economics 1-39 (2003) (tables updated to 2010 in excel format, March 2012, and available at Saez website, here).  Average incomes for the very top 0.01 percent grew at an even faster pace–in 2010 they were more than 4 times what they were in 1980, having grown to an average of $23.8 million annually!. The Great Recession “has hit bottom 90% incomes much harder than the 2001 recession” while the top decile “remained virtually constant.”   Saez, Striking it Richer: The Evolution of Top Incomes in the United States (Updated with 2009 and 2010 estimates) (Mar. 2, 2012).    

What was going on in this period?  The extreme anti-government, pro-elite right wing and its Friedmania economic ideology were the essential driving forces.  Reaganomics became the dominant creed–the more it actually failed, the more its adherents favored doubling down on the medicine of privatization of essential government functions; deregulation of banks and other important quasi government functions, militarization (including huge increases in military expenditures and fabricated rationales for going to war to create a justification for continuing them; and the related goals of cutting earned benefit programs for the vast majority of ordinary folk accompanied by decreasing tax revenues through tax cuts for the rich, pushing so-called “free trade agreements” that furthered the multinationals’ globalization goal and allowed them to take their active businesses abroad without paying any penalty, with the result of offshoring jobs and the elite’s resources. CEOs decided they no longer needed to feel bad about getting their buddies on the boards to pay them obscene salaries at 3 or 4 hundred times what an ordinary worker made while workers were left without any of the productivity gains that their labor provided.  Banksters took over the economy, combining reckless speculation with offshoring, tax shelters, and computerized trading that insured they could trade a step ahead to profit off their customers’ orders.  All of these ills that led us to the financial crisis and the Great Recession, and the lowered economic expectations of ordinary folk in America can be traced to the so-called “reaganomics revolution” and the hawking by purported think tanks of the free-trade ideology.

Saez points out that the recovery from the Great Recession was uneven in the same way that the decades since Nixon have been.  While the botton 99% saw an increase in their incomes of 0.2% by the end of 2010, the top 1% grew by 11.6%!  Corporate profits and dividends grew strongly in 2011, while wages and salary accruals grew “only modestly” and unemployment stayed very high.  Id.

The top 1% clearly control most of America’s assets.  See, e.g., the following chart from Dave Gilson, Who are the 1 Percent?, MOther Jones (October 2011.

  According to the Levy Institute, which does considerable work tracking wealth, there has been more of a gain in wealth at the top than among the vast majority of Americans.  See Edward Wolff, Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze–an Update to 2007, Levy Economics Institute (March 2010). 

From 1989 to 1998, mean wealth continued to surge while median net worth rose at a rather anemic pace. Indeed, the only segment of the population that experienced large gains in wealth from 1983 to 1998 was the richest 20 percent of households.

At the same time, however, it doesn’t appear–at least at first glance–that the wealth gap has been consistently tracking the income gap. Wolff notes that the reasons are not clear for why there was not as much an increase in net worth inequality as there was in income inequality between 2004 and 2007.  Id. at  13.    But clearly, between 1983 and 2007, those at the top gained the most.

[T]he largest gains in relative terms were made by the wealthiest households.  Thye top 1 percent saw their average wealth (in 2007 dollars) rise by over 9 million dollars or by 103 percent.  The remaining part of the top 1quintile experienced increases from 81 to 142 percent and the fourth quintile by 71 percent.  While the middle quintile gained 50 percent, the poorest 40 percent lost 63 percent!  By 2007, their average wealth had fallen to $2,200.  Id. at 13.

[T]he top quintile collectively accounted for 89 percent of the total growth in wealth, while the bottom 80 percent accounted for [only] 11 percent.  Id at 14.

A blog (toomuch online) looks at these statistics, and the CRS study on wealth distribution [see Linda Levine, An Analysis of the Distribution of Wealth Across Households, 1989-2010, Congressional Research Service (July 17, 2012) (based on Federal Reserve data)] and asks why wealth inequality appears to grow significantly less than income inequality. 

The CRS study shows “no significant expansion in the gap between the wealth of the awesomely affluent and the rest of America.”  Mitt’s Offshore Shenanigans: The Bigger Story, Toomuchonline.org (July 21, 2012), though the top 10% continue to own almost 75% of the total wealth and “net worth has become more concentrated in recent decades.”  CRS study, above, at 4.

The share of wealth held by the top 10% of wealth owners grew from 67.2% in 1989 to 74.5% in 2010. Declines occurred in the remaining 90% of households. The share of total net worth owned by households in the 50th to 90th percentile of the wealth distribution fell from 29.9% in 1989 to 24.3% in 2010, and the share of households in the bottom half fell from 3.0% to 1.1%.  CRS study, at 4.

How could anyone have thought it would be otherwise?  After all, millionaires with ample savings fared better than ordinary folk who lost their jobs and blew through their meager savings.  Clearly, these super-wealthy do not spend all their increased income.  It is extraordinarily hard to spend twenty-three million dollars annually year after year.  

 So what accounts for the fact that we don’t see evidence of a huge increase in wealth disparity paralleling the huge increase in income disparity?

Maybe the wealth of the super-wealthy isn’t being counted in the CRS study?  Sure enough, says Too Mucy, one group isn’t included at all–the wealth of the Forbes magazine list of the richest 400 in America, which in 2010 was $1.37 trillion (not chicken feed). See  Mitt’s Offshore Shenanigans (referencing CNN Money 2010 story referring to Forbes richest 400).  And it appears that much of the wealth of the wealthiest elite may not be counted in those statistics because it is being hidden offshore.  See, e.g., Stewart, 13 trillion [UK Pound] hoard hidden from taxman by global elite, The Guardian (July 21, 2012).

A global super-rich elite has exploited gaps in cross-border tax rules to hide an extraordinary £13 trillion ($21tn) of wealth offshore – as much as the American and Japanese GDPs put together – according to research commissioned by the campaign group Tax Justice Network.

James Henry, former chief economist at consultancy McKinsey and an expert on tax havens, has compiled the most detailed estimates yet of the size of the offshore economy in a new report, The Price of Offshore Revisited, released exclusively to the Observer.

He shows that at least £13tn – perhaps up to £20tn – has leaked out of scores of countries into secretive jurisdictions such as Switzerland and the Cayman Islands with the help of private banks, which vie to attract the assets of so-called high net-worth individuals. Their wealth is, as Henry puts it, “protected by a highly paid, industrious bevy of professional enablers in the private banking, legal, accounting and investment industries taking advantage of the increasingly borderless, frictionless global economy“. According to Henry’s research, the top 10 private banks, which include UBS and Credit Suisse in Switzerland, as well as the US investment bank Goldman Sachs, managed more than £4tn in 2010, a sharp rise from £1.5tn five years earlier.

Let’s recap.  Income inequality has grown, so that those at the top of the distribution average in one year what most Americans don’t see in a lifetime.  Wealth disparity has grown, but official studies like the CRS study don’t seem to show it growing quite as fast as income inequality.  However, those studies are based on Federal Reserve data, which are understandably incomplete.  They don’t count the richest 400, and they don’t count assets that may be hidden in offshore jurisdictions where they have been protected by banking secrecy.

If we understand the way disparity has grown during the last decades of policies that have heavily favored the rich, then we have the basis for a conversation about what kinds of policies make sense–and specifically, what kinds of tax policies make sense.  The philosophy of demoncratic egalitarianism suggests that those policies should strive to reduce the gap between classes rather than supporting increasing the gap, based on the recognition that large income and wealth gaps among citizens destabilizes democracy and pushes towards oligarchic/plutocratic forms of government.  Estate taxes that recognize death as the appropriate time to tax the ultra wealthy who generally can avoid taxes in life are a start.  Increasingly higher rates on top incomes so that the top rate continues to increase proportionately to the outside incomes of the super-elite would be another.  Cracking down on offshore assets–through elimination of the idea that a company in the Caymans is anything other than a sham–would be another important step.