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Wealth Gap - Research Paper Example

7 pages
1850 words
Vanderbilt University
Type of paper: 
Research paper
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The existence of evidence of the inequality of wealth in America is under study by various scholars seeking to understand and elaborate the phenomenon. The increasing concentration of wealth in the country is alarming and characterized to that witnessed in the gilded age (Zucman 40-44). According to data released in the year 2012, the one percent at the top is in ownership of 42 percent of the wealth of the United States an increase from 25 percent that was witnessed in 1970.

To enable the comparison of wealth distribution across various nations, it is essential that the definition of wealth is conventional. Wealth is the market value of the assets possessed by various household, inclusive of their net debts at a particular time (Zucman 40-44). Assets, as defined by the national systems accounts standards, include the financial and non-financial assets that the owners can manipulate to obtain economic benefits. Wealth is inclusive of pensions that could be for retirement, pension funds, and insurance. In exception, wealth excludes social security, and the projected government transfers (Zucman 40-44). The transfers are not included since it is difficult to analyze them since they do not have market prices that are observable. Additionally, human capital is significantly excluded since it does not have a defined market price.

The definition of wealth, therefore, enables better research on the concentration of wealth incorporating various sources. An ideal source of the information would be the declarations of individual taxes for a population including truthful and extensive reports by foreign and domestic financial institutions (Zucman 40-44). However, the sources are not precise and perfect. Countries including Spain, France, Norway, Netherlands and Switzerland impose direct taxes on wealth that aids in the generation of essential wealth data. Data from Norway is ranked among those of highest quality as there is an extensive collection of information for all individuals (Zucman 40-44). Denmark is exceptional since the country stopped the collection of wealth taxes in 1997 but information of wealth is still collected.

Wealth can be estimated indirectly with other information on taxes. Two approaches exist. Firstly, inheritance and estates returns on taxes provide the data about the wealth of an individual at their death. The sources can enable the analysis of the distribution of an individuals wealth across the living population by incorporating the mortality multiplier that was first used after the world war by the British administration (Zucman 40-44). Secondly, wealth estimation can be done using the returns of income tax of individuals, capitalizing on the dividends, rents, interests and other capital income forms that are professed on such returns.

In 2013, the richest households in the United States comprising 10 percent received approximately 50 percent of all the countrys income and owned 75 percent of the countrys wealth (Kuhn, Schularick and Steins 1). The rise in inequality since the 20th century has become a major subject for debate. Conservative organizations and politicians elaborate that the richest people in America pay the majority of taxes. For instance, the 20 percent of Americans at the top pay 67 percent of the income tax in the country and earn 53 percent of the United States income (Roos 1).

From the detailed income taxes, and balance sheets of financial accounts, Zucman, 40-44 incorporated the technique of capitalization for the estimation of the distribution of wealth in the U.S annually since 1913. Inequality in wealth in a population can be studied using surveys. The consumer finances survey organization in the United States has the triennial information between 1989 and 2013. Wealth surveys were led to a new approach to the analysis of wealth using comparative studies that incorporate wealth distribution from the bottom to the top inclusive of entities with net negative wealth.

The survey studies are essential since they incorporate socio-demographic detailed information and questionnaires. The surveys allow the researchers to measure a wider array of assets for the population inclusive of exempted tax assets and the assets that are not included in tax data. The wealth distribution of the U.S since the great depression to the late 1970s exhibited democratization shown by a U-shaped progression (Zucman 40-44). The trend after 1970 inverted and the share of the wealth owned by households at 0.1 percent increased from 7 percent to 22 percent in 2012. Recent data sources show that the 0.1 percent households are an average 160,000 and have $20 million net assets. The graph 1 below shows the distribution and characterizes it to be similar to that witnessed in the 1920s during the inherited fortunes era by the robbers of the Gilded Age at the Great Gatsby.

Image from Zucman, Gabriel. "Wealth Inequality." Pathways The Poverty and Inequality Report 2016 (2016): 40-44. Web. 3 Dec. 2017.

Recently, only a population fraction has experienced an increase in the share of wealth. The share of the wealth of the top 0.1 increased rapidly while that of 0.9 did not increase at all. The individuals that are wealthy but not incorporated in the 1 percent comprising 10 percent experienced a decrease in their wealth share (Zucman 40-44). In a nutshell, the fortunes at $20 million grew at a rapid pace in comparison to the smaller fortune digits.

Also, the wealth trends witnessed lead to the erosion of wealth among the middle-class individuals and the poor. The erosion of wealth is the opposite of the perception by economists that the middle-class population contribute to key structural changes in the economy of the United States through pension developments and the increase in home ownership (Zucman 40-44). The second figure shows there was an increase in the wealth distribution of the bottom ninety percent from 15 percent to 36 percent between 1920 and 1980. However, it then declined massively and data from recent sources show that population owns only 23 percent of the total wealth of the U.S.

Image from Zucman, Gabriel. "Wealth Inequality." Pathways The Poverty and Inequality Report 2016 (2016): 40-44. Web. 3 Dec. 2017.

In a comparison to the countries that provide the most comprehensive data, Norway has better wealth distribution in comparison to the U.S. In both of the countries, the bottom 50 percent of the population distributions does not own a lot of wealth as shown in figure 3 below (Zucman 40-44). Their assets and debts are almost equal and the trend is experienced in the majority of the countries in the world. However, at the top, the distribution in Norway is different from the U.S. The middle-class population of Norway owns almost half of all the wealth in the country compared to 20.3 percent ownership in the case of the U.S.

Image from Zucman, Gabriel. "Wealth Inequality." Pathways The Poverty and Inequality Report 2016 (2016): 40-44. Web. 3 Dec. 2017.

In the U.S. population of 0.1 at the top owns as much as the 90 percent at the bottom. However, in Norway the 0.1 population distribution owns a limited 8 percent that is smaller compared to the U.S. Both in Norway and the U.S the top shares in wealth in the countries is underestimated (Zucman 40-44). This is because the tax information does not incorporate the wealth held by these individuals in their offshore havens.

The emergence of the massive inequality in wealth experienced in America can be elaborated by the concerns of dynamics of change in the country. Economists in the early 1920s had observed the trend and raised alarms on its existence (Zucman 40-44). Fisher Irving the president of the economic association of America argues that income concentration was becoming similar to that experienced in Europe. He proposed for steep progressivity in taxes to counter the emerging inequality trend.

In America, it is evident that the rich are constantly getting richer and the middle class and the poor are increasingly lagging behind. 400 of the richest individuals in the country make more wealth than the bottom people comprising 150 million (Hargreaves 1). The gap in income in the country manifests itself in various ways. Social scientists elaborate that the presence of inequality in a society has negative implications. Social stability measures including non-participation of voters and crime rates have been decreasing in the previous decades.

Studies and surveys show that majority of the America people seek equality. Approximately two-thirds of the population view inequality as a major problem in the country. Strategies leading to equality are inclusive of increasing the minimum wage, having better training for employment seekers and taxing the wealthiest group of people (Hargreaves 1). Other Americans perceive the inequality as a consequence of the free market economy. The theory of the free market has enabled millions of people to come out of poverty and boost their living standards.

Inequality affects various aspects of the society.


Paychecks are not the only elements that are unequal in the population. Studies show that rich people have a longer lifespan in comparison to poor people. In the 1980s Americans that are wealthy were able to live an average 2.9 years longer in comparison to the poor shown by data from the department of human services and health (Hargreaves 1). The poor and wealthy were defined as the bottom and top 10 percent in relation to different measures of the economy. However from 1990 rich people were able to live 4.4 years longer and the gap has continued to increase over time (Hargreaves 1). The disparity that is constantly increasing results from social and material living conditions including medical care access by people.


The American citizens born in the 1960s have disparities in access to education broken down as follows. 35 percent of individuals from rich families had access to college while for the poor is 5 percent as shown by the Sage and Russell foundation who defined the poor and rich as the bottom and top 25 percent according to incomes. Later in 1980, the number of the children from rich households joining college increased by 20 percent while that of the poor by 3 percent (Hargreaves 1). The trend perpetuates the income cycle of inequality as a cumulative number of the employment opportunities for middle-class favor individuals that are more educated. Increase in inequality in income directly correlates to the factors of access to education as shown.

Economic Growth

The extension of the income gap leads to a suppression of the creation of jobs and economic growth. The theory is made on the basis of studies that show that the middle-class individuals spend their income more than the rich. When the feelings and income of the middle class decline the economic growth of the country is affected. Since the end of the recession, the growth in the United States is at 2.2 percent that is lower compared to that of 3.3 average after the Great Depression (Hargreaves 1).

Economist Joseph Stiglitz elaborated that the middle class is increasingly becoming weak and cannot support the spending of consumers that has always driven the country's economy. Inequality is at its peak will require recession that takes a long period of time (Hargreaves 1). The American dream defined as having a good life after hard work is dying progressively.

Inequality and Inefficiency

A common claim on inequality exists elaborating that it is inefficient since it shrinks the scope of the economic pie. This elaboration is attributed to the criterion by Kaldor Hicks. If the 1 percent at the top ear an extra $1 leads to a reduction in the income by the poor and the middle-class earners by $2 and hence citizens will perceive it as an issue that should be addressed (Mankiw 3-9...

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