Is the US middle class shrinking because households are moving up?
Core argument: The share of US households earning over $100,000 tripled from 9.7% in 1967 to 30.4% in 2018, while the share earning $35,000–$100,000 fell from 53.8% to 41.7%, according to Census data.
The US middle class is shrinking as households transition to higher income brackets, a trend highlighted by Census data showing a significant increase in high-income households. From 1967 to 2018, the share of households earning over $100,000 tripled from 9.7% to 30.4%, while middle-income households earning $35,000 to $100,000 decreased from 53.8% to 41.7%. This shift indicates upward mobility rather than a decline into lower-income categories. Despite media reports of stagnation, real median income for family households rose by 1.2% and for nonfamily households by 2.4% in 2018, both statistically significant. Additionally, real median income for all workers increased by 3.4%, underscoring a more optimistic economic narrative than often portrayed. The decline in average household size further distorts comparisons over time, with per-person income gains being more substantial than aggregate figures suggest.
Ed Comment: “It’s not the short-term reaction of billionaires that matters most, but the gradual long-term reaction of the economy. In the wake of higher payoffs (for more reasons than just taxes), the US gradually built an army of talented and properly trained risk-takers, who produced trillions of dollars of innovation, while Europe and Japan contributed shockingly little. There were also large spillover benefits to the US, which lead to a doubling of private sector non-automotive R&D relative to Europe, 25% more digitization, 50% faster productivity growth since 2000, and 30% more consumption per capita. It’s a gross understatement when Ip says"....No one knows exactly how would respond.” Is there really “little economic benefit to the unlimited tax-free growth of inherited wealth” when it redistributes and consumes income (i.e. future cash flows) that would otherwise be invested, and demotivates risk-takers to create more value than they can consume in their lifetime?”
Virtually all Democrats want to raise billionaires’ taxes, and it isn’t hard to see why. The ultra-rich already control near-record shares of the country’s wealth and income yet have had their taxes slashed, directly and indirectly, by President Trump, driving the budget deficit sharply higher.
But should they be taxed to the point that they are no longer billionaires? That’s a tougher case to make. In a 2016 book, economist Caroline Freund, now global director for trade at the World Bank, found that countries with a lot of billionaires per capita had higher incomes per capita. She also found a country’s share of the world’s billionaires, as compiled by Forbes, corresponded closely to its share of the world’s largest, most successful companies. While this doesn’t mean billionaires make an economy successful, it does show the two go hand in hand.
How a billionaire earns his or her fortune matters, of course. Some are “rent seekers,” meaning they skim off the productive efforts of others via corruption, royal prerogative or control of some valuable market or resource. That’s why Russia is an outlier in Ms. Freund’s research: lots of oligarchs, with not much economic benefit to show for it.
That, however, is rare in Western democracies, where the more important distinctions are between inherited and earned wealth. Ms. Freund says countries with less self-made and more inherited wealth do seem to grow more slowly, although the ranks of hereditary billionaires are shrinking while those of self-made billionaires are growing.
There is little economic benefit to the unlimited tax-free growth of inherited wealth. Democrats, and a few conservatives, have proposed personal, capital gains and estate tax changes to counter it.
By contrast a wealth tax, also embraced by presidential candidates Sen. Bernie Sanders (up to 8%) and billionaire Tom Steyer (1%), makes no distinction between when or how the wealth was acquired. It would hit not only Walmart Inc. founder Sam Walton’s children, but also future Sam Waltons; not just Bezos today, but Bezos when he became a billionaire in 1998 and Amazon sold just books and music.
No one knows exactly how billionaires would respond, but it seems certain they would, somehow. A recent study by Enrico Moretti, an economist at University of California, Berkeley and Daniel Wilson at the Federal Reserve Bank of San Francisco notes that billionaires were once largely insulated from state-level estate taxes by a federal credit. After the credit was eliminated in 2001, the number of billionaires in states with estate taxes fell 35% relative to states without. Whether the wealth was inherited or self-made didn’t seem to matter. In another study, the authors found that star scientists—the kind that power technology or biotech companies—tend to leave states with relatively higher personal or corporate income taxes.
Gabriel Zucman, an economist at the University of California, Berkeley said unlike a state tax, American billionaires couldn’t avoid Ms. Warren’s wealth tax, which he helped design, by moving, even abroad. And he said the tax wouldn’t deter entrepreneurs from taking risks and building companies, because they are not mainly motivated by money and taxes. Mr. Gates founded Microsoft, he noted, when corporate, personal and estate taxes were far higher than today. Nor would a 6% wealth tax matter much to someone like Facebook Inc. founder Mark Zuckerberg, whose wealth has grown 40% a year since 2008, he added. A wealth tax, he said, would mean the Forbes 400 would have more self-made billionaires like Mr. Zuckerberg and fewer hereditary billionaires.
But Mr. Zuckerberg’s returns are exceptional. For more typical billionaires, Ms. Warren’s taxes could easily eat up most if not all his or her returns. Founders would have to steadily sell off their holdings to pay their taxes, shrinking their stake. “To say you can’t have that wealth means you can’t own your company,” Ms. Freund said.
That’s a problem, she said: The founder is often a more successful and committed chief executive than an outsider. “They really, really care and need to have controlling interest to make decisions,” she said. Indeed, many billionaires use the wealth from one venture to start another: After selling Electronic Data Systems to General Motors, Ross Perot later used the proceeds to start Perot Systems. Mr. Bezos is selling Amazon shares to finance Blue Origin, his space company.
This isn’t a reason not to tax billionaires; it’s a reason to be careful about how it’s done.
FYI Greg Ip mentioned the new Moretti study we used in chapter, "....No one knows exactly how billionaires would respond, but it seems certain they would, somehow. A recent study by Enrico Moretti, an economist at University of California, Berkeley and Daniel Wilson at the Federal Reserve Bank of San Francisco notes that billionaires were once largely insulated from state-level estate taxes by a federal credit. After the credit was eliminated in 2001, the number of billionaires in states with estate taxes fell 35% relative to states without. Whether the wealth was inherited or self-made didn’t seem to matter.In another study, the authors found that star scientists—the kind that power technology or biotech companies—tend to leave states with relatively higher personal or corporate income taxes...."