Tags: wealth | imbalance | hurting | economy

Wealth Imbalance Is Hurting the Future of Our Economy

By    |   Friday, 19 Oct 2012 07:42 AM

When more than one-third of a nation’s wealth is owned by 1 percent of the population, an economy suffers. This is the case with the United States. According to a study performed by the University of California, Santa Cruz, the top 1 percent of U.S. households owned 35.4 percent of all net worth in 2010. This was up 50 percent since 1979 when their share was 20.5 percent.

From 1980 to 2007, the share of income for the top 1 percent (including capital gains) more than doubled, from 10 percent to 23.5 percent, while their share of taxes rose slightly more than twofold, from 19 percent to 40 percent. Following the financial implosion, their share of income and taxes fell to 18.2 percent and 36.7 percent, respectively. These data are a compilation from The World Top Income Database and The Tax Foundation.

This extraordinary wealth accumulation has eroded the economic and financial infrastructure of the United States. During this period, the economic multiplier (monetary velocity) fell more than 50 percent, according to the Federal Reserve Board. This means each dollar spent generated 50 percent less additional income.

This dynamic is a result of inefficient resource allocation. In general, wealthy households consume a smaller proportion of their income, and their investment portfolio is weighted more heavily toward financial assets, not long-term business ventures. Financial assets are primarily zero-sum, speculative transactions that tend toward wealth transfer, not wealth creation. Direct entrepreneurial investment tends to increase employment and income more effectively and efficiently.

In a recent presidential debate, GOP presidential nominee Mitt Romney claimed that he could increase economic growth, help the poor and middle class and maintain the share of taxes paid by the top 5 percent of households at approximately 60 percent. To accomplish this, he might need to consider increasing the share of taxes paid by the top 1 percent, given their extraordinary wealth accumulation over the past 30 years.

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