Trillionaires

Posted by Bob Lord 

You have to consult Dictionary.com for the definition of trillionaire. Webster’s doesn’t recognize it as a word yet. But it will. Because before long America will have its first trillionaire. If you’re under 60, it likely will happen in your lifetime.

 In 1982, Forbes magazine published its first survey of the 400 wealthiest Americans. The wealthiest American was Daniel Ludwig, with a reported net worth of $2 Billion. Last year, Bill Gates topped the list at $66 Billion. That’s a 33-fold increase in America’s largest fortune over 30 years. But the increase could have been larger. By all appearances, Mr. Gates lost interest in accumulating wealth years ago. Had he not made tens of billions in charitable gifts since then and had his primary focus been wealth accumulation, he’d be over $100 Billion. And if we’re counting total family wealth, the Walton family already has reached twelve figures.

If the growth rate in our largest fortunes over the past thirty years continues unabated, we’ll see our first American trillionaire before 2040. In all likelihood, we’re actually closer to our first trillionaire than the 2012 Forbes survey indicates. As Forbes notes, the survey tends to undercount wealth. The $21 Trillion reportedly stashed away by the world’s super elite in tax havens likely is unaccounted for in the Forbes survey.

Remarkably, as we pass the milestones, $10 Billion, $50 Billion, soon $100 Billion, no alarm bells ring. Instead, we celebrate the expanding fortunes of the super-rich as we do athletes breaking sports records. Reaching $1 Trillion will be treated like hitting 73 home runs was before we knew Barry cheated to get there. With any luck, our first Trillion Dollar fortune also will be tainted by misdeeds of the achiever. Perhaps that will wake us from our slumber.

One Trillion Dollars is a mind-boggling fortune. It will buy every square foot of real estate in Manhattan. A trillionaire could take everyone on the planet out for a steak dinner at a nice restaurant (if there were a restaurant that could hold 7 billion people). One Trillion Dollars is the wealth of a million millionaires. In the hands of one individual or one family, One Trillion Dollars ($1,000,000,000,000) signifies a concentration of national wealth found only in sick economies. And that’s where we’re headed.

Even within the Forbes 400, wealth is concentrating. In 1982, Mr. Ludwig’s wealth was 27 times that of the 400^th wealthiest American. Last year, Mr. Gates’ wealth was 60 times that of the 400^th wealthiest American. This reflects the overall trend. Whichever level of wealth you choose (top 1%, top .1%, etc.), the gap between that level and the one immediately below it is expanding.

Is our concentration of wealth approaching a limit? Unlikely. Carlos Slim of Mexico has accumulated a fortune greater than any American in a country with far less aggregate wealth. Unfortunately, there’s ample room for the concentration of wealth in America to worsen, even room for trillionaires.

Why the astonishing concentration of wealth? Tax policy. In the words of Bill Clinton, it’s just arithmetic. The analysis starts with the four principal constraints on the accumulation of wealth: living expenses, taxes on income from labor (including employment taxes), taxes on income from capital, and inheritance taxes. The roles those constraints play changes as you move up the wealth scale. At the bottom, living expenses and taxes on income from labor dwarf all other constraints on wealth accumulation. But for the super-rich, the constraining effect of living expenses and taxes on income from labor is negligible. Taxes on income from capital and inheritance taxes are the only meaningful constraints on wealth accumulation by the super-rich.

Over the past decades, policy makers have lifted the lid on wealth accumulation by those who already have significant wealth, while holding firmly in place the lid on wealth accumulation for those who don’t. Federal and state estate taxes have been reduced; and the rates of tax on capital gains and dividends have been lowered. The states have engaged in a destructive race to the bottom by cutting top rates on the wealthy. Tax lawyers and accountants have developed tax saving structures at a pace with which an increasingly underfunded IRS cannot keep up. Meanwhile, for ordinary Americans, living expenses have risen, as have taxes on income from labor. (The increase in employment taxes has more than offset the decrease in the income tax on wages.)

The unavoidable result of our tax policy is that wealth at the top is growing at a faster rate than aggregate wealth.  That’s where the arithmetic comes in to play. It’s mathematically certain that if the wealth of one group grows at a faster rate than a country’s aggregate wealth, that group’s share of the aggregate wealth must increase over time. And there’s no limit to the level of concentration. So, until inheritance taxes and the taxes on income from capital are increased to the point that the wealth of those at the top grows no faster than our aggregate wealth, America’s wealth will continue to concentrate at the top.

We often hear deficit scolds warn us we’re becoming Greece. We’re not. We control our own currency; our debt is denominated in that currency; and most of our debt is held internally.

But unless our tax policy changes, we are mathematically certain to become Mexico. The only questions are who will be our Carlos Slim and how kindly will our trillionaires treat us.