Wednesday, March 23, 2011

wealth vs income

"The richest 400 Americans are richer than the bottom 150 million combined." I've heard this statistic half a dozen times in the last few weeks. In case you weren't tipped off by the fact that Michael Moore is one of the louder voices spreading it, you should take it with a spoonful of salt.

Wealth is not the same as income. The poorer half of America has almost no wealth because it doesn't save very much. They choose some small level of savings as an emergency buffer and spend the rest of their paycheck month to month. Some of these households are making six figures but choose to send their kids to private school instead of investing. That's their choice, and quite possibly the right one for their circumstances and values. Doesn't mean that wealthier investors owe them anything for it.

If I lived in a communist society where wealth was perfectly redistributed and everyone had exactly the same income, but one out of a million citizens lived in a cheaper home and didn't go on vacation and managed to save a buck a result, that one person would have more savings than everyone else in the country combined. I don't think that's a sign of grotesque income inequality. In fact that one person could even have a lower income and higher savings rate and still be "richer" than everyone else combined.

The U.S. isn't like that hypothetical country, but the mathematical point is what matters. That statistic doesn't tell you anything useful. I want to know what the number is for income.


JohnRaymond said...

I don't have the answer either, but I would guess that there's a direct correlation between wealth/savings and income. How else do these people become wealthy? Just because they know how to save so much better? I really doubt it. Beyond income, there is the passed-on wealth that plays a big role as well.

litwm said...

Households in the top quintile, 77% of which had two or more income earners, had incomes exceeding $91,705. Households in the mid quintile, with a mean of approximately one income earner per household had incomes between $36,000 and $57,657. Households in the lowest quintile had incomes less than $19,178 and the majority had no income earnerIn 2006, there were approximately 116,011,000 households in the United States. Bill Gate income $3+ billion each year. Do the math.

litwm said...

Capial Gains doesn't qualify as income yet it is where the richest people get their money. And its taxed at 10%. which is the same as the lowest tax rate.

Vera said...

that's not enough information to do the math I want to do =)

I also should have emphasizde more that the point isn't that the superwealthy got rich by saving (obviously they are not 'saving' in the traditional connotation of the word) but the bottom 150 million are always going to be at ~0 wealth because of NOT saving. and it doesn't matter HOW rich the superrich are, if the denominator is ~0, the statistic "the top X people are as rich as the bottom 150million" will always sound ridiculous.

Also, capital gains is taxed at a low rate because capital gains have ALREADY BEEN TAXED at the income tax rate: