How rich are the richest Americans? A thorough answer to this question is necessary to address public concern over rising inequality, whether the distribution of resources is fair, and how policy ought to respond.

While over the last several years the U.S. has seen increased interest in addressing inequality through taxes on wealth or capital income (for example a capital gains tax), several questions remain. How much revenue could such taxes raise and, given the composition of wealth among the richest Americans, are these taxes the most effective way to reduce gaps in wealth and income? As the burden of coronavirus grows and policymakers start considering new tax policies, it’s important that the public have the most accurate estimates of top wealth and income available.

In a new update to their paper on measuring top wealth and inequality in the U.S. (PDF), Princeton’s Owen Zidar, Chicago Booth’s Eric Zwick, and Treasury’s Matt Smith find that the increase in wealth among the top 0.1% over the last 40 years is half as large as previous estimates would indicate.

Furthermore, they find that the financial assets and capital of the ultra-wealthy amount to a smaller share of national income than previously believed. Instead, they argue a bigger driver of top incomes is human capital and returns on labor often characterized in tax filings as private business profit.

Main findings

The authors find that the top 0.1% share of wealth increased from 7% to 14% from 1978 to 2016. While this rise is half as large as prior estimates, wealth is very concentrated: the top 1% holds nearly as much wealth as the bottom 90%. However, Americans in the 90th to 99th percentile, a group with more than $660,000 in wealth but less than $3.1 million, hold 36% of total wealth. Their wealth exceeds that of the bottom 90% or the top 1%. The chart below compares the authors’ new estimates to those produced in previous studies and using different approaches and data sources.

Top 0.1% Share of Total Wealth

Implications for inequality and tax policy

One of the most important takeaways from the research is that the primary driving force behind inequality between the richest Americans and everyone else isn’t, as many have argued, a concentration of financial wealth or capital. From 1980 to 2014, the rise in the top 1% share in national income due to capital income is only 2.4 out of 8.1 percentage points in total growth.

Share of National Income

Rather, the authors argue that much of the recent rise of top incomes and wealth represents a return to human capital, including the labor income of private business owners—for example consultants, lawyers, or doctors—often characterized as capital income of pass-through businesses for tax purposes.

Wealth Composition for Key Components Within Top Decile (2016)

Given this finding, the authors suggest policymakers aiming to reduce inequality through the tax code should consider, among other reforms, repealing the recently enacted deduction for people who receive income from pass-through businesses and eliminating the so-called Gingrich-Edwards loophole. These reforms would increase taxes on private business owners who are often at the top of the income distribution, while also helping ensure that people who receive labor income in different forms will come closer to all paying the same tax rate. For more on how to harmonize labor and capital income taxes and improve tax policy, see Owen Zidar’s and Eric Zwick’s recent tax reform proposal to roll back federal tax policy to 1997.

The paper also has implications for how much revenue a wealth tax might raise. These new estimates of top wealth suggest total revenues would be far less than many expect. A one percent tax on the top 0.1% in 2016 would generate $112 billion assuming taxpayers didn’t change their behavior in response. A graduated tax, which taxes wealth above $50 million at 2% and adds a surtax of 1% of wealth exceeding $1 billion, would raise $117 billion in 2016 (assuming no change in behavior). Prior estimates, calculated using an “equal-returns” approach (see next section for more detail), estimated $207 billion in revenue from such a graduated tax. The new estimates suggest a graduated tax would bring in only 57% of that estimated revenue before accounting for behavioral responses, which would lower revenue estimates further.

Why the new estimates differ from previous estimates

The approach the authors take to estimate wealth builds on an approach first employed by others (Giffen, 1913; Stewart, 1939; Saez and Zucman, 2016) to scale up or “capitalize” income observed on tax returns to estimate top wealth. That is, they take an individual’s income, reported in official fiscal statistics, and estimate how much wealth created it.

The strength in the authors’ new approach, however, is that they use new data to discipline how income maps to wealth for different groups of people. They start by looking at several types of income: fixed income (from liquid assets, deposits, bonds, etc.), public equity income, private business income, etc.

Then, in estimating the amount of wealth that creates these different types of income, they allow for the possibility that rates of returns for each income type can vary across people. Accounting for this empirically relevant variation produces different wealth estimates than earlier work that assumes equal rates of return across people.

As one example, they show that fixed income portfolios of the rich skew toward high-yield bonds and loans, whereas the fixed income portfolios of the non-wealthy are mostly bank deposits. Simply put, fixed income portfolios for the wealthy differ in nature, risk, and liquidity from those for the less wealthy. This difference in the composition of people’s portfolios means there are unequal effective returns on fixed income for the rich and everyone else.

While the authors are not the first to argue that the rich earn higher rates of return on their income (it’s a key point of Thomas Piketty’s Capital), an important contribution of the research is the extent to which they test both their assumptions and previous assumptions against administrative and survey data that does exist.

When the authors produce wealth estimates using their assumption that the rich earn higher rates of return, their results line up nicely with estate tax data and the wealth data reported by the Federal Reserve’s Survey of Consumer Finance (SCF). When they produce estimates using the assumption that everyone earns equal rates of return, their results overstate fixed income assets reported by the SCF, especially at the top. For more detail on how the authors’ new approach differs from the 2016 study by Emmanuel Saez and Gabriel Zucman, read section 10.1 of the full paper or the authors’ response to comments on their earlier draft.

Another contribution of the new research is showing how the authors’ updated wealth estimates change what we know about income inequality and how national income is distributed across income groups. For more detail on how wealth estimates relate to distributional national accounts and inequality statistics, read Eric Zwick’s recent testimony before the Joint Economic Committee of the U.S. Senate (PDF).

Conclusion

While there are many ways to continue improving estimates of wealth and income, this new research further improves our understanding of why inequality has increased and the most effective ways to address growing gaps in wealth and income.

To learn more about the findings and methodology, please download the full paper.