It’s generally understood that the very richest Americans control a disproportionate share of America’s private wealth, but a lot is riding on the details. Policy makers trying to level the economic playing field need to understand the components of that wealth in order to establish taxes and rates that work as intended.
While researchers disagree as to how, exactly, to calculate wealth, the Treasury Department’s Matthew Smith, Princeton’s Owen Zidar, and Chicago Booth’s Eric Zwick have developed a new data set and method. According to their calculations, the rich may not be as wealthy as some estimates have it, but wealth is still concentrated and expanding at the top.
“There are a lot of proposals out there that try to improve taxation of the wealthy, and some of those proposals put a lot of pressure on being able to collect from people—those with $50 million, $100 million, and more,” Zwick says. “Knowing how many people there are in those extreme categories and how much wealth is in those buckets is pretty hard. It makes the amount of revenue you can raise uncertain.”
The three leading approaches to calculating wealth result in disparate estimates. The first approach uses estate-tax data, the second a Federal Reserve survey of the ultrarich, and the third studies tax returns. Recent estimates from these methods have the richest 0.1 percent of Americans holding 10–20 percent of total wealth.
The richest Americans’ share of household wealth has risen since the 1980s, but different methods of calculating wealth can lead to disparate estimates of just how rich this group is.
Zwick and his fellow researchers built on the tax-return approach but introduced some innovations: they better appraised interest rates for those at the top and linked individuals to their privately held companies and sources of capital income, to name two. They then combined their new data with refined estimates of housing, pension, C corporation equity wealth, and pass-through business returns. (Pass-throughs are businesses that aren’t subject to corporate income taxes and instead pass profits through to proprietors, who pay individual income tax rates.)
In terms of calculating wealth concentration, their method results in numbers that land somewhere in the middle of those produced by the other approaches. The study suggests that the top 0.1 percent of Americans held 15 percent of total assets in 2016, and that the top 1 percent, 0.1 percent, and 0.01 percent all expanded their already large pieces of the pie since the 1980s. They estimate that the wealth of the top 1 percent of Americans about equaled the wealth of the bottom 90 percent of the country.
Some of that wealth came from higher interest income. The researchers used tax records to disaggregate taxable interest income, allowing them to estimate the interest rate earned by individuals more accurately than in previous methods. The interest rate paid on investments owned by those at the top is about three times higher than the average, they write. Zwick stresses that this isn’t a huge source of income for the superrich, however. “Their primary source of income is from equity, stocks, and private business,” he says. Nevertheless, getting the top interest rate right is crucial to developing accurate estimates of top wealth, he adds.
The researchers find that corporate equity and pass-through businesses are the primary sources of wealth for the richest Americans, while houses and pensions account for most of everyone else’s net worth. (For more background on their assets, see “Never mind the 1 percent. Let’s talk about the 0.01 percent.”)
“Pass-through businesses ended up being more important than previously thought,” Zwick says. “We were able to assign wealth to people that generate tax losses—they show losses for tax purposes, but the company itself is worth a lot.” Previous estimates didn’t account for this pass-through wealth.
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