Living Off the Interest

By Colin McAuliffe (@ColinJMcAuliffe)

New York congresswoman Alexandria Ocasio Cortez sparked a debate over top tax rates when she proposed a 70% marginal rate on income over 10 million. Income and wealth inequality are accelerating while rates of extreme poverty are rising, so it’s an important debate to have. However, it’s difficult to conceptualize how extreme inequality has become because the wealthy make up such a small part of the population and control amounts of wealth that are so vast that it defies imagination.

To try to put things into perspective, we pulled data from the IRS statistics of income, which breakdown reported earnings by size of income and income type. The wealthy make most of their money from capital income, or returns on assets they own, as opposed to labor income or social insurance. Capital income includes things like interest, dividends, inheritance, capital gains, and a portion of income from small businesses. Excluding business income for now, the capital income in the form of interest, dividends, inheritance, and capital gains taken by filers with over 10 million in income in 2016 was more than five times greater than the cost of ending child poverty in the United States. That’s about 16,000 households who make up the top 0.01% of the income distribution and take more than five times the income needed to lift 5.7 million families out of poverty.

 
 

A recent report on social housing in the United states by Peter Gowan and Ryan Cooper estimated that the cost of building 10 million new homes over a period of 10 years to address the housing crisis would cost about $600 billion. Excluding business income, capital income to the top 0.01% in 2016 alone was about half of this amount. It’s important to also note that when we talk about the cost of anti poverty programs and housing construction, the status quo is not free. To the contrary, the human costs of poverty and housing insecurity are extraordinary, in addition to substantial financial costs.

For a historical perspective, data from inequality researchers Saez and Zucman shows that passive capital income taken by the wealthy has always exceeded federal spending on the Supplemental Nutrition Assistance Program (SNAP). They define passive capital income as interest, dividends, inheritance, and positive rents. Capital gains, which make up a substantial portion of income for the wealthy, are excluded entirely. In the 115th congress, Republicans’ signature legislative achievement was cutting taxes for the wealthy. They also introduced dozens of pieces of legislation that would have restricted or cut SNAP and other assistance programs.

 
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We make these comparisons because they help give a frame of reference for just how extreme income inequality is in the United States, but they are not policy prescriptions. The capital income we show here is already taxed (often at much lower rates than labor income), and the rates on this income should be raised regardless of whether or not that is used to offset new spending programs. Furthermore, new spending often doesn’t need to be offset one to one by new taxes. However these comparisons show that while the US has massive productive capacity, ultimately that capacity is not being used to meet the basic needs for survival and flourishing of US residents to the greatest extent possible. Instead, much of it is being used to generate enormous passive incomes for a small fraction of the population.


Colin McAuliffe (@ColinJMcAuliffe) is a co-founder of Data for Progress.

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