Addressing the Wealth Gap

A good friend sent me the link to a NYT article about a woman in Georgia who will inherit a modest chunk of farmland which was once tended by slaves. Her prize is not a huge plantation, but she does want to address the inequities of history in some way. Should she just give the land away? Teach black people farming techniques? What, exactly, would be the most constructive action she could take? 

I found the article thought provoking because so many people today are thinking about “how to make it right.” Many opinions are being offered, but little agreement is to be found. Ms. Marshall, featured in the article, is in a unique position because her property is situated in a rural area where many black and white families continue to live with their shared history. Few of us today have such a direct connection to our country’s history of slavery and Jim Crow. 

For those of us who lack this direct connection, there is still the challenge of the great divergence of circumstances that occurred over the course of the 20th century. As of 2016, the average net worth of white families was about $171,000, while the average for black families was a tenth of that, $17,000. This Brookings Institution article identifies several events and policies that contribute directly to this divergence.

We know that actions of our government contributed to this gap. Specifically, in the aftermath of WW II, returning white soldiers were able to get GI Loans to purchase homes in desirable neighborhoods; returning black soldiers were not. Redlining, a practice of mortgage bankers linked to FHA policy, prevented banks from making loans in neighborhoods with more black families. As a result, the wealth of white home owners grew much faster than the wealth of black home owners. Home value is a key element of a family’s net worth, a treasure that can be leveraged to increase wealth in other ways through home equity loans. It’s not a guarantee of wealth, but few families accrue wealth without the benefit of rising home values. Tax policies such as mortgage deductions continue to favor families with greater home values. 

Should we desire to address the wealth gap today, we could start by  looking at ways that current policies favor wealthier families. Mortgage deductions could be a starting point. Canadians have survived without mortgage deductions, so perhaps we could, too. Beyond that, consider the obvious effect of the favorable treatment of inherited wealth. I know many good people who get very prickly when I suggest that taxing inheritance at a much higher level could help address the wealth gap. Why so prickly? Because they have very strong feelings that their money should go to their children, not the government. 

So, while it seems obvious to me that inherited wealth is unearned wealth which could be taxed in order to benefit others, this feeling of wanting to provide for one’s own children deters many from consideration of this policy. I have benefitted directly from inherited wealth, so I know full well the compounding effect of this inheritance. I am able to live comfortably in retirement because I inherited a modest sum many years ago and invested a potion of it. The earnings my husband and I had provided for a decent standard of living while we were working but could not have provided for the retirement we now enjoy. 

The challenge of inherited wealth is not just the advantage it offers to the next generation, but the way it increases as generational wealth builds on itself. Any wealth that can be invested and not used immediately can lead to a huge divergence over subsequent generations. Elizabeth Warren’s proposal for a wealth tax hasn’t gone far, but it is intended to address this situation. A wealth tax could also address the challenge of our first generation billionaires, mostly individuals who have brought us our wonderful tech toys. Do Gates, Bezos, Zukerberg and their cohort really need all their personal billions?

At some point, a discussion of taxing wealth brings us to a discussion of capitalism itself. Is there any way to tax wealth that doesn’t squelch creativity and innovation? Americans take pride in our reputation for innovations that are the envy of the world, so much so that we sometimes forget that good things come from elsewhere as well (such as the Dutch machine without which silicone chips cannot be made). And yet, that foreign machine could serve as proof that higher taxes do not eliminate innovation. 

Capitalists in general, and Americans in particular, accept divergent outcomes as the natural reward for people who risk failure and may toil for many years before being rewarded for their effort. Count me in this group. I took few chances over the course of my career, preferring the safety of a predictable paycheck and good benefits. That said, my government, during my lifetime, gave advantages to some and withheld them from others on the basis of skin color, not their willingness to take risks or benefit us all with their industriousness. I find that I can’t just say, “Oh, well. Too bad.” 

My modest inheritance, many years ago, gave us a cushion that carried us over various small crises; it gave us options and kept us from becoming overwhelmed by debt. My parents could have tried harder to spend all their money while they were alive, but they were determined to leave some to their children, and we have benefitted from their decision. But I now know that they benefitted from policies that were discriminatory against black citizens. This would not have bothered them; they were flat out racists. But it bothers me, so like Stacie Marshall, who inherited a modest chunk of farmland in Georgia, I’m doing a lot of thinking right now and reading about options going forward. 

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