Chuck Collins and Felice Yeskel
No one who built a great fortune did it on their own. They benefited from the investments made by taxpayers in education, roads, civil justice, and science, as well as the contributions of those who taught them how to read and play games, and who helped keep them out of trouble as youths. Two leading advocates for a fairer economy explain all this in thoughtful detail.
Self made men, indeed! Why don’t you tell me of the self-laid egg?
—Francis Lieber
During the political battle over preserving the federal estate tax, an interesting thing happened. Thousands of multimillionaires and billionaires signed a petition, sponsored by United for a Fair Economy’s Responsible Wealth project, to maintain the estate tax.
The fact that many wealthy people would endorse paying a tax was news in itself. But underlying their support for a tax on accumulated wealth is a new way of looking at society’s contribution to wealth creation and a reevaluation of the American success narrative.
Some commentators argued that this “billionaire backlash,” as Newsweek called it, was rooted in unselfishness or class betrayal. But for many of the individuals who signed the petition, it was a matter of simple accounting: “We owe something back to the society that created opportunities for us.”
The notion that wealthy individuals might have an obligation to pay something back to society is a radical departure from the individualistic, antigovernment ethos. Many successful people view government and society as irrelevant to their good fortune, or worse, as a hindrance. They attribute their success solely to their own character, values, and performance.
A 2004 report published by Responsible Wealth took on this “great man theory of wealth creation.” Relying on interviews with wealthy supporters of the estate tax, United for a Fair Economy published I Didn’t Do It Alone. The report amplified the voices of individuals who countered the myth and reflected on the role of society, privilege, historical timing, and luck in their success, in addition to their own moxie, creativity, and hard work. Those profiled discussed such factors as the role of U.S. property law and patents, public investment in education and technology, orderly and regulated investment markets, and other factors in creating a fertile ground for their wealth creation.
Investor Warren Buffett observed that his skills are “disproportionately rewarded” in the U.S. marketplace. He reflected that if he were attempting to do business in another country, without our system of property laws and market mechanisms, he “would still be struggling thirty years later.”
Amy Domini, founder and president of Domini Social Equity Fund, attributed her success in part to basic government-provided public infrastructure. “Getting my message out over the public airwaves has allowed me to be far more successful than if I had been born in another time and place,” she said. “The mail runs on time, allowing me to communicate with existing and potential shareholders, and the rise of the publicly financed Internet has lowered the costs of these communications still further. I can fly safely—and most often conveniently—throughout the country, sharing my ideas and gaining new clients, again thanks to a publicly supported air-travel system.”
Venture capitalist Jim Sherblom was the chief financial officer of biotech wonder company Genzyme when it went public in 1986. He estimated that the stock market, a socially financed and regulated institution that provides enormous liquidity for private companies, created 30 to 50 percent of the value of the company.
The stock market’s liquidity and trust depend enormously on societal institutions that regulate, ensure transparency, and enforce fair transactions. If there is any doubt about this, consider how the accounting scandals behind Enron and WorldCom affected the value of dozens of publicly owned technology companies. Hundreds of billions of dollars in wealth vanished overnight. Cook the books, shake the public trust, and watch wealth disappear.
New York–based software designer Martin Rothenberg argued that his “wealth is not only a product of my own hard work, but resulted from a strong economy and lots of public investment in others and me.” He credited his New York City public technical school for his early education, and the GI Bill and government-backed student loans for funding his university degree. Later, government investment directly supported the lab research that led to his establishing a company that he later sold for $30 million.
Our society needs a new narrative of success, one that shows a more complex reality: that societal forces are important in fostering success. This is no small challenge, for the American self-made success narrative is deeply rooted. But wider recognition of the social roots of wealth should lead to a deeper understanding of the need to pay taxes and invest in public goods and services.
The mythology of self-made success would not be such a problem if it were a matter of simple personal self-delusion. But this worldview, held by many who hold great power and influence in our society, has serious consequences for the kind of society we have, and for our commitment to equality of opportunity.
REDUCING THE ASSET AND WEALTH GAP
There are a variety of actions we can take to reduce the enormous gap in wealth ownership in America.
Asset-building policies have been an integral part of U.S. history. The Homestead Act in the nineteenth century gave white settlers access to land—often land expropriated from Native Americans. During the years after World War II, the GI Bill enabled millions of Americans, primarily white men, to have a debt-free college education and access to low-interest mortgages.
Unfortunately, in recent years, our government has targeted its subsidies to those who don’t need any help with asset building. An estimated $175 billion* in federal subsidies are directed to corporations in the form of tax loopholes, direct cash transfers, and subsidized access to public resources. This misdirected “corporate welfare” benefits large corporations and affluent individuals.
Government assistance should be focused on nonaffluent households, small businesses, family farms, and democratic enterprises such as cooperatives. Immediate reforms are needed to enable low- and moderate-income families to earn, save, and invest more money in order to build asset security.
Thoughtful Americans are advancing a variety of proposals that would narrow the wealth gap, ranging from expanding worker ownership to creating universal asset-building accounts. What follows is a brief survey of some of these initiatives.
Over the long run, we should make sure that tax policies encourage access to higher education and asset building by low- and middle-income Americans rather than disproportionately subsidizing wealthier Americans.
SOME SOLUTIONS TO CONSIDER
Individual Development Accounts (IDAs) are like Individual Retirement Accounts (IRAs), but are targeted to low- and moderate-income households to assist them in asset accumulation. Participants in IDAs may have their tax-free deposits matched by public or private dollars. A number of private charities have financed pilot IDA programs through community-based organizations. A publicly funded IDA program, with matching funds based on income, would provide significant opportunities for asset-poor households to build wealth.
Participants could withdraw funds from IDAs to purchase a home, finance a small business, or invest in education or job training. Even small amounts of money can make a substantial difference in whether or not individuals get on the asset-building train.
Baby Bonds One interesting proposal to reverse inequality trends over generations would be to create a “kids savings account” for children when they are born. In 2003, the British Parliament created just such a program, which people refer to as the “baby bond.”
The idea is to provide every American child with $1,000 at birth, plus $500 a year for children ages one to five, to be invested either until adulthood or until retirement. Through compound returns over time, the account would grow substantially, provide a significant supplement to Social Security and other retirement funds, and enable many more Americans to leave inheritances to their children. That would strengthen opportunities and asset building across generations.
Such universal accounts could be capitalized by a portion of estate-tax revenue levied on estates in excess of $10 million, redistributing a small portion of the largess of the 1 percent to address the generational inequalities of wealth.
No-Tax Threshold Progressive tax policies can enable working families to keep more money in their pockets. These include an expanded earned-income credit an increased personal exemption, and a higher no-tax threshold.
Affordable Housing Owning a home has long been considered a stepping-stone to building assets. Public policies that increase access to home ownership include subsidized mortgages and mortgage insurance, down-payment assistance funds, second-mortgage subsidy programs, and grants and low-interest loans for home improvements and weatherization. Stricter enforcement of fair housing and community reinvestment laws would remove barriers to asset building for people of color.
Home ownership is not the only tenure option that should be promoted, however, as it is not appropriate for all households at all stages of life. Nor should home ownership be considered the only “asset account” and “line of credit” for low- and moderate-income families, as it has many risks.
Access to decent and affordable cooperative and rental housing would enable many people to save and meet other financial security goals. Public subsidies should be targeted to “third sector” housing ownership that includes community land trusts, housing cooperatives, mutual housing, and other models that reduce housing costs and preserve long-term affordability.
A NEW GI BILL?
On June 22, 1944, President Franklin Roosevelt signed into law the Servicemen’s Readjustment Act of 1944, known as the “GI Bill of Rights.” Without the GI Bill, the American Dream would have never become real for millions of Americans. The GI Bill opened tremendous opportunities for veterans and their families and transformed America.
The GI Bill was one of the greatest investments made in our nation’s history—and it almost didn’t happen. Influential college presidents testified against it, complaining that millions of unschooled veterans would lower education standards and create millions of “educational hobos.” Congressional conservatives tried to block it as too expensive and gave in only after concerted grassroots lobbying by the American Legion.
It’s time to revitalize the American Dream and restore the foundation for a new century of progress. America needs a bold effort to expand opportunity, close the racial wealth divide, and ensure that college is affordable to all Americans.
Why can’t we establish a GI Bill for the next generation? It should not be restricted only to those who served in the military. A universal fund would provide grants for college and subsidized mortgages for all those who need them. This opportunity fund could be capitalized by a reformed federal estate tax, our nation’s only tax on accumulated wealth. Much of that wealth has appreciated tax-free over generations. A reformed estate tax, completely exempting the first $2.5 million in wealth for an individual and $5 million for a couple, would generate almost a trillion dollars in revenue over the next two decades. Unfortunately, Congress is considering abolishing the estate tax, even at a time of war, sacrifice, huge budget deficits, and widening gaps in opportunity.
What would be more American than for those who have accrued tremendous wealth in our country to pay a small portion of their accumulated wealth to capitalize a fund for opportunity for the next generation?
BROADENING EMPLOYEE OWNERSHIP
In The Ownership Solution, Jeff Gates urges us to look beyond wage and job policies and expand the ownership stake that workers and their communities have in private enterprise. There is a range of public policies that could promote broader ownership and reward companies that share the wealth with employees, consumers, and other stakeholders. These include encouraging employee ownership through government purchasing, licensing rights, public-pension-plan investments, loans and loan guarantee programs, and so on.
While the overall trend of wealth growth has been toward concentration, a significant exception is found among employee owners of businesses. As of 1998, nonmanagement employees owned more than 8 percent of total corporate equity, up from less than 2 percent in 1987. Newer figures are not available.
This ownership takes the form of Employee Stock Ownership Plans (ESOPs), profit-sharing plans, widely granted stock options, and other forms of broad ownership. In 2004, according to the National Center on Employee Ownership, the average ESOP had about $45,500 in corporate equity, disregarding what they were able to save from their paychecks. A second study of 102 ESOP companies in Washington State found that average employee-owned wealth was $32,000.
Many of the proposals described above are aimed at assisting people with very little savings and assets to increase their personal net worth. There will continue to be distortions, however, in who benefits from public policy unless we address the issue of the current overconcentration of wealth and power at the pinnacle of the population.
From Economic Apartheid in America: A Primer on Economic Inequality and Insecurity.
*This estimate does not consider state and local subsidies, estimated in 2010 at $700 billion by Professor Kenneth Thomas of the University of Missouri–St. Louis, who studies financial incentives to business.—Ed.