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Tax Nepotism to Close the Wealth Gap

Democrat presidential candidates and others on the left are proposing a wealth tax as a way of closing the wealth gap in America—a gap that is a serious problem, as this writer has documented many times.

One of the lame ideas for closing the gap is to tax the unrealized "paper" gains on stocks, bonds and other investments that are held at the end of the tax year, instead of the current tax law of taxing the gains when they are realized; that is, when the investments are sold. 

Another lame idea is to tax heirs for the accumulated appreciation of investments bequeathed to them, as if the investments had been owned all along by the heirs. 

Such taxes would create a disincentive to save and invest, would tax people for the inflation caused by government, would tax unrealized gains that might later turn into realized losses, would shift capital to tax-avoidance schemes, would make estate attorneys rich, and wouldn't address other causes of the wealth gap.

A major cause is human nature, especially the nature of parents in positions of power, prestige and wealth.  They pass more than money to their offspring.  They also pass along a family name and associated connections and networks that open doors of opportunity for their offspring.  Oftentimes, the family name and connections are worth more than money.

Examples abound:  Joe Biden's son has leveraged his dad's name and connections to establish lucrative business relationships overseas.  Chris Cuomo has used the Cuomo name to get his own show on CNN.    Likewise, Meghan McCain got a spot on "The View" because of being the daughter of John McCain.

Speaking of John McCain, his rise in politics was due largely to his wealthy father-in-law, who gave him a no-show job after the Navy so he could travel Arizona and get to be known in political circles.

Of course, Joe Kennedy opened doors for his sons John, Robert and Ted.  George Herbert Walker Bush did the same for his sons George and Jeb.  And Donald Trump benefited immensely from his father's real estate business and connections.

Not only did these fathers open doors, but they got their sons admitted to Ivy League universities through legacy admissions.

Women also benefit from family connections.  For example, Michelle Obama, who claims to care about healthcare costs, landed a $300,000 figurehead job in public relations at a Chicago hospital due to Barack's political influence as a legislator before he ran for the presidency.

Even Warren Buffet, who says he is against inherited wealth, has put at least one offspring in charge of a nonprofit foundation endowed with his money, thus enabling the kid to have lifetime financial security, as well as the prestige, influence and board positions that accrue from being in a position to distribute money to popular causes.

This form of nepotism isn't restricted to capitalists.  Communist dictators and high-level party members also give their kids advantages not available to the proletariat.

Proponents of a wealth tax somehow think it would be fair to confiscate a big chunk of the investment earnings and estate of a schlemiel who never made it to a position of power but accumulated wealth by working his ass off, living below his means, and making wise investments—all in  the hope that his offspring can someday have security and influence, like the offspring of a Biden, Cuomo, McCain, Bush, and Buffet. 

If it's fair to tax a powerless schlemiel to close the wealth gap, then it would be even fairer to tax the powerful for the imputed value of the name and connections that they pass on to their children.  Yes, it would be complicated to calculate the value, but it also would be complicated (and subject to political shenanigans) to calculate a capital gain before the gain has been realized.

Of course, powerful Democrats and Republicans would never support a nepotism tax.  Nor would media personalities like Chris Cuomo and Meghan McCain.  But that shouldn't stop you from sticking their nose in their double standard

So, what should be done to close the wealth gap?   That's a complex subject for another day, but suffice it to say for now that it would require significant changes in American culture, the financial industry, the Federal Reserve, K-12 schools, higher education, and other institutions.

Alternatively, the gap could close on its own with a dose of poetic justice—with a stock market crash triggered by the shortsighted financial and economic policies of the elites at the head of those institutions. 

A closing note:  Pasted below is a recent Wall Street Journal article about half of families missing out on the recent boom in home prices and investment returns.  The article hints at the root problem but doesn't say it as clearly as I will, as follows: 

The elites and their institutions have stuck it to the bottom half with the financialization of much of the economy, with Federal Reserve zero-interest nuttiness that inflated the stock market, with shortsighted trade policies that shifted money from working-class Americans to working-class Chinese, with social policies that encouraged one-parent families, with deficit spending and trillions wasted on wars in the Middle East, and with cockamamie housing policies and dangerous mortgage instruments, both of which caused the housing bubble and subsequent bust. 

It makes one wish for a crash to cleanse the system of the crud and nepotism at the top.

* * *

Historic Asset Boom Passes by Half of Families

Scant wealth leaves families vulnerable if recession hits, economists say

By David Harrison

The Wall Street Journal, Updated Aug. 30, 2019 6:44 am ET

The decadelong economic expansion has showered the U.S. with staggering new wealth driven by a booming stock market and rising house prices.

But that windfall has passed by many Americans. The bottom half of all U.S. households, as measured by wealth, have only recently regained the wealth lost in the 2007-2009 recession and still have 32% less wealth, adjusted for inflation, than in 2003, according to recent Federal Reserve figures. The top 1% of households have more than twice as much as they did in 2003.

This points to a potentially worrisome side of the expansion, now the longest on record. If another recession comes, it could be devastating for people who have only just recovered from the last one.

Wealth, also called net worth, is the value of assets such as houses, savings and stocks minus debt such as mortgages and credit-card balances. Net worth is different from income, the cash a household receives each month such as wages, dividends and government benefits. It is common for countries to have a highly skewed wealth distribution. Nonetheless, in the U.S., wealth inequality has grown faster than income inequality in the past decade, making the current wealth gap the widest in the postwar period, according to a study by Moritz Kuhn, Moritz Schularick and Ulrike Steins, economists at the University of Bonn.

Behind this trend: More than 85% of the assets of the wealthiest 1% are in financial assets such as stocks, bonds or stakes in private companies. By contrast, slightly more than half of all assets owned by the bottom 50% of households comes from real estate, such as the family home. Economic and regulatory trends over the past decade have not only favored stock over housing wealth, but have also made it harder for the less affluent to even buy a home.

Until the mid-2000s, the net worth of households across the wealth distribution increased at roughly the same pace, keeping inequality stable. That started to change when housing prices took off in the early 2000s. For the bottom 50%, rising home values were more than offset by mortgage debt, which almost doubled between 2003 and 2007. For the top 1%, debt was flat between those years. When the housing bubble burst, many less-affluent households saw housing wealth wiped out; some lost their homes altogether.

Today, the bottom half of American households aren't carrying so much debt compared with the prerecession peak, after adjusting for inflation. And starting in 2012, a recovery in home prices has allowed their net worth to inch up. But house prices, adjusted for inflation, have yet to reach their 2006 peak, according to the S&P CoreLogic Case-Shiller index. Meanwhile, a decade of rising equity prices has buoyed the 1% wealthiest households, pushing the value of their financial assets up 72% since the recession, after adjusting for inflation.

Structural economic forces have affected the wealth of the rich and the lower-middle class differently. The Fed kept interest rates near zero and bought bonds in the years after the crisis to revive the economy, in the process amplifying the run-up in asset prices. "Who owns that stuff? Rich people," said Karen Petrou, managing partner at Federal Financial Analytics.

Meanwhile, the share of families in the bottom half who own a home has fallen to about 37% in 2016, the latest year for which data are available, from 43% in 2007, according to the Fed. Homeownership among the entire population has crept up since 2016.

For those who lost a house during the recession or never had one, getting a toehold in homeownership has become more difficult. Partly because of regulations designed to prevent another crisis, banks have toughened credit standards and down-payment requirements, said Susan Wachter, a University of Pennsylvania economist. Had the looser, prerecession credit standards stayed, the proportion of Americans who own their home would have been 5.2 percentage points higher in 2010-2013, a study by Ms. Wachter and three co-authors estimates.

Builders have focused on higher-end homes for those with good credit and high incomes. As a result, affordable homes have become scarcer and more expensive. Between 2011 and 2017, the inflation-adjusted price of a starter home rose 56%, according to CoreLogic, a data provider. Real median incomes increased 12%, according to the Census.

Veronica Cortez, a 30-year-old municipal employee in San Fernando, Calif., is working on paying down her debts. She takes home between $3,500 and $4,000 a month depending on overtime, of which about half goes for the rent on the two-bedroom apartment she shares with her two children. She intends to buy a home, but "here in California it's expensive," she said. "You pretty much live paycheck to paycheck. It's going to be impossible for me to save up $20,000 or $30,000 for a down payment." She has set aside $6,000, so far, and plans to apply to assistance programs to help cover the rest.

Wealth helps households weather the ups and downs of the business cycle. In good times, they pay for living expenses out of their income and set the remainder aside. In bad times, when layoffs hit, those savings can help pay bills.

Households with little wealth, however, are more exposed to the vagaries of the economy. Areas that saw a bigger drop in housing wealth after the recession also suffered a sharper decline in consumption, according to research by economists Atif Mian, Kamalesh Rao and Amir Sufi.

"If no shock is happening then everything is fine, but if a shock is happening you have a much more fragile economy," said Mr. Kuhn.

Leticia Segura 's house in the West Humboldt Park neighborhood of Chicago lost about half its value during the recession, she said. Today, it is worth about $250,000, still almost $30,000 short of its value in 2007, she said.

Ms. Segura and her husband, Jesus, almost lost the home to foreclosure during the crisis after Mr. Segura lost his job and the couple fell behind on mortgage payments. A government program helped the couple get current, but they remained underwater on their mortgage until just a few months ago, meaning they owed more than their home's value.

Today, both have new jobs and Ms. Segura feels more comfortable financially. But the couple remains cautious. They have set aside some money to cover the mortgage for three or four months should disaster strike again. "After that we'd just have to pray," she said.

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