A Non-Political Look at Income Inequality and the Wealth Gap

3 ways you can end income inequality and narrow the wealth gap. Together we can change the world.Frequently we look for political solutions to income inequality and the wealth gap. While the issues can be improved slightly from political action, there are two additional ways to close the wealth gap and level income that are more effective.

Politics is the messiest way to fix these problems and history offers ample warning for those who seek answers from this source. One need not look further than Mao’s China or Stalin’s Russia to see how abysmal political leveling can be. North Korea is a modern example of how not to level the playing field. 

Let’s turn our attention to the second way income inequality can be reduced. Walter Scheidel in his book The Great Leveler explains what he calls the “Four Horsemen” of leveling: war, revolution, collapse and plague. Historically these four horsemen have been the leading cause of leveling of income and wealth throughout history. 

Once again this is not a comforting thought. You can read Scheidel’s work for an in-depth review of his research. The record is clear, however; it takes great dislocation, pain, suffering and death for income and wealth to level naturally.

The first two methods of leveling the playing field are not valid choices if you enjoy freedom and like living a comfortable life. These first two methods of leveling are accomplished by bringing the top down rather than the bottom up. Which leads to an interesting thought experiment on how much we really want income equality and a narrower wealth gap.

 

Defining What We Really Want

Before we continue to the third and most viable way to level income and wealth we need to define what it is we really want and what we are trying to accomplish.

Leveling the playing field is actually very easy if you are willing to destroy massive amounts of wealth. Scheidel’s work and the 20th Century are amply examples of fixing the problem the wrong way.

Political solutions eventually lean toward solutions that are relatively effective which means forcing the top down and violence. The four horsemen do the same thing with the crude hammer of god. 

When most people speak of equality they mean they want to bring the bottom up, otherwise they are no better off than before while the upper classes are rent destitute. Normal people are not so dark in their thinking.

Therefore, we really should not care what other people have as long as we are enjoying affluence. Complaining you have one less apple as you relax in paradise is way too diva for this writer; it also shows a remarkable lack of emotional maturity.

In the Western world affluence is high, but there are still people stuck in poverty. The 1% have taken a larger and larger piece of the pie which means the middle class is getting squeezed with smaller gains and the poor are outright losing ground. (See embedded video.)

 

 

From the middle class on up the Western world enjoys massive affluence the rest of the world aspires to. A nice home with two SUVs in the garage are common. Travel is an affordable luxury. Food and clothing ample.

But there is something that grinds on our conscious when one person is paid less than another for the same exact task at the same exact skill level. This requires effort to fix.

While it is easier to ask someone else to make the change, each of us have within ourselves the ability to force equality. 

As a business owner we can take great measures to ensure employees are treated fairly and equitably. But what about large employers? How can we force change across our society?

And before these actions take hold, what can we personally do to narrow the wealth gap in our own life? Can we narrow income inequality in our own life regardless what business or government does?

This brings us to the third way to level the playing field.

 

 

The Numbers Don’t Lie

In 1995 James M. Poterba of MIT and Andrew A. Samwick of Dartmouth College published a damning report on household wealth in America

The above chart shows the household savings rate in America for the last 60 years. In the 1970s the savings rate began a precipitous decline. At the same time income inequality began to grow. Could there be a correlation?

Poterba and Samwick discuss historical stock ownership in America in their report. Their most interesting comment is telling: All corporate stock is ultimately owned by individuals. They allow for foreign ownership of U.S. equities which was around 5% at the time they published.

Here is what you can do to end income inequality today! 3 ways to narrow the wealth gaps and level income.While stock ownership eventually is owned by individuals, the real question revolves around which individuals own these investments.

According to the report household ownership of stocks was nearly 90% in the 1950s and has declined to less than 50% by the 1990s. Since the report it is fair to say stock ownership has continued declining.

The third way to level income and smooth wealth can only be accomplished on the personal level. If most people refuse to engage the exercise they will suffer greater inequality and there is nothing the government or any politician can do about it!

Traditionally the arguments surrounding income inequality involves wages. There is truth behind the inequality in wages over the last 30 or so years. The richest are getting the largest share.

But this ignores every other source of income! In the 1950s virtually all households held some stock. These households had a fractional share of ownership in these corporations. Dividends went to the household, almost all of them.

Now fewer than half of households own stocks which means these households have zero income from this source. The wealthiest by default ended up owning nearly all America’s wealth. People complained, but refused the one solution nobody could stop them from exercising.

And capital gains and dividends are taxed at a lower rate than ordinary income, like wages. Even with this massive incentive for individuals to own stocks the average person took a pass. And so income inequality grew. 

All the gains in America’s growth hence went to the remaining owners of America’s engine of economic wealth. There was no other possible outcome. The people who held stocks (owned a piece of American businesses) ended up with all the gains and the gains were spread to a narrower and narrower group with each passing year.

 

Get Your Share

At first glance you might think something as simple as having more people own shares in American businesses would not solve the whole problem. That thinking is wrong.

Owning a piece of America’s value creating machine means you get a slice of the profits in the form of dividends. Many middle class taxpayers pay a very low or no taxes on these dividends. 

Something else happens when more people own a piece of corporate America. Your fractional ownership slightly levels the wealth gap because you now own something tangible like the wealthy do. Your share might be small, but there is power in numbers. 

When nearly 90% of households held U.S. stocks, dividends were more widely distributed. It also meant nearly every household had a small say in how companies operated! (Remember, you are a part owner when you hold stock.)

As fewer people held stock there was no one to slow down the enormous gains in CEO salaries. The CEOs rewarded the remaining few shareholders and employees were left out of the discussion because they didn’t own a piece of the enterprise.

Of course, owning a few shares in McDonald’s doesn’t give you the ability to dictate policy at the firm. But if many people owned stock in the company they could gather enough influence to change corporate behavior!

It might sound strange, but what would happen if every employee of McDonald’s owned 100 shares and worked together to change wage policy at the firm? I know, I know. People working at McDonald’s can’t afford to own stock in the firm. Yet I argue you can’t afford not to own a piece of the company if you ever want to change corporate policy!

Income inequality and the wealth gap are the same exact problem! As the wealth gap widens the lower end of the economic scale has less and less say. Of course the people on top want more and they get it because nobody that owns the company says different. 

 

The Gift That Keeps Giving

When my kids were growing up they received a share of stock as a gift for Christmas every year. One year they got a share of Wrigley, another year a share of Disney. 

Part of the gifting process was to examine each company they had stock in along with a few other possibilities.

The family came to the conclusion Wrigley was a winner for a variety of reasons. Wrigley gave every shareholder a case of gum each Christmas which my kids found incredible valuable. Stock ownership had real benefits! 

The financial reports also looked promising. Earning grew and so did dividends. Dividends were reinvested while excess cash was funneled into more shares. The growth was impressive.

Then Warren Buffett came along and funded Mars Corporation’s cash buyout of Wrigley. (Damn you, Warren!) Every member of the Accountant household got a big, fat juicy (Wriggly makes Juicy Fruit gum) check for their ownership in Wriggly. It was a bittersweet moment, however.

Yes, a big, fat juicy check is always welcome, but the regular income of dividends ended! And worse, no more gum in the mailbox in mid-December! It was as close to a crisis as I ever saw it!

While many people use index funds, there is something lost when we give authority to a mutual fund to vote our shares. That is why I still own individual shares in companies.

Your influence is minor when you own a few shares in a company. But even without a majority of ownership a large number of shareholders can make life very unpleasant for management tone deaf to owner/employees. 

Regardless your minor control of the companies you hold stock in, you have an unseverable right to your share of profits. This by default shrinks the wealth gap and income inequality for you.

 

Fixing the Wealth Gap and Income Inequality One Person at a Time

It is tempting to blame government and politicians for the wealth gap and income inequality problems. But as we saw above, the problem is not a political one and politics can’t solve it regardless what politicians promise!

You can change the world; you can make a difference in ending income inequality.Natural levelers are down-right brutal. We don’t need a catastrophe to level the field to an acceptable level. Complete equality is a terrible goal as the 20th Century has shown. However, the current environment is way too lopsided to be good for society in the long run either.

Businesses are the engine of value creation and growth; labor builds the goods and provides the services that make that value creation and growth possible. It is fair to say labor should have a reasonable slice of that pie.

Looking to the government for solutions is only a minor stopgap. Social services (the safety net) can be increased (and improved), but this is unproductive after a point. While more can be done in this area, it will not solve income inequality if individuals refuse to own a piece of the means of production! Nor make even a dent in the wealth gap!

Unexpected plague, war, revolution or collapse can temporarily level the field, it does so by bring the top down, leaving the middle and bottom no better off than before and probably worse. To fix income inequality issues and narrow the wealth gap, we want to focus on improving the most amount of lives as possible, not destroy everything until we are all level digging in the dirt for sustenance.

I know the world preaches index funds; so do I. Before Jack Bogle passed away recently he warned of the issues I brought up above. If mutual funds/index funds/ETFs control all the stocks they will vote the rules in corporate guidance. 

If you respect and value freedom you will demand a voice and your voice is purchased with ownership. It doesn’t take much. A few shares of three good companies can do wonders for your economic status. You can still hold index funds with the bulk of your money. (They pay dividends too, you know.)

Even without direct ownership (ownership through index funds) you still personally shrink the wealth gap. The increasing dividends added to your wage income narrows income inequality ever so slightly.

It took 40 years for the problem to grow this wide; it will take more than a few years to fix, even in your personal life. 

Or we could do what we’ve been doing all along and hope it changes magically all on its own.

Or demand a government bailout. (But then you’re just like corporate America.)

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!

Keith Taxguy

15 Comments

  1. Mr. Hobo Millionaire on February 24, 2019 at 8:10 pm

    I don’t personally believe in “income inequality”. I believe in “life inequality”. And as soon as you learn it exists, you’ll be better off. What someone else has accumulated has a near zero affect on someone else. CEO’s who make 380x the average are an anomaly. It’s not like there are millions of CEOs making 380x. My guess is there are 5000 or less. 5000 out of 300 million people in the US. People have plenty of opportunity to save money. It’s all choices. Keith, you are a great example of someone who has lived a lifetime of hard work, low consumption, and pretty extreme saving. It can be done. My next blog post will discuss how ONE $5000 decision in your 20’s can lead to missing out on 75k-450k of wealth by your 60s. And a $5000 decision per year (which is only ~$400 a month over 40 years) can lead to missing out on 1M-4.5M of wealth by your 60s. People have more “stuff” than they’ve ever had. All of their wealth is in stuff, and not assets. It’s really not that hard. And I’ve said it a many times before… if you were born in the USA, you won the birth lottery. If you have the internet and can read this blog, you have no excuses, especially if you were born here.

  2. William on February 24, 2019 at 8:23 pm

    Great article once again Keith. Truly appreciate it!

  3. Matt on February 24, 2019 at 8:29 pm

    Great article. So What stocks would our favorite Wisconsin accountant recommend to a 25 year old? Thanks

    • Keith Taxguy on February 24, 2019 at 8:46 pm

      I own and have added to my positions in MO, FB and AAPL late last year, expecting these to be very long-term holdings. Bought my first shares of MO way back in 1982 and still riding the wave.

      JNJ and MSFT are on my watch list; AFL, too. Might add to PM, but probably will add to MO instead.

      What to look for: leadership in industry, pricing power/unique product/dominant market position, and low debt. You don’t have to buy much to start. I sometimes buy 1 share just to keep an eye on a company I’m interested in.

  4. Jamie V on February 25, 2019 at 8:53 am

    Excellent article, Keith. I bought a few shares of AAPL after they did the split a few years ago, and then my job surprised us by giving 20 shares to each and every single employee that was employed at the time (there were over 60,000 of us, too – that was a kindly gift!), which vests over 4 years, starting back in..2017?* So I own two stocks outside of my mutual funds. While they are set to reinvest each dividend, I’m still stoked to see how much those dividends have increased over the years as the companies have increased the yields. I think my first AAPL div was no more than $1 and my company stock first div was also $0.84 (I’m tracking this one to a T and did forecasting out for another optimistic 50 years; yeah I nerded out, I was so excited for free shares!). Back in the beginning, these seemed so pointless to make maybe $5/year from these two stocks. But I held on and now, in this year of 2019, I expect to receive over $35. That’s with me sitting back and doing nothing. If I decide to invest even more with a lump sum, it’ll only help that number grow quicker.

    *People were also super pissed to get these shares, for various reasons, and it just floors me. Some sell their gifted shares as they vest each year to have the money now rather than later and it just boggles my mind; in about 4-5 years time (so, around 2021) I’ll have earned one whole share from all the reinvestments added up over time. I’ll take it. And the compounding will only take it from there. I mean, come on people! Hold on to it, look at the long term! Ah, well. To each his/her own. I wish I could have taken all the unwanted & unappreciated shares.

    • Keith Taxguy on February 25, 2019 at 9:12 am

      Jamie, those small steps really add up over time. Keep growing!

  5. RD on February 25, 2019 at 11:49 am

    Great article, and hopefully your solution becomes *the* solution, but I’m afraid your platform isn’t quite widely read enough for that to happen. Maybe you need to run for office?? (sorry, wouldn’t wish that on my worst enemy!)

    The one problem with most articles that touch on income inequality (including this one, albeit a very small problem here, as the focus is wealth inequality) is that they completely ignore the fact that a person’s income changes over time. Instead of setting it up as the people who earn in the top 10% vs the rest, you should be asking: how many people at some point will be in the top 10% of income earners in America? The answer is “more than half” … which is much less polarizing right away, and suggests that most people should be able to, at some point in their lives, do some form of investing. Problem solved!

    https://www.aei.org/publication/evidence-shows-significant-income-mobility-in-the-us-73-of-americans-were-in-the-top-20-for-at-least-a-year/

    • Keith Taxguy on February 25, 2019 at 1:04 pm

      RD, we can get this blog more widely read; it just requires readers to spread the good news. Share on social media and demand national media use this information as a launching board to improve our society. Linking to this blog also helps. I can’t do it alone. We are all in this together.

      I don’t want to run for (or even hold) political office. I actually want to help people.

      I agree 100% with your last paragraph, RD. The thought crossed my mind to add something on this (most people earn more than minimum wage a few times in their life), but I had to decide where to cut the story. (People sometimes get grumpy when I run long.) Many people do have a year (or many years) with above average income. When they should be investing for a better tomorrow, they instead borrow based on the higher income so they can spend even more yet. Of course, the wealth gap then widens and income inequality expands.

  6. simply me on February 25, 2019 at 1:04 pm

    Starting items to solve the inquality problem.

    1. Tax all income at the same rate. Except for short-term capital gain which should be higher.
    Namely, all dividends, long-term capital gains, interest, etc., should be taxed at the same rate as earned income. This likely will lower earned income tax rate, but raise tax on dividends, long-term capital gains, interest, etc. Short-term capital gains to be taxed at a higher rate thanm earned income.

    2. Eliminate the “carried interest” giveaway. Since capital gains will be taxed at same rate as earned income, then hedge-fund managers income will also be taxed at earned income rates.

    3. “Off balance sheet entities” should be eliminated and made illegal. All corporations should account for assets and liabilities on their own balance sheets.

    4. Companies not be able to buy their own stock. Stock repurchases should be made illegal.

    5. Healthcare should be a function of being a resident, not of being employed. Whether we have a single payer system or a multi-payer system TBD, but everyone should have level playing field access to health care.

    6. Every government entity should be audited frequently. Namely, every local government entity, whether a city, village, county, state, police department, state agency, local water district, local development agency, and so, should all be audited on a regular basis. We should proactively root out corruption, not wait for newspaper reporters to find it.

    7. Corporations that are found guilty of crimes should forfeit the entire amount of the most recent quarterly income. No more slap on the wrist fines that allow them to do business as usual. If companies knew that real fines would be levied for breaking the law, they would be less inclined to do so, one would hope.

    And that’s just the beginning.

  7. Ckarion on February 25, 2019 at 2:18 pm

    The Nordic welfare states are a fourth option, both tried and tested.

    Interestingly, your example of McDonalds workers buying shares and organizing against overpaying the top management, reflects a recurrent idea of creating stockowning union-controlled funds meant to keep excesses of CEO salaries etc at bay by voting in the workers interest at shareholder meetings.

  8. Social Capitalist on February 25, 2019 at 2:59 pm

    Keith, again an interesting article. As a believer in a more 1950s style capitalism I find it interesting what you point out. I totally agree that household stock ownership, ownership of the means of production, is one key step. But we didn’t get from there to here without a lot of government assistance, dare I say, corporate welfare, which aided those at the top most. And by that turn, changes in the tax code and government spending need to occur in order to increase the opportunity for economic equality.
    Comments above point out examples without talking about the over-arching fact, that the 1% in the USA own 40% of the wealth; and in the past 60 yrs. – not 40 though the starkest change began under Reagan – income taxes on the rich have continued to drop, capital gains taxes have dropped, corporate taxes have dropped and state local taxes, especially sales taxes which disproportionately affect those on the lower income scale, have increased speaking in % terms strictly. All of these are through politicians who convinced us that taxes are bad but spending is good (or at least hidden.) And the power of labor (decline of unions?), ie. these households, to own stock continues to decrease.
    I am not going to attempt to blog within a blog, needless to say I enjoy the point of the article and every American should begin the fight economically and through stock ownership, but we cannot use extreme examples only to say that governments cannot function to redistribute, or at least ensure that all who deserve it receive their fair share – Norway and its oil trust is one example. from the other side, I argue that many capitalistic countries become fascist when capitalism fails, see Germany and Italy so to be fair governments have a history of doing well until they don’t, much like the people they serve. Vigilance is important, economic vigilance especially, and somewhere in that I agree with you. But if it takes another 40 yrs. to fix things the ultra-rich better be opiating the masses with more than just Netflix and Xboxes.

  9. Katie Camel on February 27, 2019 at 1:57 pm

    In many respects I don’t believe income equality is actually possible. You will always have opportunists who will snatch whatever they can from an unsuspecting person. You will always have power hungry individuals, who will create things like war or overthrow governments in order to assert themselves as dictators or leaders and then redirect money to their own pockets instead of the citizens (see African history). And you will always have lazy people who will grumble about those earning more money, while doing nothing to improve their own financial situation, whether through gaining more skills or saving and investing. Some people are just too intimidated by investing to even bother to learn, much less try. War, plagues, etc. may flatten the playing field, but human nature also plays a significant role in determining wealth inequality. Regardless, I’ve added Scheidel’s book to my list of books to read — sounds fascinating!

    Interestingly, I wasn’t aware that so many more individuals held stocks in the 1950s. My first stock purchase was McDonald’s, so I was happy to see it mentioned here.

  10. Long-Term Thinking – Jason Clapp on February 27, 2019 at 3:50 pm

    […] Wealthy Accountant’s blog post entitled: A Non-Political Look at Income Inequality and the Wealth Gap brought this idea back to the forefront of my brain. It was a great read, and I suggest checking it […]

  11. William on March 9, 2019 at 10:01 am

    Keith, what do you think of ADP and AFL as a long term holding?

    • Keith Taxguy on March 9, 2019 at 10:16 am

      Both are good companies. I own some AFL and outsource payroll to ADP. Neither company is at a price I am willing to buy at.

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