America's millionaires

The term "millionaire" used to always be a reference to net worth.  Recently, we've started to see it used to refer to people with annual incomes of $1 million or more -- usually in articles suggesting that a significant and growing percentage of us fall into that category and isn't America wonderful?

Here is a bit of information which uses the traditional definition: people with net worth of more than $1 million.  It comes from a study entitled "Migration of Wealth in New Jersey and the Impact on Wealth and Philanthropy."  The data cited comes from the Federal Reserve Board's triennial Survey of Consumer Finances.

In 2007, according to the Federal Reserve Data, only 9% of U.S. households had at least $1 million in net worth. That 9% made the majority of charitable contributions, owned the majority of equity in unincorporated and closely held businesses, and had a disproportionately large share of investable assets as compared with the remaining 91% of the population. These “wealthy households” made 53% of all household charitable contributions ($117 billion). They also owned 93% ($13.7 trillion) of business equity owned by all households in unincorporated and closely held businesses, and they had 41% ($10.3 trillion) of investable assets owned by all households, i.e. liquid assets, stocks, bonds, and mutual funds. Typically, wealthy households do not have million dollar incomes. In 2006, the average wealthy household income before tax amounted to $354 thousand, while the median amounted to $159 thousand. Only 6% of millionaire households made as much as $1 million in 2007. The pattern is similar for unearned income. The average household unearned income of millionaire households was $145 thousand in 2006 and the median was $18 thousand. Only 6% of wealthy households had unearned income of as much as $500 thousand. Nevertheless, wealthy households received 86% of total unearned income received by all households in 2006.

Among wealthy households, both household income and household assets are importantly related to charitable giving, but assets, especially investable assets, are much more important than income. Statistically, the relationship between the value of assets and the amount of charitable giving is roughly 7 times stronger than the relationship between the level of income and the amount of charitable contributions. Put simply, millionaire households make charitable contributions more because they are wealthy than because they earn a high income.

Most (more than 90%) millionaires acquired their wealth in their own lifetimes through business, investment, or service as corporate executives rather than through inheritance. The majority became wealthy through growing their own business or investing in businesses of others. They tend to be entrepreneurial and agents of economic expansion. In earlier paragraphs we saw that as a group they own 93% of the equity in unincorporated and closely held businesses owned by all households in the U.S. Even in retirement millionaires participate in business opportunities. They contribute to local economic development as a source of funds, as a potential investor, and as an agent for creating new businesses and expanding established ones.

This seems to be a paean to trickle-down economics, and even those of us who don't believe in trickle-down economics can be tempted to accept that, since our wealthiest fellow citizens have such a large fraction of the total net worth, trickle-down must be the only relevant model for understanding wealth.  

I question the realities behind the statement that "Most (more than 90%) millionaires acquired their wealth in their own lifetimes through business, investment, or service as corporate executives rather than through inheritance."  

• Many of them, I suspect, were given college educations by their parents or grandparents; a private college education today costs about $200,000.  Not an insubstantial figure.  Graduate school runs about the same amount, particularly in the private universities or for out-of-state students at public universities.  
• Many of them, I suspect, were given the 20% down payment on a home either by the government or by their parents or other relatives.  It might have been 20% of $80,000 or $125,000, which might sound trivial in relation to their 2007 $1,000,000 corpus -- but it made a big difference which the paragraph above fails to acknowledge. (Paying off the other 80% made a relatively small contribution to their "home equity.") The appreciation of the land under that home may be a major contributor to their net worth. 

We may call that "investment" but it is really the legalized privatization of that which one's community and one's local, state and federal governments' spending has created.  Self made men?   Hmph!  And the startup funds for their businesses may have come from borrowing on that land equity.  -- and of course that interest is deductible on one's federal and, likely, state income taxes.  A nice subsidy, huh?  And the most profitable businesses tend to be those who own the building and land on which the business is conducted -- and the sites of others' businesses too!   Those folks may work hard -- almost as hard as their employees -- but they also get the benefit of the local economic activity as it drives the selling and rental value of their landholdings upward.  Bu we permit them to call themselves self-made.  Aren't we generous?   Or would it be more accurate to say that we're wearing blinders?

We should set the playing field level between landlord businesses and tenant businesses. (Land value taxation would do this.)  Landlords do not create land!  To permit structures which compensate them as if they do is dumb.

A bit later, the study continues,

According to the Survey of Consumer Finances, sponsored by the Board of Governors of the Federal Reserve, on a national basis households with net worth of at least $1 million, headed by a person age 60 or older, comprise 4% of all households but donated approximately 25% of all household charitable contributions in 2007 (the most recent year for which data is available).

The first paragraph of their 3-paragraph conclusion reads:

During the December 13, 2009 edition of “Meet the Press” former Chairman of the Federal Reserve, Alan Greenspan, touted the importance of rising stock prices to economic recovery. In a broader context Greenspan’s words highlight the importance of wealth to economic growth. During decades of research at the Center on Wealth and Philanthropy we have consistently found that wealthy households contribute disproportionately more to charitable causes both from their household assets and from their foundations, trusts, and donor advised funds.

Perhaps we would have less need for charity if we had a less concentrated distribution of wealth in America.  Perhaps, if we funded our local, state and federal spending via taxes on the value of the commons that individuals and corporations and other domestic and foreign entities claim as their own --  instead of taxing sales and wages and buildings -- we'd create more opportunity for more people to earn adequate incomes.

Until we do that, though, shouldn't we be collecting back this land appreciation once per generation, through taxes on the largest estates?