“Despite a voluminous and often fervent literature on “income distribution,” the cold fact is that most income is not distributed: It is earned.”Thomas Sowell
Table Of Contents
- You are One of the “Golden Geese” Supporting the Inverted Pyramid (and That’s Okay)
- The Wealth of the Minority Grows Faster – and Receives More Government Support
- The Necessity of the Wealthy Minority to Save
- The Pragmatic Idealist
- Is It Time for a Personal Assessment?
For your own enlightenment, answer the following 3½ questions. (Approximation is okay.)
1. Are you currently saving money on a regular basis?
2. Did you pay income taxes in 2019?
3a. Was your 2019 adjusted gross income greater than $68,400?
3b. Was your 2019 adjusted gross income greater than $97,973
If you’re reading this post, it’s likely you answered “yes” to more than two of the three questions, which means you are a part of a demographic minority in the United States. Whether you know it or not, you have a unique financial standing relative to most of the nation.
For an interesting take on what it means to be part of the financial minority, read on. You probably won’t get this type of commentary from the teleprompter-reading, talking heads in the national media.
In determining your status as part of the financial minority in the United States, there are two key indicators:
1. Are you paying income taxes?
2. Are you saving money?
In ways you may not have considered, these two financial actions are closely linked. This is especially true for those in the financial minority. Let’s look at the significance of income and taxes.
You are One of the “Golden Geese” Supporting the Inverted Pyramid (and That’s Okay)
According to Pew Research, American household incomes have trended up over the last 40 years. And, it’s been just over 10 years since 2009’s Great Recession. The median U.S. income in 2018 was $74,600. This represents a 49% uptick from 1970 when median income stood at $50,200. However, this doesn’t factor in the pandemic (an obvious outlier).
While household incomes have grown modestly over the past century, household wealth has not. What’s more, the bottom 90% own just over 50% of the real estate in the U.S. This is a cause for concern with wealth inequality when comparing stocks and real estate.
When housing prices increase, wealth inequality shrinks, and the middle-class increases. And yet, if the stock market outperforms housing, this too can widen the wealth inequality gap.
(As a side note, middle-income families rely more on home equity than upper-income families. The latter derives some of its wealth from business equity and financial market assets.)
Mind the Gap
It’s estimated that the top 10% of households own about 90% of the stocks in the United States. Now, keep in mind that there’s a big difference between 10% for someone who’s a millionaire, versus 10% for someone in the middle class.
A millennial under 35 with $1 million is classified as rich. This is slightly over the 99th percentile for household wealth, which stops at $998,000. If you’re older, though, it’s a different story. People aged 35-44 with $1 million are barely scraping the 95th percentile. What’s more, those over the age of 55 are barely reaching the 85th percentile.
Consider inflation and an increasing lifespan, and a million dollars may not go as far as it used to.
And it raises a deeper question, what is rich? When exploring wealth, why is the economic playing field skewed to favor the wealthy?
What’s Rich Anyway?
Defining the term “rich” is an exercise in relativity (it’s often applied to someone who earns or owns more than you). And of course, the U.S. tax system isn’t flat, so Americans are paying more or less tax based on income.
The top 1% with an income just under $2 million made up 20.9% of income in the U.S. last year. However, they paid 24.1% of taxes. This wasn’t the case with the middle 20%. While they accounted for 10.9% of U.S. income, their income levels ranged from $41,000-$66,000 and they paid 9.4% of taxes. The remaining 20% with salaries under $23,000 paid 2.8% of America’s taxes.
This group of unlucky duckies paid the most significant amount in taxes because they may not have real estate and tax advantages.
Now, let’s say a person has $2 million. That’s rich, right? Not exactly.
Having $2 million puts people in the top 10th percentile unless they’re aged 55-64. They would actually need $2.1 million to qualify in this category. A recent study found that 39% of U.S. residents tracked over 44 years only spent one year in the top 5% of incomes. Hence, income can fluctuate and affect how much a person can save.
And there are other contributing factors.
The wealthy might include people who inherit money or have high savings and little income (retirees). This can also include college graduates with high-paying jobs (and student loans). A family that’s in the 90th percentile has about 6x the median wealth as they do income. This sounds lopsided until it’s viewed as a ratio.
Look at it like this:
- A family in the 50th percentile can have a $53,000 salary and a median net worth of $97,000. Their wealth to income ratio is nearly 2:1.
- A family in the top 10% has a ratio that’s 6:1.
- Respectively, for a family in the top 20%, it’s 3:1.
So, what happened? The wealthiest save into assets they control.
The Wealth of the Minority Grows Faster—and Receives More Government Support
In general, the amount of taxation imposed by various government entities in the United States is high. In particular, the income tax burden on the financial minority is steep. Income taxes have risen disproportionately for the top 25%. For example, the top 1% pay 40% of all federal income taxes. The top 20% pay nearly 90%. By way of comparison, the bottom 50% only pay 3% of all federal income taxes or less than 0.001%.
There’s a quirky occurrence—the rich pay more taxes and yet so many complain about income disparity. Why? The government’s attempt to manage the national economy while not controlling it entirely. Here’s how this works.
The Golden Goose
Taxes, tariffs and other monetary policies are used to siphon some of the productivity of the wealthy to pay for government programs and services (social welfare, consumer regulation, law and order, national defense, etc.).
Once governmental units establish streams of revenue, they don’t want them to dry up. If there is no financial production, there is no economy to manage. It’s the personification of the golden goose fable. If governments want ongoing streams of revenue from their citizens, they can’t destroy the ones who generate them. Since they generate and hold a disproportionate percentage of income and assets, governments need the financial support (or at least compliance) of wealthy individuals.
Governments make the rules in concert with those who are most affected by them. And since all governments (at the federal, state and local levels) need money to function, they have a vested interest in maintaining a working relationship with the wealthy minority.
On an institutional level, the corporatism mentality explains why some parts of the economy look “too big to fail.” These receive government-sponsored financial help, while others go into bankruptcy.
On an individual level, it explains why the wealthiest segment of the population uses individual tax breaks. This is partly because wealthier individuals can save more. And the tax advantage is greater for those in higher income tax brackets.
Friends with Benefits
The idea of governments supporting the wealthy minority may sound like political commentary. However, this isn’t a liberal or conservative talking point. Commentators from very disparate ends of the political spectrum say the same thing. The current economic system helps the wealthy—once they get there—and gives them an edge going forward.
This perspective can apply at an individual level. Individuals with money get the tax advantages because they have the money and knowledge to take advantage of these breaks. They explore personal finance and financial advising and hire the best advisors. For example, taxable income from capital gains receives favorable tax treatment compared to income from wages.
Mortgage interest deductions are for homebuyers, not renters. Individuals in the wealthy minority have clear advantages. And they can borrow more money at better rates because they have leverage.
The Necessity of the Wealthy Minority to Save
If the only things you’re doing as a member of the financial minority are earning an income and paying taxes, you’re not playing the game. To take advantage of your minority status, it is imperative to accumulate assets (and write-offs). You must save for your own financial benefit and the preservation of the whole inverted-pyramid/golden-goose system.
Someone has to make a profit. And, while governments are better at assessing taxes on profits, their intention isn’t to make a profit, (they may not know how). Making a profit requires a forward-thinking, future-oriented mindset. People save because they understand that it’s not only what is happening today that matters–it’s just as (if not more) important to prepare for an unknown future.
Creating Seed Money
Some reasons for savings reflect a prudent view of the future. A pandemic can occur. A job may not last forever. Things (homes, vehicles, a mother-in-law) need replacing. And yet, saving is also the seed money for future productivity.
Saving provides the capital that moves innovative ideas into practical use. Eventually, some of those innovations become new engines of progress, improving existing markets and opening new ones. Whether it stems from an attitude of caution or ambition, people who save contribute to a functioning economy.
This emphasis on saving and accumulating assets can read like “economics for fifth-graders.” However, a quick once-over of the facts reveals most Americans don’t understand the importance of saving. They also may not understand the consequences of not saving. This is why the economic playing field skews to favor the wealthy minority.
How to Accumulate Assets as Part of the Wealthy Minority
People acting on behalf of the government (legislators, political analysts, economic advisors, etc.) may know that saving is a critical component in maintaining a solid economy. Often, they enact legislation to encourage saving. This can come in the form of IRAs or 401(k)s. Yet, the governmental perspective on saving and asset accumulation is short-sighted or incomplete.
Consider that the major purpose of IRAs or 401(k)s is to provide retirement income. Saving for your future is a worthwhile objective, and yet there are plenty of other reasons to save. Picture Bill Gates at age 25. What would have been the value of saving in a 401(k) for retirement as opposed to saving directly into his business? In real life, especially when one wants to make a profit, the need for capital is fluid, constantly changing. Most government-sponsored asset accumulation programs don’t offer much flexibility.
This leads to a controversial conclusion. The best way for the wealthy minority to save or accumulate assets is often outside of government-sponsored savings programs. Why? Because assets beyond government programs offer control, liquidity, leverage, and tax advantages. Our personal favorite, dividend-paying whole life insurance, also offers permanent coverage of your income earning potential–with additional riders for greater certainty.
The Pragmatic Idealist
There are compelling social and philosophical issues regarding the widening wealth gap in the United States between the top 25% and everyone else. And, some Americans feel a sense of anxiety when comparing themselves to their wealthy neighbors.
In his book, Dream Hoarders, Richard Reeves explores the growing disparities among the top 20%. The widening gap passes down to the children of the affluent and it increases social divisions while reducing social mobility. There are also gaps in neighborhoods, lifestyles, travel, and attitudes of the affluent.
And, maybe that’s why a tipping point existed in 2015.
The Tipping Point
The richest 1% owned as much as the rest of the planet. Or, from another perspective, 8 men owned as much as 3.6 billion people across the globe. Hence, equality concerns are obvious. The rest of the population might secretly fear a tilted economy, monopoly and ability to leverage political power.
These are justified views but not everyone shares them. There are Americans who feel more secure with affluent neighbors next door. America is better if everyone pays taxes. And yet, so many argue we need fewer affluent people, rather than seeking more opportunities to grow wealth. These are interesting perspectives.
This is not a discussion of the social or ethical ramifications of the gap between the wealthy minority and everyone else. It’s simply a practical assessment of which approaches work best in light of the current state of affairs. As it stands, most people’s economic lives are better off if they earn enough to both pay income taxes and save.
And, let’s face it. Our economic system has been through a lot over recent years.
Maintaining Balance Amidst Major Economic Shifts
From the pandemic and financial crisis to new technologies and production changes, maintaining a pyramid balance is crucial. This is especially true when it shifts in new directions. Years ago, big business included names like GE, Exxon, PetroChina, Bank of China and China Mobile. Today, the 5 biggest global companies include Amazon, Facebook, Apple, Google (Alphabet) and Microsoft.
Furthermore, a shift in industries is a driving factor in our economy:
- Construction: Spending reached $1.365 trillion in 2019. It’s projected to grow 4% in the next 10 years, based on Bureau of Labor Statistics (BLS) data.
- Healthcare: This sector added 2.8 million jobs from 2006-2016. What’s more, from 2008-2018, jobs increased by 20%. The BLS projects 18% growth through 2026.
- Non-durable manufacturing: This includes items like gas, clothing, and electricity. It makes up 4.8% of GDP and contributes 4.4 million jobs. By way of comparison, durable manufacturing only accounts for 349,000 jobs.
- Retail: This sector makes up 5.5% of the GDP and 9.6% of jobs, based on BLS data. Further, the NRF estimates a 4.1% increase occurred in holiday sales from 2018 to 2019.
- Technology: It’s estimated to grow 11% by 2029. In 23 states, this sector is among the top 5 contributors, and in 28 states it’s among the top 10.
Hence, successful economic rebounds are somewhat reliant on multilateral cooperation from those who pay the most in taxes which include big businesses.
Is It Time for a Personal Assessment?
If you’re concerned about personal finance or financial advising, you may have questions. Perhaps you’re paying income taxes and not accumulating assets. It’s time to reassess your financial behavior.
Those who earn enough to pay taxes never acquire the saving habit. The long-term prognosis is they eventually become part of the financial majority.
If you are already saving, it’s time to address the other issue. What percentage of your asset accumulation program do you allocate into “outside” (outside of government control) sources?
These concepts relating to your position as part of the financial minority may be a bit counter-intuitive, and yet it’s relatively simple. However, the applications of these ideas are complex (don’t try a Roth IRA conversion on your own). The practical answer: Consult with our team at Partners 4 Prosperity! You can contact us here, or email firstname.lastname@example.org.