Wealth, Mobility, Inheritance And The Estate Tax
Table of Contents
Wealth Is Tenuous In America
Wealth in America has always been distributed highly unequally, perhaps even more so before the Civil War than today.3 This concentration of wealth was tolerated, however, because equality of opportunity prevailed widely. This meant that there was great mobility in and out of wealth. Alexis de Tocqueville noted that "the rich are constantly becoming poor" and "the rich daily rise out of the crowd and constantly return thither."4
Wealth Mobility in the 19th Century. Some recent scholarship suggests that wealth mobility was less than de Tocqueville thought.5 However,
- A study of the late 1800s found that 82 percent of millionaires were "nouveau riche" and only 18 percent inheritors.6
- Another study found that there was substance to the "Horatio Alger" myth - a significant share of successful 19th century entrepreneurs had disadvantaged childhoods and overcame adversity.7
- In any case, there is no question that the perception of mobility was widespread and a key reason why government redistribution policies were unpopular in the 19th century.8
Wealth Mobility Today. However much or little mobility there was in 19th century America, there is little doubt that it was far greater than in Europe. Indeed, this still appears to be the case.9 A study comparing the United States and Great Britain in the 1950s found that while income was distributed similarly in the two countries, wealth was distributed far more unequally in Britain.10 Furthermore, it appears that inheritances play a larger role for those with great wealth in Britain than in America.11 Research also shows that wealth is much more equally distributed in the U.S. than in Europe, Latin America and Asia.12
"Fortunes rarely survive past the second generation."
Recent data on mobility tend to support de Tocqueville's observation that fortunes rarely survive past the second generation. Moreover, the data show that inheritances continue to play a small role among the wealthiest Americans. A significant percentage of the largest American fortunes were accumulated in a single generation. To some extent this is due to the changing landscape of America's largest businesses, which have also undergone major churning.
Income and wealth mobility is unambiguously good because it mitigates inequality.13 While there is a large literature on income mobility, there is much less on wealth mobility. The data show that incomes are highly mobile, with many of the rich becoming poor and many of the poor becoming rich within relatively short periods of time.14 The more limited data on wealth indicate that its mobility is on the same order of magnitude as that of income:15
- A comparison of families between 1966 and 1976 found that 35.5 percent increased by at least one decile of wealth (one-tenth) and 18 percent moved up at least 2 deciles.
- Over the same period, 34.6 percent moved down at least one decile and 17.9 percent moved down at least 2 deciles.
A study of families between 1984 and 1994 found that:16
- 60 percent of families in the bottom decile of wealth the first year had reached a higher decile 10 years later.
- Of these, 40 percent jumped one decile, 26 percent rose two deciles and 11 percent leaped three deciles.
- An amazing 23 percent went up four or more deciles, with 1.42 percent rising from the lowest decile to the highest.
- Only 47 percent of those in the top decile in 1984 were in a lower decile 10 years later.
- However, about 10 percent fell more than three deciles and a few ended up all the way down in the bottom decile.
Sources of Wealth. Virtually all research shows that inheritances are insignificant as a source of major wealth in America. A 1961 survey found that:17
- Among the affluent, only 6 percent acquired most of their assets from gifts or inheritances.
- Sixty-two percent of the affluent reported no inheritances whatsoever.
- The vast bulk of wealth arose from saving and an increase in the value of assets.
Another study found that among the top 5 percent of households ranked by wealth, inheritances accounted for less than 8 percent of assets. [See Figure II.] The study concluded that "wealth inequality is largely the same when the direct effects of financial inheritances are removed."18
A recent study of U.S. millionaires found that 80 percent acquired their wealth in a single generation, without the benefit of inheritances.19
"Entrepreneurship is key both to the concentration of wealth in America and the high degree of mobility in and out of wealth."
U.S. Trust Corporation surveyed the wealthiest 1 percent of Americans and found that inheritances were a significant source of wealth for only 10 percent of respondents. Earnings from a privately owned business were the dominant source of wealth (46 percent), followed by earnings from corporate employment (33 percent) and earnings from a professional practice (29 percent).20
A study of the Forbes 400 in 1986 identified 265 separate fortunes among this group. Of these, 108 were inherited to some degree while 157 represented new wealth.21 The latest data show 149 of the 400 having inherited some or all of their wealth, with 251 being self-made.22
Causes of Mobility. Entrepreneurship is key both to the concentration of wealth in America and the high degree of mobility in and out of wealth. Entrepreneurs gain and lose wealth faster than workers.23 Hence, a consequence of having a high degree of entrepreneurship, which all economists agree is essential to growth, is necessarily going to be a higher degree of wealth concentration, though mitigated by a higher degree of mobility as well.
"Inheritance accounts for very little of the wealth of the richest Americans."
Many factors explain why wealth tends not to perpetuate itself in the U.S. A key one simply is the dynamics of the American economy. Businesses and industries that are dominant at one time frequently lose their footing and fall from grace. Consequently, fortunes based on declining businesses and industries soon dissipate, replaced by those based on newer, rising enterprises like companies exploiting the Internet today.
Not surprisingly, few of 1917's top companies are still among the top today; only AT&T is on both lists.24 But the churning is also considerable over shorter periods. Only nine of 1969's 25 largest companies (by market capitalization) were still ranked as such in 1999. Indeed, many of today's largest companies didn't even exist 30 years ago - or even 10, as in the case of Yahoo!25
In addition to the churning of industry, many other factors explain the fact that wealth is frequently dissipated, and why nouveaux riches are consistently able to break into the ranks of the wealthy. One is that rich men tend to marry younger women who outlive them, eventually consuming the family fortune. The sons and daughters of the wealthy often show no interest in running the family business or lack the skill to do so well. Finally, a not insignificant number of the rich die childless or leave their fortunes to charity.26
Consequences of Mobility. Whatever the reason, it is clear that very few great fortunes last more than two generations. Even the Rockefeller fortune, perhaps the greatest of all time, has been broken into so many pieces and been so depleted by charity and bad investments that little of it remains.27