Wealth, Inheritance and the Estate Tax
Thursday, September 21, 2006
by Jagadeesh Gokhale and Pamela Villarreal
Table of Contents
Wealth mobility mitigates inequality.14 While there is a great deal of 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.15 For example, a study of families between 1984 and 1994 examined the income movement of households, divided into 10 equal population groups (deciles). It found:16
- Almost two-thirds of families in the bottom 10 percent of income in the first year reached a higher income group 10 years later.
- Of these, 40 percent moved up to the next decile, while slightly more than one-fourth rose two deciles and about one-tenth leaped three deciles.
- Almost one-fourth jumped four or more deciles, with 1.42 percent rising from the lowest 10 percent to the highest.
- Nearly half (47 percent) of those in the top 10 percent in 1984 were in a lower decile 10 years later.
- About 10 percent fell more than three deciles and a few ended up all the way down in the bottom 10 percent.
Wealth is also highly mobile. 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.17 The latest data show 149 of the 400 having inherited some or all of their wealth, with 251 being self-made.18 The super-rich have experienced a comeback in recent years. By 2000, the number of billionaires had shot up to 298, before falling to 266 in 2001 and 228 in 2002. In 2003, the number shot back up to 262 and in 2004 to 313.19
Because wealth is highly mobile in the United States, most fortunes are earned, rather than inherited, and rarely survive past the second generation. For instance, according to data from the Internal Revenue Service:
- More than 2,218 taxpayers made the list of the 400 richest Americans profiled each year in Forbes magazine at some point between 1995 and 2003.
- Three-fourths of those 2,218 made the cut for only one year.
- Most (87 percent) were only listed one or two years, and less than 1 percent made the cut every year.
“Most children of the super-rich will not be rich.”
Moreover, being raised in a super-rich family does not guarantee that children will be super-rich as adults. For instance, when the children of today's retiree households (those headed by an adult between the ages of 60 and 69) themselves reach retirement age:
- Only 21 percent of children in the top 5 percent of households - those with accumulated wealth of at least $4.0 million - will be in this wealth range when they retire.
- Furthermore, more than one-fourth (30.2 percent) of children whose parents are in the top 5 percent will drop to the bottom 80 percent when they retire.
- More than half of children (52.6 percent) of parents in the bottom 50 percent of the wealth distribution (with accumulated wealth of less than $387,000) will be in the upper 50 percent of the wealth distribution when they retire.
- About 4 percent of children in the bottom 50 percent will retire in the top 20 percent of the wealth distribution.
According to the 2004 Survey of Consumer Finances, only 20 percent of today's retirees have more than $1 million for retirement, and only 4 percent of them have more than $5 million. But despite large bequests, most of the children of the rich will not do as well. In fact, 43 percent of them will arrive at retirement within the poorest 80 percent of the population because their skill levels and earnings are likely to be lower than that of their high-skilled parents. But wealth and poverty are never static. Americans of all classes often move up and down the economic ladder depending on their personal circumstances and the state of the economy at a given point.
Causes of Mobility. Entrepreneurship accounts for a large degree of mobility in and out of wealth in the United States. Entrepreneurs gain and lose wealth faster than workers.20 Hence, economists agree that a high degree of entrepreneurship is essential to growth, and in turn creates a higher degree of wealth concentration - which is mitigated by a higher degree of mobility.
Many other factors also help explain the fact that wealth is frequently dissipated, and why the nouveaux riche are consistently able to break into the ranks of the wealthy. One factor is that rich men tend to marry younger women who outlive them and eventually consume the family fortune. The sons and daughters of the wealthy often show no interest in running the family business or lack the skills to do so well. Finally, a significant number of the rich die childless or leave their fortunes to charity.21