How Can We Calculate the US’s Greatest Fortunes?

Narrator: Whether you love them or hate them, the wealthiest 0.01 percent of Americans have dominated news headlines, but do we really know how wealthy they actually are? Recent estimates suggest the wealthiest 1 percent hold 10 to 20 percent of total wealth in the United States. However, calculating the wealth of the richest people in America is complicated, and not an exact science. There are disincentives to fully reporting their assets, difficulty identifying them, and issues with accurately valuing their ownership in companies.

Eric Zwick: It’s very hard to measure wealth for several reasons. First, unlike income, several components of wealth, there aren’t actually agreed-upon values even. So private business wealth is not transacted on a day-to-day basis in the stock market or anything like that. So the values are based on estimates. Second, there isn’t comprehensive data on components of wealth for anybody or the flows that come from that wealth for everybody in the US. A third reason is that the ultrarich have fairly complex portfolios. So just understanding what’s in those portfolios is challenging. While the rich have very high wealth and the concentration of wealth has grown significantly since the 1980s, the level is a bit lower, and the trend is less dramatic than some previous studies have documented. So it’s nevertheless something that policy makers would want to focus on, but it doesn’t have this rocket-ship explosive growth that maybe previous research focused on.

Narrator: That’s Chicago Booth’s Eric Zwick. He and the Treasury Department’s Matthew Smith and Princeton’s Owen Zidar developed a method using new data to create more accurate estimates of how much wealth the richest Americans actually have. The researchers suggest that estimates based on individual income tax data alone don’t properly account for the holdings in private companies or in other sources of income. Currently, the main approaches to calculating wealth just use estate-tax data, Federal Reserve surveys of the ultrarich, or individual income tax returns. The researchers expanded on the tax-return approach by adding better data on interest rates, housing wealth, pensions, and private business equity, including the assets and cash flows of businesses, where the tax code allows for generous deductions that make the income observed in individual tax returns unreliable for valuation.

Eric Zwick: So we assemble a whole set of new data using what are called information returns that for each source and each firm that people own in certain categories, we can actually then observe that entity that they own, try and value it more precisely using the facts about that entity like, oh, this is a business with $100 million in revenues and $10 million in profits, $50 million of assets. We can estimate the value of that business and then apportion it to the person. Previous research hasn’t had access to that data and so hasn’t been able to do that kind of precise, fine-grain measurement. It has a few benefits. One, we can take advantage of the fact that valuation metrics are different across industries. So in real estate versus doctor’s offices, a dollar of profits is going to be valued differently because of the underlying nature of the business. In addition, a lot of businesses generate taxable losses because of generous deductions available in the tax code. And we can adjust for that because we’re not just using taxable income to estimate wealth. We’re also using characteristics of the business like assets and revenues.

Narrator: What they found as of 2016 was that the top 0.1 percent held 15 percent of wealth; and the top 1, 0.1, and 0.01 percent all got richer from 1989 to 2016. Further, their estimates suggest that the wealth of the top 1 percent nearly equals the wealth of the bottom 90 percent of Americans. According to the researchers, if we can understand where and in what form the rich are generating the most wealth, we can find the source of the growing wealth inequality in America.

Eric Zwick: In terms of the composition of top portfolios, we find a larger role for private business and for equity wealth, entrepreneurial wealth more generally, relative to previous research that has emphasized more . . . easier-to-value liquid assets like fixed income and stocks. We find a larger role for this kind of entrepreneurial wealth, which then tells you not just about what the level and composition of wealth is, but also where wealth inequality seems to be coming from; the importance of closely held private business for wealth inequality, even within the top groups and the very right tail of the wealth distribution. Our research points to the importance of private business wealth and entrepreneurial wealth in driving wealth inequality. It helps reconcile what seemed to be disparate findings across the income inequality and wealth inequality literatures, where income inequality looked like entrepreneurial income was quite important, but with wealth inequality, we weren’t sure. So these are now brought a little closer together, but there’s still room to learn more about the relationship between this wealth, especially by closely held businesses or entrepreneurs, whether it’s self-made or whether it’s inherited or multigenerational, the relative importance of those things across time and space.

Narrator: According to the researchers, the more accurate our estimates are of the wealth of the richest Americans, the more it will help policy makers weigh taxes and other incentives to level the economic playing field. (upbeat piano music)

Eric Zwick: There have been a lot of proposals recently to think about expanding the tax base to include either wealth directly or unrealized capital gains. There have been proposals to expand or close loopholes in the estate tax system. There have also been proposals to think about broadening the income tax to harmonize the treatment of capital income or income from businesses and from wealth with that from wages, and research points toward, if you want to raise a significant amount of revenue, here’s where you should be looking. And I think policy makers continue to try and build these models into their revenue-scoring estimates to try and score different policy proposals and think about what makes the most sense given their goals.