How the wealthy hanging onto their money actually makes everyone else poorer, according to a new study

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  • A Chicago Booth Review report looks at the link between the wealthiest saving their money and inequality.
  • Wealthy people’s savings are used to finance household debt for everyday Americans.
  • As debt grows for the lowest-earning Americans, the wealthy having more savings just fuels the cycle further.
  • See more stories on Insider’s business page.

The wealthy sitting on their savings may be helping finance the debts of poorer Americans and therefore play a role in rising inequality, according to the Chicago Booth Review.

Researchers Amir Sufi, Ludwig Straub, and Atif Mian looked at the growing savings of America’s wealthiest residents, and found it isn’t going into what they call “productive” investments, like building roads or new research. Instead, the stockpile is going toward financing debt from everyone not in the top 1%.

Prior to the financial crisis in 2008, such savings financed “almost a third of the rise in household debt owed by the bottom 90%.” After the housing crash, they began to take on a greater role in subsidizing government debt (although the continued debt from lower-earning Americans is still financed from those savings).

How does that work, exactly? Rebecca Stropoli at Chicago Booth Review uses the hypothetical of a corporation issuing equity to a wealthy shareholder, but the proceeds don’t go on research or equipment but into a deposit at a bank, which in turn uses it to fund a mortgage for a less-affluent household. The wealthy are financing bank lending to average Americans, in other words.

When the poorer take on more debt – especially when they’re incentivized by low interest rates – that’s less money they have to spend on other things.

During the pandemic, wealthy savings climbed, along with their fortunes

On the whole, the personal saving rate – the amount that Americans have left over from their income after paying off bills – has climbed during the pandemic, although it shot down in April 2021. But, as Time’s Alex Gailey reports, an increased savings rate may not show the whole story. Poorer Americans, Time reports, continued to spend at levels just a little below pre-pandemic rates, while their wealthier counterparts held on to more money.

The wealthiest Americans saw their net worths grow during the pandemic as widespread economic devastation and unemployment ravaged the country. From March 18 to December 30, 2020, the world’s billionaires added $3.9 trillion to their net worths; that’s enough to pay for the world’s vaccines and to keep everyone out of poverty.

In the US, billionaires got 44% richer throughout the pandemic, Insider’s Lina Batarags reported. That stands in marked contrast to the millions of Americans facing down unemployment and poverty.

The researchers note that the pandemic has cleaved an even deeper divide between the top 1% and the bottom 99%. Low-wage workers and workers of color were disproportionately impacted by the pandemic’s economic devastation, which took the shape of a K – high-earning workers saw jobs and incomes grow, while those at the bottom experienced the opposite.

“Mian, Straub, and Sufi see in the data a widening wealth gap and more saving by the rich, thus more money being turned into loans and lent out to consumers,” Stropoli writes.

The methods by which the ultrawealthy hang onto that wealth have come into greater relief this week, too, as a bombshell ProPublica investigation revealed that the wealthiest Americans are paying an incredibly low rate of taxes proportional to their wealth. That’s all legal, but it could finally kickstart reform targeted at America’s highest earners.

In the meantime, the savings of the wealthy will sit in bank accounts, fueling more debt for the rest of the country.

Read the original article on Business Insider

Bernie Sanders and Elizabeth Warren want to tax CEOs who make 50 times more than their typical worker

Sens. Elizabeth Warren and Bernie Sanders talk before the tenth Democratic 2020 presidential debate in South Carolina.
Sens. Elizabeth Warren and Bernie Sanders talk before the tenth Democratic 2020 presidential debate in South Carolina.

  • Bernie Sanders and Elizabeth Warren are part of a group that introduced a bill to tax CEOs.
  • Similar initiatives have already brought in, or could bring in, millions for cities like Portland.
  • The bill comes as some billionaire CEOs have seen huge gains in wealth throughout the pandemic.
  • See more stories on Insider’s business page.

Several legislators – including Sens. Bernie Sanders and Elizabeth Warren – announced on Wednesday that they’re introducing a bill to raise taxes for companies where top executives are paid 50 times more than their median workers.

It’s called the “Tax Excessive CEO Pay Act,” and, according to a press release, it’s targeted toward tackling corporate greed. Sanders and Warren are introducing the bill with Sens. Ed Markey and Chris Van Hollen, as well as Reps. Barbara Lee and Rashida Tlaib.

“At a time of massive income and wealth inequality, the American people are demanding that large, profitable corporations pay their fair share of taxes and treat their employees with the dignity and respect they deserve,” Sanders said in a press release. “That is what this legislation will begin to do.”

The legislation is targeted at larger public and private companies; only those with “with average annual gross receipts of at least $100 million for the three preceding years” would be subject to the tax.

Companies where CEOs make between 50 and up to 100 times the median worker’s pay would have their corporate taxes increase by 0.5%. For those CEOS paid between 100 times and up to 200 times more than the median worker, taxes would increase by 1%, with a 1% increase for every order of 100. The highest increase would be 5%, for companies where CEOs make over 500 times their typical worker.

The legislation was discussed on Wednesday during a Senate Budget Committee hearing, chaired by Sanders, called “The Income and Wealth Inequality Crisis in America.” The hearing also discussed unionization efforts by Amazon workers in Alabama.

Sarah Anderson, the Global Economy Program Director at the Institute for Policy Studies (IPS), testified at the hearing about the CEO and worker pay divide.

“What this bill would do is it would change the incentives by encouraging corporations to share their wealth – and discourage the outrageous CEO paychecks that have led to outrageous CEO behavior,” she told Insider.

Some cities have already implemented similar measures

Anderson highlighted that the city of Portland, Oregon has had a similar initiative for years. NBC News reported that that tax penalty brought in about $4 million in 2018, and it was projected to bring in a similar amount in 2019. It also inspired some skepticism from academics in the area, according to NBC News, with some saying it didn’t raise significant revenue or bridge a wealth gap.

San Francisco also passed a similar tax as a ballot measure in November 2020, which was projected to bring in around $60 million to $140 million a year. According to the press release, the bill could raise up to $150 billion in 10 years.

Anderson said, “I think we can send a message about our national priorities and values through our tax code and other public policies.” She framed the disparity between CEO pay and their workers as a self-esteem and morale issue, with frontline workers – like those working at grocery stores – not being rewarded for the work they’re doing.

The bill also comes as some billionaire CEOs have seen huge gains throughout the pandemic, with American billionaires adding $1.3 trillion to their collective net worths since March 2020.

“I think that a lot of people just haven’t ever thought about the fact that we are the richest country in the world. And so why can’t we get rid of poverty?” Anderson said. “And I think, unless we get rid of the concentration of so much money and power at the top, we won’t be able to get rid of poverty because it means that so much of our nation’s resources is flowing upwards.”

Read the original article on Business Insider