Mitigated wealth inequality is not necessarily problematic. Some even argue that, under capitalism, wealth inequality is benign. Those who take calculated risks and apply themselves get rewarded financially, and, in turn, surpass those who do not take risks or provide value to the economy. Yet, in the United States, the top 10% now owns 70% of all U.S. wealth and since 2007, household wealth decreased among all classes except the top 20% [1]. For middle-class Americans, their prospects of achieving substantial wealth in the United States are steeply declining. Wealth inequality surpassed acceptable standards years ago. The U.S. approaches unprecedented levels of wealth division not because of the income taxation system, an oft-blamed culprit, but because of ignored loopholes and a Federal Reserve complicit in preserving and inflating the assets of the rich.

Since 1960, the federal budget in the U.S. has grown from 17% of GDP to around 30% in 2022 [2]. Average annual GDP growth dramatically slowed during the same period, coinciding with an explosion in U.S. debt in excess of 30 trillion dollars [3]. In light of increased economic dependence on the government in addition to slowing growth, the exponential wealth growth among the affluent classes should be surprising. Explaining wealth inequality in the U.S. is particularly difficult as the causes are numerous, yet almost exclusively misdiagnosed. Over the last decade or so, Democratic politicians typically cite tax policy as the cause of these disparities. Last June, President Biden tweeted, “it’s about time the super-wealthy start paying their fair share” [4]. Despite these claims, in 2020, the top 1% earned 22.2% of the country's income while paying 42.3% of all U.S. income tax revenue collected. The bottom 50%, by contrast, earned 10.2% of the nation's income while paying just 2.3% of all income tax. The 1% is the only demographic who has been on average consistently paying higher income taxes every year since 2001 [5]. Diagnosing wealth inequality as an income tax problem misses the point. 

Fresh into Biden's presidency, he advocated for policies which would increase corporate income taxes from 21% to 26.5% as part of his Build Back Better agenda to alleviate wealth inequality and fund social programs [6]. Corporate income taxes, however, project a financial burden onto consumers as companies raise prices to mitigate their losses while unable to afford larger wage increases. In 2017, Congress cut the corporate income tax from 35% to 21% in the Tax Cuts and Jobs Act. Subsequently, from 2017 to 2019, the bottom half of earners experienced wage growth at about twice the rate the top half experienced, a trend not seen in decades. Black household median income increased by over 15%, outpacing white households, which experienced around 11.5% growth [7]. Ironically, tax revenue increased after state and local tax deductions were capped and the substantial tax cut spurred economic activity [8]. While seemingly counterintuitive, the US has experienced increased tax revenue in the wake of tax cuts many times in history. JFK’s Revenue Act of 1964 disproportionately benefited the wealthy by cutting income taxes, yet tax revenues increased in following years [9]. This provides merit to the Laffer Curve, a theory dictating that tax cuts will increase tax revenue up to a certain point. Largely speaking, concentrating efforts to combat wealth inequality on increasing taxes is fruitless. 

Rather than tax policy, the modern explosion in wealth inequality is a direct result of artificially low interest rates which, in response, heavily inflated asset values. Among American-owned stocks, the top 1% owns 17 trillion dollars worth, or 53% of all owned stock and 14% of all American real estate. The top 10% of Americans own around 90% of all owned stock. By contrast, the bottom 50% own a meager 19 billion dollars worth, or only 0.6% of all owned stock, which is less than the single net worth of many investors [10]. At the same time, interest rates (largely referring to the ten-year yield) have been in steady decline since 1981 [11]. While large portions of asset appreciation in the U.S. are entirely legitimate as the U.S. has traditionally been one of the most financially secure nations in the world, superficially low interest rates undermine this legitimacy in recent years, especially since the Great Recession. Using a fiat currency has enabled egregiously excessive fiscal and monetary stimulus. If gold or something else were to back our currency, this would place firm constraints on both the federal government and the Federal Reserve. Citizens could trade in their dollars for gold, for instance, if the government printed or spent too much causing the value of the dollar to decrease. Realistically, our economy is far past the possibility of reinstating a backed currency. Instead, we have experienced a fairly short and amazing explosion in asset values, an economic boom essentially realized by only 10-20% of Americans which is also likely not repeatable. 

During the financial crisis of 2008, the Federal Reserve was forced to employ a new tactic to flood the economy with liquidity. Setting the federal funds rate to 0% was not enough to ease market turmoil, so they pivoted and began purchasing toxic mortgage-backed securities and government treasuries in the trillions. This practice, known as quantitative easing, did take the economy out of immediate freefall. The real economy was so fragile the Fed continued quantitative easing from 2008 to 2014, purchasing around 4.4 trillion dollars in government treasuries [12]. Over this period, the U.S. averaged 1.34% average annual GDP growth while the stock market increased by 160% [13]. This discrepancy demonstrates the sheer power of an overly loose Federal Reserve to enrich asset holders. Although this changed very recently, bond yields have at times produced meager or even negative real returns since 2010 [14]. Negative real returns in the bond market means that the interest a bond holder receives is less than the rate of inflation, causing the bond holder to experience a financial loss in value. In a free market, bondholders would not tolerate negative real returns, meaning that these negative real returns are a response to a third party—the Fed—purchasing exorbitant quantities of treasury bonds and artificially suppressing bond yields.

 Artificially low interest rates create a moral hazard in the marketplace and grossly inflate asset prices as investors are forced into riskier assets like stocks and real estate. Meanwhile, they are “protected” against traditional risk because the Federal Reserve pumps trillions of dollars into the market. Quantitative easing serves as a tool to increase asset prices and mend large-scale market crashes like in 2008, 2011, and 2020. In that sense, it provides a type of “insurance” for the risky investments of the rich paid for in part by declining real wealth for the middle-class. Since 2008, the Federal Reserve's assets have grown by over 7 trillion dollars [15]. Stock market performance heavily correlates to the chart of Federal Reserve assets. A weak real economy partially reliant on an overly-stimulating Federal Reserve is horrible for non-asset holders and enriching to the wealthy, asset-owning classes. Real incomes experience little growth while housing—a rate-sensitive asset—dramatically appreciates, leaving middle class people with little hope of home ownership. Despairingly, 55% of current homeowners could not afford to purchase their home at current prices [16].

Under current U.S. tax policy, the rich also protect their assets against wealth taxes. When someone extremely wealthy passes away, their wealth is subject to estate taxes typically ranging from 18-40% on anything past 13.6 million dollars [17]. However, they can preserve their generational wealth through a largely-unknown loophole called the “stepped-up basis.” On this basis, if a person dies with an estate of Apple stock worth 100 million dollars at an average cost of $0.10 a share, their family would inherit the stock at a stepped-up basis cost of where Apple stock is trading today. If Apple stock is now worth $170 per share, the new inheritor of the stock would only pay tax on the gain above $170 per share. The growth the inheritor’s parent experienced from $.10 per share to $170 becomes entirely taxless. More impactfully, this also applies to real estate, the largest asset class in the world. Not only are assets inflated beyond fair value, but the growth they experience can be virtually taxless through this loophole [18]. 

In a perfect world, there would be something backing the dollar or another means of preventing our government from excess stimulus and spending. A consistent system in which the Federal Reserve uses market tools to target an explicitly stated inflation rate, though, would be even more significant than installing a backed currency. For instance, if the Federal Reserve were to target 2% inflation every year, they could reach this goal more easily if they used the bond market to guide them. The difference between the yields of a ten-year bond and a ten-year inflation-protected bond is the market's projection of annual inflation over ten years. Whenever this figure goes over 2% the Federal Reserve could sell bonds; if it dipped below 2%, the Federal Reserve could buy bonds. This would provide the market with simplicity and ease of mind, while also ensuring an appropriate amount of liquidity. Instead, the Fed is consistently in front of or behind the ball in providing liquidity to the market. However, the forward economic outlook is tricky as the government and the Fed almost certainly cannot employ past tactics with inflation concerns and rising interest rates. Today’s drastic wealth inequality is a byproduct of a large-scale failure on the part of the U.S. government and central bank. Without addressing such issues, we are setting ourselves up for financial decay.