On Wednesday night, the first of the 2020 Democratic debates will take place with ten candidates vying for the national spotlight. Senator Elizabeth Warren, one of the leading contenders for the nomination, will take the stage. She has proposed a wealth tax on the richest Americans, sparking intense debate about wealth inequality in the United States. Her proposal would levy a two percent tax on household net worth above $50 million and a three percent tax on household net worth above $1 billion.

As the Democratic candidates debate how to best address economic inequality, here are six things to know about wealth in the United States.

1. There’s a lot of wealth out there

American households held over $98 trillion of wealth in 2018. Wealth, or net worth, is defined as total assets minus total liabilities. Assets are resources with economic value—think houses, retirement funds, and savings accounts. Liabilities, or debt, is the opposite—think mortgages, student loans, and car loans.

In 2018, U.S. households held over $113 trillion in assets. For context, that is over five times as much as all the goods and services produced in the U.S. economy in a single year. If that amount were divided evenly across the U.S. population of 329 million, it would result in over $343,000 for each person. For a family of three, that’s over a million dollars in assets.

Almost three-quarters of aggregate household assets are in the form of financial assets—namely stocks and mutual funds, retirement accounts, and closely-held businesses. Real estate makes up the vast majority of nonfinancial assets.

2. There’s also a lot of debt–and much of it is in our homes

American households also hold a lot of debt—over $15 trillion in 2018. Not surprisingly, over two-thirds of that debt is in our homes.

A rising share of household liabilities is student debt. U.S. households hold almost $1.6 trillion in student loans—an increase of over 150 percent since 2006.[i] Millennials are, in fact, the “student debt generation.” Compared to their Generation X peers, they took out more loans at higher amounts and were more likely to default, largely due to higher tuition, increased enrollment at for-profit schools, and a weak labor market.

3. Wealth inequality is high and rising

The share of wealth in the economy is increasingly owned by families in the top of the income distribution. The top 20 percent held 77 percent of total household wealth in 2016, more than triple what the middle class held, defined as the middle 60 percent of the usual income distribution.[ii]

In fact, the top one percent alone holds more wealth than the middle class. They owned 29 percent—or over $25 trillion—of household wealth in 2016, while the middle class owned just $18 trillion.[iii]

This has not always been the case. Before 2010, the middle class owned more wealth than the top one percent. Since 1995, the share of wealth held by the middle class has steadily declined, while the top one percent’s share has steadily increased.[iv]

4. Only the top 20 percent has recovered since the great recession

While the middle class has seen modest growth of 7 percent in their net worth since 1995, it has not yet recovered to its previous peak in 2007. This tepid recovery is driven by declines in home-ownership and stock market participation since 2007—if you do not hold assets, you cannot benefit from recovery in asset prices.

In contrast, the wealthy have seen robust growth since 1995 and have fully recovered from the Great Recession. Median net worth for the top 80th-99th percentiles has increased by 149 percent since 1995. For the top one percent, it has grown by 187 percent from a far higher base, making it difficult to even see the wealth of the bottom 99 percent on the following chart!

5. Americans’ liquidity could improve

Liquidity, or the amount of assets easily convertible to cash, is an important concept when evaluating household financial well-being. For example, money put into a savings account is liquid, thus it is readily available if a household needs to cover an emergency expense.

A recent survey from the Federal Reserve Board found that 61 percent of Americans said that they would cover a hypothetical $400 expense with cash or its equivalent, a record high since the question was first asked in 2013.[v] This statistic has led some news outlets to say, erroneously, that nearly 40 percent of Americans can’t cover a $400 expense. Some politicians are using a similar line.

As Michael Strain and others have pointed out, saying that almost 40 percent of Americans can’t cover a $400 emergency expense is not correct. While 61 percent of Americans said they would cover a $400 emergency expense with cash or its equivalent, only 12 percent said they would not be able to pay for the expense right now. The remaining 27 percent said they would cover the expense through such means as putting it on a credit card and paying it off over time, borrowing from a friend or family member, selling something, or taking out a loan.[vi] Whether those are the best ways to pay for an emergency is, of course, debatable.

While the statement that 40 percent of Americans can’t cover a $400 expense is false, Americans’ ability to handle emergencies such as loss of a job, a major house or car repair, or a medical emergency, is troubling. In fact, another study found that 6 in 10 Americans do not have enough saved to cover three months of expenses.[vii] Social insurance programs such as unemployment benefits certainly help, but other life events such as the birth of a child, a serious illness that makes working impossible, or the need to retrain or relocate to find a new job are not currently covered by a system that was originally enacted in the 1930s and has not been updated to address changes in the economy or the dramatic rise in women’s employment.

 6. Generational wealth inequality matters, too

While wealth inequality is certainly an important story, there are also important differences in wealth accumulation by age.[viii]

Age-based wealth inequality has increased over time. From 1989 to 2016, the median net worth of families with a head of household age 65 or older increased by 68 percent. Over that same time period, the median net worth of families with a head of household age 35 or younger decreased by 25 percent.

Two additional issues need to be kept in mind when thinking about generational wealth inequality. First, the average value of education loans held by younger families has increased by a factor of seven over this period.[ix] However, the human capital accumulated through further education is not counted in assets. In other words, in principle, the payoff to higher education through higher wages over a career should be counted as well. Although the returns to higher education remain positive, they vary a lot by whether a student completes college, the type of school they attend, what they major in, and family background.

In addition, these measures of net worth do not capture the value of government benefits. Projected growth in real federal spending over the next decade is concentrated in areas that benefit older families, such as Social Security and health care. At the same time, spending on younger families, such as investments in children, is projected to fall as a share of the federal budget. These two trends, plus large projected growth in net interest payments, mean that younger families will not only have less wealth but will be expected to pay for debt-financed federal spending that has mainly benefited prior generations.[x]

A small portion of top bracket wealth could be used to fund investments in infrastructure, broad tax cuts, or baby bonds

The top one percent of the usual income distribution holds over $25 trillion in wealth, which exceeds the wealth of the bottom 80 percent. That is more than all the goods and services produced in the U.S. economy in 2018.

Just one percent of the top one percent’s wealth ($250 billion annually; $2.5 trillion over ten years[xi]) could address some of America’s most pressing problems.

For example, it could substantially improve infrastructure, a public good that benefits everyone and would boost productivity. The American Society of Civil Engineers gave America’s infrastructure a grade of D+ in 2017. To improve that grade to a B, the U.S. needs to invest an additional $2 trillion in infrastructure over ten years.

Another example of how this wealth at the top could be used is for a broad-based tax cut. That $2.5 trillion over ten years, divided equally, would give every American family a tax break of around $1,400 annually over a decade.[xii]

Another option would be to invest directly in children. Almost 4 million babies were born in 2017.[xiii] With $2.5 trillion over ten years, and assuming a constant number of births, we could give every baby born $9,600 annually over the next decade.

These are just illustrative examples that roughly estimate what could be done. We recognize the challenges of a wealth tax, including administrative difficulties, possible constitutional issues, and the importance of maintaining incentives for saving and investment. We also understand that wealth taxes can be thought of as a tax on rates of return. For example, a two percent wealth tax is really a 40 percent tax on a rate of return of five percent. In other words, if an investment grows by five percent in a year, a two percent wealth tax would capture 40 percent of that growth.

Sen. Warren understands how much wealth there is at the top and its potential as a revenue source. Her wealth tax—a two percent tax on household net worth above $50 million and three percent tax on household net worth above $1 billion—could raise a substantial amount of revenue. Emmanuel Saez and Gabriel Zucman, economists at the University of California, Berkeley, estimate that Sen. Warren’s wealth tax would raise $212 billion in 2019, and add up to $2.75 trillion over ten years. This estimate has been criticized, most notably by Lawrence Summers of Harvard University and Natasha Sarin of the University of Pennsylvania. Their optimistic estimate of Sen. Warren’s wealth tax is just $75 billion in the first year, roughly 35 percent of the Saez and Zucman estimate. Summers and Sarin assume that a wealth tax will be subject to similar avoidance maneuvers as the current estate tax, while Saez and Zucman assume a 15 percent avoidance rate.

Still, there is a lot of wealth out there to be tapped to meet a variety of national needs. Moreover, higher taxes on the rich is a popular way to raise revenue, and many wealthy individuals, from Warren Buffet to Ray Dalio, have recognized the importance of reforms that will sustain both capitalism and democracy.

The United States is a rich country, but it is becoming one in which a very small number of citizens own most of the wealth, and from which both younger Americans and the broad middle class are failing to benefit. The six facts summarized in this paper are an attempt to educate more people about our collective wealth, who owns it, and how it might be used to create a better future for all Americans.

[i] Authors’ calculations of G.19, Federal Reserve Board. 2019 dollars using PCE.

[ii] Usual income measures family income where economic shocks are smoothed, approaching what economists call “permanent income.” See Box 4 for a full discussion.

[iii] The Survey of Consumer Finances (SCF) excludes the Forbes 400, thus wealth shares of the top one percent are almost certainly underestimated—Bricker et al. (2016) estimate that the Forbes 400 account for about three percent of total wealth. SCF also does not include the value of future Social Security benefits or defined-benefit plans. Sabelhaus and Volz (2019) find that defined-benefit plans are about as concentrated as defined-contribution plans, but Social Security benefits are progressive relative to pre-retirement incomes. The definition of SCF Bulletin wealth, or net worth, can be found here.

[iv] For a brief discussion of the challenges in measuring wealth inequality, see Burtless (2019). For a more in-depth discussion, see Kopczuk (2015).

[v] Cash or its equivalent includes cash, savings, or credit card paid off at the next statement.

[vi] Respondents could choose multiple answers. See figures 10 and 11 for a full breakdown of responses.

[vii] The study (Bhutta and Dettling, 2018) includes transaction accounts, cash, prepaid cards, and directly held stocks, bonds, and mutual funds as liquid savings.

[viii] Gale, Gelfond, and Fichtner (2019) identify multiple disadvantages millennials face when saving for retirement, including a weak early-career labor market, longer lifespan, and low rates of return, among others. They also identify two advantages: higher levels of education and longer careers.

[ix] Authors’ analysis of the Survey of Consumer Finances. Bricker, Volz, and Llanes (2018) find that education debt is also increasing substantially for families with a head age 40 or older. Part of this rise is likely due to parents subsidizing their children’s education.

[x] See Auerbach, Gokhale, and Kotlikoff (1994) for an alternative way to account for government deficits across generations.

[xi] As a rough calculation, this estimate assumes no real growth in the wealth held by the top one percent of the usual income distribution.

[xii] Here, families refer to tax units. According to the Tax Policy Center, there were 172,000,000 tax units in 2018. Assuming no real growth in the net worth of the top one percent of the usual income distribution, $2.5 trillion divided equally over ten years comes out to $1,453 for each tax unit per year. The Tax Policy Center estimates that there will be 183,490,00 tax units in 2028. With this number of tax units, and again assuming no real growth in the net worth of the top one percent, each tax unit would receive $1,362 each year.

[xiii] Centers for Disease Control and Prevention. 3,855,500 births in 2017.