What fraction of total wealth was created by those holding that wealth (as opposed to inherited/gifted)?

Question

Relevant data for the US in 2000: GDP per capita (wealth created per year) = $34785. Net wealth held in 2000 = $182381. If we knew the fraction of yearly wealth that Americans save, we'd be closer to answering the question... (I'm interested in the answer for other countries too.)

Thanks for the great sources! I'm asking this from a public policy perspective -- the greater the fraction of people's wealth that was endowed the greater justification for redistribution through progressive taxation.

Clarification: I want to count Bill Gates's wealth as all created, as well as investment income. By created I mean paid to you in the free market, as opposed to given to you as a gift.

Answer 1

I don't think the problem is that simple. The net savings rate in the US is currently negative and has been falling steadily since 1980, so most of the increase in real (adjusted for inflation) wealth is due to the increase in real asset values, mostly housing and the financial markets. At least 1/3 of the increase in the stock real prices was due to the decline in interest rates over the last 25 years, with the remainder due to increased profits.
This makes partitioning either income or wealth as earned vs unearned very tricky. Most people get most or their income from work but people with incomes in the millions, investment income also matters. For sources of income of the very rich see http://www.visualizingeconomics.com/2007/05/06/sources-of-income-for-top-001-percent/

Note: Another complication is that people like Bill Gates who created a company and who's wealth is still held in the company stock never show up as earning income beyond his salary which is about one million a year, even thou his wealth is fifty billion. This wealth accumulation is not taxed until it is sold during his lifetime and then become a capital gain or he dies and inheritance tax paid. Since he is giving it away it will never be taxed.

Answer 2

That's a hard question to answer.

First of all, you are assuming that wealth is only measured in terms of currency -- while that is an acceptable measure, you must bear in mind that there are resources that cannot necessarily be valued so. This includes human resources, time, technology and the like.

That said, one could potentially measure the creation of wealth through other means (e.g. KIBS [1]) and the like. This would entail detailing a series of contributors to the economy and calculating their effect individually.

The United Nations World Institute for Development Economics Research (UN WIDER) [2] has some data in this regard. Other sources would be the National Bureau of Economics Research. The work of Professors Kopczuk [3] and Saez [4] are also relevant in this regard.

For other countries, the EU commission provides detailed data on inflation, growth, labour productivity and so on [5] that would be useful in gleaning such information from the data.

I could give you a more detailed answer in this regard, but it would be meaningless without delving into the nitty gritty details.

Also, the answer to this would depend on your needs. Feel free to ping me if you are interested in getting into the details of deriving such information.

Cheers.

Answer 3

If your goal is to justify redistribution through progressive taxation, then wealth earned versus wealth gifted might not be the ideal metric. A more relevant metric might be the correlation between a person's wealth and their parents' wealth. This is because a person's ease and ability to earn/create wealth may very well be inherited.

Answer 4

I do not know how to teach basics. WEALTH CAN NEITHER BE CREATED NOR BE DESTROYED BUT CAN BE CHANGED FROM ONE FORM TO ANOTHER. This is Law of Conservation. In double entry bookkeeping method of accounting, debits = credits and assets = liabilities. You cannot create a debit/credit without a corresponding credit/debit. Let me prove this law mathematically. Can you add 2a and 3a? Yes. Answer is 5a. Can you add 2a and 3b? No. Can you add 2km and 5km? Yes. Answer is 7kilometer. Can you add 4 kilometers and 4 kilograms? No. Wealth only can be added to wealth and wealth only can be subtracted from wealth and thus wealth can neither be created nor be destroyed but can be changed from one form to another.
Where do economists err? Economists think that when a wealth that has value in use is converted into wealth that has value in exchange wealth is created. Example photosynthesis. Carbon dioxide, water, essential plant nutrients etc have value in use. They combine to produce food grains, a form of wealth that has value in exchange. We say that Wealth is created. We are wrong.
If value in exchange is prerequisite for classification of wealth do loss, depreciation and goodwill have value in exchange? Are they not wealth? Why are they expressed or measured in units of wealth? What are units of measurement of non-wealth? It is hightime that economists start studying basics of wealth on the lines that chemists study matter and redefine economics as study of nature, composition, properties, laws and classification of wealth.