How wealth creation gap between African, white Americans maintains generational inequities

Fifty-two years after a decade long civil rights movement in the US led to the Fair Housing Act, the gap between the finances of blacks and whites remains wide.

Based on data from the Federal Reserve’s Survey of Consumer Finance, the typical black family has only 10 cents for every dollar held by the typical white family.

 

Before 1968, centuries of unequal treatment of African Americans was sorely manifest in nearly every part of American society and business. Although many have pointed out the far larger share of white millionaires than black, but among the middle class, the inequities are stark.

 

In 1968, a typical middle-class black household had $6,674 in wealth compared with $70,786 for the typical middle-class white household, according to data from the historical Survey of Consumer Finances (after been adjusted for inflation).

 

According to Kriston McIntosh et al., in ‘Examining the Black-White Wealth Gap’ at $171,000, the networth of a typical white family is nearly ten times greater than that of a black family ($17,150) in 2016.

 

“The historical data reveal that no progress has been made in reducing income and wealth inequalities between black and white households over the past 70 years,” economists Moritz Kuhn, Moritz Schularick and Ulrike I. Steins in their analysis of US incomes and wealth since World War II noted.

 

Gaps in wealth between black and white households show the effects of accumulated inequality and discrimination, as well as differences in power and opportunity that can be traced back to America’s inception. The black-white wealth gap reflects a society that has not and does not afford equality of opportunity to all its citizens.

 

Wealth takes into account, not just the wages that people earn for work, but homes, stock-market investments and other assets they have. More wealth makes for a more comfortable, safer living. And, more importantly, it is passed on to the next generation.

 

Inheritance: A boost at birth  

Parents’ wealth gives many white children a boost at birth, an advantage many of their black peers lack.

 

In 2020, Americans are projected to inherit about $765 billion in gifts and bequests, excluding wealth transfers to spouses and transfers that support minor children. Inheritances account for roughly 4 percent of annual household income, much of which goes untaxed by the US government. White families receive much larger inheritances on average than Black families.

 

The wealth gap is even more pronounced among less-educated Americans. A white household whose head has only a high school diploma has almost 10 times the wealth of a black family with the same education. The fact that black families start with so much less wealth makes it difficult to catch up, research has found.

 

All of this matters because wealth confers benefits that go beyond those that come with family income. Wealth is a safety net that keeps life from being derailed by temporary setbacks and the loss of income.

 

This safety net allows people to take career risks knowing that they have a buffer when success is not immediately achieved. Family wealth allows people (especially young adults who have recently entered the labour force) to access housing in safe neighbourhoods with good schools, thereby enhancing the prospects of their children. Wealth affords people with opportunities to be entrepreneurs and inventors.

 

A burden too big to bear

Heather Long and Andrew Van Dam in an article in The Washington Post accentuated how blacks are living the impact of COVID-19. They observed that the first economic victims of the COVID-19 crisis was the service industries that employ disproportionate numbers of non-white workers. As a result, after the “Great Lockdown”, fewer than half of all black adults had a job.

 

“The pandemic is falling on those least able to bear its burdens. It is a great increaser of inequality,” Jerome H. Powell, Federal Reserve Chair said in a recent videoconference with Princeton University. “It is low-paid workers in the service industries who are bearing the brunt of this.”

 

A special survey by the US Census in late April and early May 2020, revealed how stark the situation is for African Americans. More than 1 in 5 black families now report they often or sometimes do not have enough food — more than three times the rate for white families. Black families are also almost four times as likely as whites to report they missed a mortgage payment during the crisis.

 

Education and restitution?

Despite the progress black families have made in civic and economic life since the passage of the Civil Rights Act of 1964, they face systemic and cumulative barriers on the road to wealth accumulation due to discrimination, poverty, and a shortage of social connections (including role models and mentors in their communities) as both mechanisms and results of racial economic inequity. These adverse elements have helped maintain a persistent and widening wealth gap.

 

”In our view, education alone cannot address the centuries-long exclusion of blacks from the benefits of wealth-generating policies and the extraction of whatever wealth they may have” stated Darrick Hamilton, executive director of the Kirwan Institute for the Study of Race and Ethnicity, Ohio State University, and Trevon Logan, the Hazel C. Youngberg Distinguished Professor of Economics, Ohio State University. “The most just approach would be a comprehensive reparation programme that acknowledges these grievances and offers compensatory restitution, including ownership of land and other means of production.”

Boardrooms and C-suites lack colour 

“In the ‘new normal’, racial and gender equality is a crucial part of building a good business – period. Companies can lead, follow or cease to exist, the choice is theirs,” Olu A. Verheijen, energy sector executive, impact investor and philanthropist said in an email to BusinessDay.

 

Diversity along racial and gender lines in American companies’ boardrooms are still dismal and need to be redressed.

 

Black professionals in 2018 held just 3.30 percent of all executive or senior leadership roles, which are defined as within two reporting levels of the chief executive officer, according to the US Equal Employment Opportunity Commission (EEOC).

 

Among Fortune 500 companies, less than 1 percent of CEOs are black. Today there are only four, down from a high of six in 2012, according to Fortune. And over the past two decades, there have only been 17 black CEOs in total. Of those, only one has been a woman – Ursula Burns, who ran Xerox from 2009 to 2016.

 

Black Enterprise’s 2019 Power in the Boardroom report found that among S&P 500 companies, there were 322 black corporate directors at 307 companies. Of those, 21 were chairmen and lead directors. But the report also found that more than a third of S&P 500 companies did not have any blackboard members whatsoever.

 

One major factor responsible for this variance is that corporate leaders are not doing enough to develop a pipeline of black talent to promote into the C-suite and to be named to boards, said Cari Dominguez, former chair of the EEOC and a member of the National Association of Corporate Directors. “I see companies asking for a diverse slate of candidates, but not saying what percent should be made up of people of colour.”

 

The culture of promotion can also exclude qualified black candidates, who may not be part of the social networks that board members and CEOs often use to vet a candidate.

 

Can taxes bridge the wealth gap?

The widening racial wealth gap disadvantages black families, individuals, and communities and limits black citizens’ economic power and prospects and effects are cyclical. Such a gap contributes to inter-generational economic precariousness: almost 70 percent of middle-class black children are likely to fall out of the middle class as adults.

Other than its obvious negative impact on human development for black individuals and communities, the racial wealth gap also constrains the US economy as a whole.

 

Darrick Hamilton and Sandy Darity, economists, have concluded that inheritances and other inter-generational transfers “account for more of the racial wealth gap than any other demographic and socioeconomic indicators.”

 

Some experts have proposed the use of taxes to rectify these historical race dependent wealth gaps. The core objectives of tax policymaking should be to raise revenue efficiently and equitably.

 

Current taxation of estates and gifts (and non-taxation of inheritances) fails to meet these goals, perpetuating high levels of economic inequality and impeding interdenominational mobility.

 

Lily Batchelder at the New York University School of Law recommends reform to the way the US tax inheritances by taxing inherited income through income and payroll taxes. She suggests three-lifetime exemption levels – $2.5 million, $1 million, and $500,000 – to ensure that the proposal only taxes individuals receiving the largest inheritances. The proposal would limit tax avoidance through reforms to the rules governing the timing and valuation of transfers through trusts and other devices.

The income from inheritances and from wealth more generally, is taxed at an inequitably low rate, especially when compared to earnings.

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