The Cavernous Divide

Two magazine covers stood out in poignant contrast on newsstands last week. Forbes magazine released its 29th annual listing of the world's billionaires. Time magazine's cover story wondered "How to End Poverty."

It was a good year for the global billionaires' club. Their ranks grew to 691, up 17 percent from the previous year. Collectively, the wealth of the world's billionaires reached $2.2 trillion, up more than 57 percent over the last two years.

Poverty is growing as well. Time reports that nearly half of the world's 6 billion residents are poor. Over one billion of them subsist on less than $1 a day. In the United States, according to the U.S. Census Bureau, the number of impoverished Americans rose 3.7 percent in 2003. The number of children living in poverty rose 6.6 percent.

Forbes seeks to explain the billionaires' success by noting that a majority of those on the list are "self-made." Forbes' web site features an interactive quiz that asks, "Do you have what it takes to become a billionaire?" and proceeds to explore things like marital status and hobbies. The idea is that many billionaires made it on their own.

But to suggest that membership in the growing billionaires' club requires only a combination of hard work and character traits ignores some dramatic shifts in global economic rules that explain the cavernous divide that has developed between the very rich and the very poor.

Tax rates have fallen on upper-income citizens and corporations worldwide. Fifty years ago in the United States, the highest marginal income tax rate was 91 percent; today it is 34 percent. As recently as 1979, taxes on capital gains from the sale of stock, real estate and businesses were 35 percent; today they are 15 percent. Corporate taxes as a percentage of the U.S. economy have shrunk from 4.1 percent of Gross Domestic Product in 1965 to just 1.5 percent in 2002. While corporate taxes have declined throughout the world, they have plummeted in the United States, leaving only Iceland among industrialized countries with a lower corporate tax burden.

Several of the wealthiest billionaires capitalized on public assets and made their fortunes by buying formerly public assets. This was the case with Mexican Carlos Slim Helu, the world's fourth richest man, who used inherited wealth to buy a substantial share of Mexico's privatized national telephone company. U.S. billionaires Bill Gates, Paul Allen and Steve Ballmer of Microsoft, and Larry Ellison of Oracle would not be in Forbes' top 20 billionaires had the U.S. government not invested tens of billions of public dollars developing computers and the internet.

Some billionaires' fortunes rest upon paying their employees poverty wages. Such is the case for the Walton family (numbers 10 through 14 on the Forbes list.) Wal-Mart is the largest private employer in the world. Many of its U.S. workers are so poorly paid that they must rely on food stamps and other forms of public assistance to get by. Such forms of government aid represent an indirect government subsidy to corporations whose business model does not include paying employees enough to live on. Worldwide, billions are gained by outsourcing service, production and manufacturing functions to workers who labor in sweatshop conditions in countries like China.

The role of government policy in determining who has wealth and who does not continues to expand. During the recent debate on the bankruptcy bill, federal lawmakers refused to close the "asset protection trust" loophole increasingly used by millionaires and billionaires to shelter mansions and other assets from creditors in bankruptcy. Those same lawmakers weakened protections that protect the family homes of ordinary people from creditors during bankruptcy.