THE BLOG
07/01/2010 04:45 pm ET Updated May 25, 2011

Private Wealth, Public Needs

With both federal and state governments running record deficits, many fear that the United States is going broke. This is absurd, of course. Public coffers may be bare at the moment, but the wealth in private hands - even after the crash - is at near record levels. The trick is finding ways to tap that wealth to fund urgent national priorities.

In 1980, the total wealth of U.S. households and nonprofit organizations stood at $10 trillion. That figure soared to $65 trillion in 2007, before shrinking back to $55 trillion today - a stunning increase over 30 years. Americans are so rich that they hold a quarter of all wealth in the world.

Low tax rates and soaring inequality, starting under President Reagan, helped fuel the huge build-up of private wealth. Affluent Americans have been making far more money than they can actually spend - to the point that the top 1 percent of families now sit on some $19 trillion in assets.

Compare this vast sum to the deficits of all 50 states this year, which amount to $200 billion. California is reeling from budget cuts, yet it is by far the wealthiest state in the nation, with more millionaires than the entire East Coast, from Maine to Georgia. While the state's budgetary gap is big, $20 billion this year, consider that California's 82 billionaires - who together wouldn't fill a small movie theater - have a combined net worth of over $225 billion.

The Obama Administration is already seeking new taxes on upper class Americans. These tax hikes, though, will apply mostly to future earnings and leave current assets untouched.

The most painless way to tap private wealth for public ends is to encourage the rich to give away more of their money. As revealed this week in Fortune magazine, Bill Gates and Warren Buffett have been pushing their fellow billionaires to pledge at least half of their net worth to charity. That effort could unlock hundreds of billions of dollars to help the needy or fund the arts, since the very wealthiest Americans now give away just 11 percent of their income every year and only 12 percent of large estates go to charitable bequests.

Government can also encourage more charity - for instance, by raising the estate tax. This tax prods the wealthy to donate more, since otherwise a big chunk of their wealth goes to the U.S. Treasury. During recent years, the estate tax rate - which long topped out at 77 percent - has been under 50 percent. Pushing the rate to 65 percent would direct more money to charity as well as boost federal revenues.

Forcing foundations to give away funds at a faster rate could also have a big impact. Currently, the nation's 75,000 foundations - which together have over a half trillion dollars in assets - are only required to pay out 5 percent of their principal annually. Making them pay out 10 percent could yield over $25 billion in annual new giving.

While charity can never rival government spending in its scope, private wealth plays a critical role in meeting social needs. Legions of college students now go to school for free, thanks to the vast accrued wealth in university endowments. Charities help feed, shelter, and clothe millions of needy people every year. And, of course, most U.S. cultural institutions are underwritten by philanthropy.

Americans are rightly proud of their charitable sector, but this sector will need to grow much larger to compensate for the long-term fiscal squeeze on government.

That squeeze may demand even bolder steps to tap the mountain of wealth in private hands, such as imposing a tax on all fortunes over a given threshold. For example, a 2 percent annual wealth tax on the top 1 percent of households, similar to such taxes in Europe, could yield several hundred billion dollars a year.

Many wealthy people would be sure to fight a wealth tax and will also resist pressures to give away more of their money to charity. But the alternatives are not pretty. For instance, one hundred thousand teachers may be laid off next year as states further tighten their belts. And the U.S.'s once-vaunted public university system has already been battered by budget cuts. If such disinvestment goes on long enough, it will undermine the nation's future growth and prosperity - which will hurt everyone, including the wealthy.

The United States is still a rich country - for now. Let's act that way.