A Clear-Eyed Look at the Consolidation of a Billionaire Class

Back in 1987, a class of billionaires was starting to emerge. Forbes issued its first billionaires list, which found 140 billionaires worldwide, 44 in the United States. Today, the numbers are more than 15 times higher.

Even then, within the United States, there was a considerable aristocracy, as the Institute for Policy Studies (IPS) documented in a report on dynastic wealth a few years ago.

“Over the next 20 to 30 years…more than 1,000 billionaires [will] pass an estimated USD 5.2 trillion to their children.”

Dynastic wealth, by definition, is multigenerational, so current corporate titans such as Bill Gates or Jeff Bezos don’t qualify. That said, the IPS report authors warned that a new generation of dynastic wealth was emerging, which could “pave the way for even greater billionaire dominance over politics, culture, the economy, and philanthropy.”  

That future is quickly approaching, according to the 2023 Billionaire Ambitions report by UBS, a firm that advises high-net-worth individuals (including many billionaires) and which recently acquired Credit Suisse. UBS reports that first time since it started its annual survey, more wealth globally was acquired by billionaires in 2023 through inheritance ($150.8 billion) than through direct business earnings ($140.7 billion).

Benjamin Cavalli, who heads the UBS strategic client team, expects inherited wealth to gain in importance “over the next 20 to 30 years, as more than 1,000 billionaires pass an estimated USD 5.2 trillion to their children.” The report notes that this number is based on the wealth of 1,023 billionaires who are already over the age of 70.  

A Buyback Culture 

Why are there so many billionaires today? 

At NPQ, we have written about the rise of neoliberalism, a set of policies that has dominated politics and economics in the United States and elsewhere for half a century, in which the state acts to support the concentration of wealth among an elite few through its taxation, spending, and regulatory policies.

IPS, the organization mentioned above, also publishes an annual Executive Excess report, which focuses on one aspect of this dynamic—CEO compensation. NPQ has covered these reports before. Over the years, IPS has tracked the rise of the ratio of CEO to worker pay. Back in the 1960s, CEOs at the nation’s largest companies earned, on average, roughly 20 times as much as their firms’ workers. By 2020, that ratio was 351-to-one.

Because CEO compensation is typically tied to a company’s stock price, buying back stock helps increase CEO earnings.

In its latest report, IPS’s Sarah Anderson focused on the 100 companies with the lowest median wages among the 500 largest publicly listed companies by stock value and tracked the increasingly pervasive use of stock buybacks to juice up share value.

In the United States and beyond, stock buybacks have become part of business culture, helping drive up executive pay and siphoning away resources that might otherwise support higher wages or investment in the businesses themselves. In the United States, buybacks were illegal from the 1930s until 1982, largely because of their potential to be abused to manipulate stock prices. (The rationale for legalization was to help corporations stave off hostile acquisitions, but that’s not their primary use today.) 

Stock buybacks occur when a company repurchases shares of its own stock. This action tends to drive up a company’s stock price since each remaining share now represents a greater percentage of the total value of the company. Because CEO compensation is typically tied to a company’s stock price, buying back stock helps increase CEO earnings and widens the gap between CEO and worker pay.

How common are stock buybacks? Very. Of the 100 companies analyzed, Anderson writes, “90 of the firms had spent profits on buybacks at a combined cost of $341.2 billion” between January 2020 and May 2023. The scale of these buybacks can be significant. Lowe’s, for example, spent over $14 billion to buy back its own stock in 2022. That works out to $46,000 per employee! By contrast, the median wage level at Lowe’s in 2022 was less than $30,000.

In 2022, as part of the Inflation Reduction Act (also known as the climate bill), Congress approved a 1 percent tax on buybacks, which the Wall Street Journal reports generated $3.5 billion in federal revenue in the first half of 2023. But the Journal adds that the tax had little effect on reducing stock buyback activity, which totaled $458 billion in the second quarter of 2023 alone.

Tax Dodges

But other than boosting the endowment levels of foundations that invest in the stock market, what does buyback culture have to do with philanthropy? Well, one throughline is that corporate titans and megadonors are often the same people. Another common thread is that in both arenas the tax system is manipulated to the wealthy’s benefit. 

To return to buybacks, it’s important to recognize that if the buyback leads to a higher stock value, that increases shareholder wealth. Another way that a company can support its shareholders—one might say the traditional way—would be to issue dividends. 

But as Karl Montevirgen writes for Britannica Money, dividend payments result in income. This means that shareholders must pay income tax on the dividends that they receive (albeit at a lower tax rate than the tax on wage income). By contrast, Montevirgen notes, other than the recent modest federal buyback tax, “buybacks are almost nontaxable” since you only pay tax when you choose to sell the stock. Buybacks are, in other words, more “tax efficient.” 

Similar maneuvers also prevail in philanthropy, as another IPS report, titled The True Cost of Billionaire Philanthropy, explains. Coauthored by Helen Flannery, Chuck Collins, and Bella DeVaan, this report documents the rise of donor-advised funds (DAFs) from 4 percent of donations in 2008 to 27 percent of donations in 2022. All told, today nearly two million Americans have DAF accounts. If you include donations to foundations, fewer than six in ten donated dollars today go directly to operating nonprofits, with DAF and foundation donations especially prominent among wealthier donors. 

As NPQ has detailed, DAFs offer donors some benefits, including the flexibility to commit to donating money upfront while buying time for the donor to decide where the money should ultimately go. (A disadvantage is that there is no time limit to disburse the money to an operating nonprofit). But whatever benefit DAFs provide in, for example, making donations more convenient, they clearly are also an excellent tax-avoidance vehicle. For example, both foundations and DAFs make it easy to donate assets, such as stock, which offer donors outsized tax-writeoff benefits. Flannery and her coauthors note that when Warren Buffett donated $4.1 billion in stock to the Gates Foundation, he not only got an income tax deduction, but avoided an $800 million capital gains tax bill. 

The rise of a billionaire class is relatively recent. Back in 1980, there were 13 billionaires in the United States.…Today, [there are over] 700.

As law professors Roger Colinvaux and Ray Madoff have detailed, wealthy donors—if they donate stock and combine the income tax deduction with avoiding capital gains and estate taxes—get up to 74 cents in tax benefits per dollar donated, even as nine in ten taxpayers do not benefit from the federal charitable tax deduction at all. 

The exact cost of federal tax benefits is hard to calculate, but Flannery et al. estimate the cost at $111 billion in 2022, with $73.34 billion directly coming from the charitable tax deduction and the remainder from excluded capital gains and estate tax revenue.

In the corporate tax world, figuring out the revenue shortfall that results from tax shifting is even more complicated to calculate. We do know that US corporate tax revenue has declined dramatically over time; as of 2023, the Peterson Foundation estimates that federal corporate tax exclusions cost $161 billion. 

US corporate tax revenue after these exclusions totals 1.6 percent of gross domestic product (GDP), which is less than half of the Canadian level. According to the Congressional Budget Office, federal corporate tax revenue in 2022 was $425 billion. If US corporate tax revenue were on a par with Canada, the federal government would collect over $400 billion a year more in corporate income tax.  

A New Generation of Dynastic Wealth

The rise of a billionaire class is relatively recent. Back in 1980, there were 13 billionaires in the United States. As of 1987, that number was still only 44. Today, it exceeds 700. Yes, an item that cost $1 in 1980 would cost $3.74 today. But inflation is a small part of the story. And, as the UBS report reveals, the phenomenon is international. More than two in three billionaires worldwide live outside the United States.

The UBS report points out that those who come upon great wealth in their own lives—think Andrew Carnegie in the late 19th century or folks like Bill Gates or MacKenzie Scott today—are more philanthropic than those who simply inherit their billions. 

Perhaps this is because the first generation experienced what it was like to have less. In any event, according to UBS, the difference is dramatic: “more than two thirds (68 percent) of first-generation billionaires stated that following their philanthropic goals and making an impact on the world was a main objective of their legacy, less than a third (32 percent) of the inheriting generations did so.” 

This finding by UBS parallels a finding in the IPS dynastic wealth report that there were very few signers among the 50 dynastic families of the Giving Pledge—a commitment by wealthy individuals to donate at least half of their assets to charity. As Collins and Flannery have noted, many who have signed the pledge have actually seen their wealth increase. Even so, the signing of the pledge at least shows an intent to share the wealth, an intent less prevalent in later generations of dynastic families.

The bottom line of what the UBS report calls “three historic decades of wealth creation”—and what might better be described as historic wealth concentration—has been to generate “a new cohort of multigenerational wealthy families.” The authors add that “although inheritance will not always outdo entrepreneurship as the source of new billionaire wealth, it’s clearly becoming an increasingly material factor in the creation of new billionaires, as wealth accumulates within families.”

Can Plutocracy Be Contained?

In their 2021 report on dynastic wealth, Chuck Collins and his colleagues warned, “If we remain on our current trajectory, today’s individual billionaires will be tomorrow’s wealth dynasties.” Three years later, as the UBS study shows, that process of consolidating new wealth dynasties continues apace. 

There are measures that if enacted into law over corporate opposition—a tall order—can limit at least some of the worst practices. Anderson’s Executive Excess report, for instance, recommends making stock buybacks illegal (or at least sharply raising taxes on the practice) and calls for raising corporate income tax rates on firms in which the CEO earns 50 times or more than the company’s median wage level. For their part, Flannery, Collins, and DeVaan outline a series of policies reforming the use of DAFs.

The challenge, however, goes beyond getting a reform passed here or there, valuable though those wins may be. The broader goal, instead, must be to actively challenge and arrest the growing concentration of wealth—and to dismantle what has become, as one analyst astutely noted, an increasingly plutocratic system.