The Disparity Between Inherited and Earned Wealth: Understanding the Divide and Its Implications
Our society is often characterized by significant differences between inherited and earned wealth. While earning wealth requires a lifetime of effort and perseverance, inheriting it can provide an instant boost to one's financial situation. This article explores the reasons behind the disparity in these types of wealth and its implications for different communities.
Introduction
It is a common observation that inheriting wealth is a much quicker path to amassing a considerable fortune. On the other hand, earning wealth through hard work and dedication takes a lifetime to accomplish. In the case of families where the parents or grandparents pass away leaving behind assets such as personal property, real estate, or a business, the beneficiaries are likely to experience an overnight increase in their net worth. However, this phenomenon is not evenly distributed across all demographics, with African-American communities often facing significant disadvantages due to the lack of inherited assets.
What Is Earned Income vs. Earned Wealth?
Let's begin by contrasting earned income and earned wealth:
1. Earned Income: This is the direct compensation received for labor, services, or skills, such as a salary or wages. For example, an individual earning $100,000 per year through their employment can be said to have earned income.
2. Earned Wealth: This refers to the process of leveraging one's earned income into assets that can generate passive income, such as rental properties or stocks. Over time, these assets grow in value and can provide a steady flow of income, much like the example of an individual leveraging their $100,000 income into a portfolio worth approximately $500,000 in assets, with an expected growth rate.
The ability to grow earned income into assets is a valuable forward value in itself, often capitalized as an asset and valued against the cost of capital. This means that the wealth accumulated through such processes can be significantly higher than the annual earnings, perhaps by a factor of 16-5, depending on the exponential growth and interest rates.
The Role of Inheritance in Wealth Accumulation
Inheritance, on the other hand, is a transfer of wealth from the past. It involves receiving assets and resources left behind by deceased family members. However, the nature of this transfer has implications for the ability to build a sustainable and growing portfolio.
For instance, if a family business is not a going concern, its value might be limited to the salvage of property after the business has ceased operations. In the example of a car yard, the business might need to be run by a dedicated individual; without this, the property's value would be significantly reduced.
However, if the deceased ancestor had managed to pass down a going concern, such as a well-managed car yard that had employed mechanics to run it, and had also expanded the operations by buying and selling car yards with mortgaged land, the inheritance would be a lot more valuable. The portfolio of property would be growing in value against fixed debt.
In such a scenario, if the inheritor reinvests the surplus into more car yards, there is the potential for exponential growth. However, external factors such as the rise of electric vehicles (EVs) could disrupt this expansion and force a transition towards focusing on electronics rather than internal combustion engines.
Historical and Legal Context
Looking back into our history, we can trace the roots of the current wealth disparity to the early to mid-1900s when laws at both the local and federal levels limited the amounts of assets that could be gifted or inherited. This was accompanied by high inheritance taxes aimed at preventing excessive generational wealth accumulation. The goal was to protect the middle class and avoid the emergence of a wealthy aristocracy that could wield disproportionate influence over the nation's wealth.
Strong lending laws that restricted interest rates and mortgage lending also played a role in these protections. These measures were designed to keep the financial system stable and ensure that wealth was more evenly distributed.
However, many of these protective measures were phased out in the 1970s and 1980s under the guise of protecting the middle class. The net result has been a significant increase in wealth inequality and a greater share of inherited wealth.
Conclusion
The disparity between inherited and earned wealth is a complex issue with deep historical and legal roots. While earning wealth through hard work and dedication is commendable and essential for many, the advantages of inherited wealth cannot be disregarded. It is crucial to understand these dynamics to address issues of wealth inequality and ensure a fairer distribution of resources.