State House, Room 405
Boston, MA 02133
State House, Room 130
Boston, MA 02133
Chair Senator DiDomenico, Chair Decker and esteemed members of the Poverty Commission,
My name is Phineas Baxandall, and I am the Policy Director for the Massachusetts Budget and Policy Center (MassBudget). MassBudget is a non-partisan non-profit think tank that has for four decades provided rigorous research and analysis to improve state policy in the Commonwealth. We are particularly focused on policies that help low-income households and communities of color.
My comments focus on the differences between income and wealth. Currently, anti-poverty programs overwhelmingly focus on income inadequacy rather than wealth. There are many reasons that makes sense, but the choice also causes us not to focus on certain economic disparities that have deepened over time. By contrast, targeted asset building programs, like Baby Bonds, do target wealth gaps. Economically progressive tax policies can also be potent ways to reduce gaps in wealth.
Income versus wealth
Income is the flow of money that a household regularly receives, whereas wealth is the assets people have accumulated and inherited from their families. To calculate wealth, we subtract a household’s debt, which is why wealth is sometimes referred to as “net worth.”
Income and wealth are so connected that we overlook the ways they have distinct dynamics. After all, households living with low incomes tend to have low wealth and visa versa. Steady, ample income makes it easier to build wealth. And many kinds of wealth generate their own income, such as capital gains, interest, dividends and rent collected from property ownership. These kinds of wealth are far more prevalent among those with higher incomes.
But lack of wealth can often be the most important factor determining a family’s life chances. It greatly determines how a family weathers a misfortune, like an unexpected medical expense, a divorce, or job loss. Having wealth may also determine whether a family can take advantage of additional wealth-building opportunities, such as going to college, buying a home or starting a business.
Wealth is far more unequally distributed than income. In 2024, the wealthiest top 1 percent hold over 30 percent of all U.S. wealth, more than ten times the wealth held by the bottom half of American households.1 Looking just at financial assets, the top 1 percent hold substantially more wealth than the bottom 90 percent combined – which wasn’t true a dozen years ago.2
Wealth differences also tend to correspond with race because they reflect accumulated and compounded inequities from four hundred years of racism. Looking across racial and ethnic categories, Black and Latino/Hispanic households across the United States earn roughly 50 percent of a typical white household income, but hold only 15 to 20 percent of white wealth.3 Despite policies that work to reduce poverty and support households living with low incomes over the past 70 years, the gap between white wealth and the wealth of Black and Latino households has remained relatively stagnant.4 A Boston Federal Reserve Bank study of households around the Boston area in 2015 reported that white households in Greater Boston had a median net worth of $247,000, while U.S.-born Black households had a median net worth of just $8.
Poverty policy tends to focus on income, not wealth
Anti-poverty policies tend to focus on income inadequacy because it’s more immediate, more straight-forward to measure, verify, and address than lack of wealth. No wonder that poverty is defined in terms of income, not wealth. After all, we have a lot of excellent anti-poverty tools to remedy or support inadequate income. Many of the Commonwealth’s anti-poverty tools are income-tested programs to help families pay bills or assist in times of need. Examples include cash assistance programs like Transitional Aid to Families with Dependent Children (TAFDC), Emergency Aid to the Elderly, Disabled and Children (EAEDC), as well as nutritional assistance programs like Supplemental Nutrition Assistance Program (SNAP), and refundable tax payments like the Earned Income Tax Credit (EITC). These vital assistance programs represent a lifeline for many Massachusetts families, and we should continue and increase our investment in them. At the same time, we should recognize that they are designed to help people meet basic needs and are targeted to only reach residents with low or no income. These programs are not designed to help families build wealth.
In fact, in order to target the most income assistance using limited resources, anti-poverty programs are generally designed not toward building wealth. They generally phase out at intermediate income levels rather than contribute to surplus assets families might build. In fact, until 2021, Massachusetts cut off families from TAFDC if their assets exceeded low levels. Similarly, the Massachusetts Senior Circuit Breaker Tax Credit excludes seniors if they own a high-valued home.
Narrowing wealth disparities takes longer and tends to be more incremental. The longer-term impact may be harder to appreciate, even though the impact of raising a family’s wealth is no less profound, perhaps even more profound, than temporarily supplementing income. Too often people just throw up their hands about the lack of wealth, or just hope that policies to remedy income inadequacy will eventually help.
Policies that reduce gaps in wealth
I want to talk about two kinds of policies that do address wealth gaps: progressive taxation and what’s become known as Baby Bonds.
Tax policy can be an effective tool for addressing income and wealth gaps. A tax policy changes how much money a household keeps at the end of year and marginal after-tax differences in income can accumulate over time and become major differences in wealth.
When a tax falls heavier on high-income people, it narrows differences in after-tax income. The Fair Share tax on incomes above $1 million, for instance, narrows the difference in after-tax income by $40,000 between somebody taking home $2 million a year and their Uber driver or child care provider. That tax would reduce inequality even if the revenue didn’t directly fund a long list of programs like free school meals, free community college, and free regional bus service that particularly help low-income families.
The Earned Income Tax Credit (EITC) is an example of tax policy that helps narrow wealth disparities by giving families living on lower incomes a bit to save at the end of the year, or meaningful ways to become more economically secure. It may allow a family to fix their car, pay a sizable medical bill, or cover afterschool care that helps a parent keep their job. These are all benefits that can help a family avoid poverty and – in small, meaningful ways – put a family on a path toward building wealth.
Estate taxes are a relatively direct way to reduce wealth disparities, directly reducing the intergenerational transfer of great accumulations of wealth while raising revenue for public programs. Conversely, policy changes that reduce estate taxes accelerate the concentration and racial disparities of wealth in the Commonwealth.5 The tax package enacted at the end of 2023 included major cuts to estate taxes, fully exempting estates up to $2 million and providing a tax cut of $99,600 to larger estates. This change will cost the Commonwealth over $200 million in annual revenue and could thus further widen racial wealth disparities.
One promising way the Commonwealth can directly invest revenue to reduce the wealth gap is through Baby Bonds. A Baby Bond is a publicly created account, trust, or bond created for eligible children shortly after their birth and invested for their future. These invested funds grow during the extended period until recipients become adults, at which point they can use their Baby Bonds fund to invest in building their future wealth, such as by buying a home, starting a business, or paying for higher education. Recipients of Baby Bonds – children with little or no preexisting wealth – are far more likely to be people of color, as a result of past and ongoing systemic racism. Baby Bonds are a way to help bridge the racial wealth gap by providing a subsidized savings mechanism for children who otherwise would have little ability to accumulate wealth.
A Baby Bonds program was recommended by a task force that was formed in March 2022 by Massachusetts Treasurer and Receiver General Deborah Goldberg.6 The task force proposed that children would be automatically enrolled into Baby Bonds based on their TAFDC eligibility or participation in the foster care system. The task force urged the identification of a long-term funding source and recommended a review of criteria to determine whether enrollment could be expanded after five years. Legislation filed this past session, “An Act Addressing the Racial Wealth Gap,” would have launched a Baby Bonds program and I urge you as a commission to recommend such action.
Baby Bonds are not some impossible dream. In July 2023, Connecticut launched a Baby Bonds program that automatically enrolls children covered by the state’s Medicaid program (HUSKY). The program has already been fully funded for the first 12 years of children. Eligible newborns receive a deposit of up to $3,200 that can be claimed between ages 18-30 and used for starting or investing in a business, higher education or job training, buying a home, or saved for retirement.7 Participants are expected to receive $11,000 – $24,000 depending on when the funds are retrieved. The state estimates that 15,000 to 16,000 Connecticut children who are covered by HUSKY will enter the program each year.8
Considering wealth for greater ambitions
In closing, to more effectively combat poverty, we urge the Commission to recommend heightened anti-poverty efforts on many fronts. This includes increasing cash grants, creating Baby Bonds, boosting the Earned Income Tax Credit (EITC) and broadening its eligibility to excluded groups such as workers filing taxes without a Social Security Number.
More broadly, I urge the panel to think more ambitiously about addressing the long-term causes of poverty by thinking past the immediate definition of inadequate income to also think about ways to address more fundamental disparities of wealth. These may be harder to fix, require greater resources to bring to scale, and may take time to pay off. Without addressing disparities of wealth, however, we will leave untouched some of the most profound and persistent barriers to opportunity.
Endnotes
1 For the top 1 percent share, see Board of Governors of the Federal Reserve System (US), Share of Total Net Worth Held by the Top 1% (99th to 100th Wealth Percentiles) [WFRBST01134], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/WFRBST01134. For the bottom 50 percent share, see Board of Governors of the Federal Reserve System (US), Share of Total Net Worth Held by the Bottom 50% (1st to 50th Wealth Percentiles) [WFRBSB50215], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/WFRBSB50215.
2 In 2024 (Q1), the top 1 percent held 34.2 percent of financial wealth compared to a combined 28.7 percent of financial wealth held by the bottom 90 percent combined. In 2012 (Q1), the top 1 percent held 30.0 percent of financial wealth, compared to 30.7 percent held by the bottom 90 percent. See Board of Governors of the Federal Reserve System (US), Share of Financial Assets Held by the Top 1% (99th to 100th Wealth Percentiles) [WFRBST01112], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?id=WFRBST01112,WFRBSN40166,WFRBSB50193.
3 Aditya Aladangady and Akila Forde (2021). “Wealth Inequality and the Racial Wealth Gap,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, October 22, 2021, https://doi.org/10.17016/2380-7172.2861.
4 Federal Reserve Bank of Minneapolis, Moritz Kuhn, Ulrike I. Steins, and Moritz Schularick, “Income and Wealth Inequality in America 1946-2016,” (June 2018); https://www.minneapolisfed.org/research/institute-working-papers/income-and-wealth-inequality-in-america-1949-2016 See also, Fabian T. Pfeffer and Alexandra Killewald, “Intergenerational Wealth Mobility and Racial Inequality,” Socius, March 2019; https://doi.org/10.1177/2378023119831799.
5 MassBudget, “Estate Tax Cuts Worsen Our Large Racial Wealth Gap,” (May 2023); https://massbudget.org/2023/05/17/estate-tax-racial-wealth-gap/
6 Office of the State Treasurer and Receiver General Deborah B. Goldberg, Baby Bonds Task Force Findings Report (2022); https://www.mass.gov/info-details/baby-bonds-task-force-findings-report
7 Office of the Treasurer Erick Russell, CT baby bonds, at https://portal.ct.gov/ott/debt-management/ct-baby-bonds
8 Office of the Treasurer Erick Russell, “Treasurer Russell and Connecticut Hospitals Mark One-Year Anniversary of State’s Landmark CT Baby Bonds Program,” July 1, 2024; https://portal.ct.gov/ott/newsroom/news/news-releases/babybonds_yeartwobegins
