Much has been written about the dramatic increase in income and wealth inequality in the United States over the last four decades. This volume of literature not only warns about the injustice of our current system, but also raises alarm that extreme inequality poses a serious risk to our democracy.
Concern about inequality is at least as old as the United States itself. Writing in 1792 about the necessity and dangers of political parties, James Madison made the connection between excessive wealth and its political influence:
The great object should be to combat the evil: 1. By establishing a political equality among all. 2. By withholding unnecessary opportunities from a few, to increase the inequality of property, by an immoderate, and especially an unmerited, accumulation of riches. 3. By the silent operation of laws, which, without violating the rights of property, reduce extreme wealth towards a state of mediocrity, and raise extreme indigence towards a state of comfort.
Excessive wealth concentration, in Madison’s view, was as poisonous for democracy as war. “In war,” he continued, “the discretionary power of the executive is extended; its influence in dealing out offices, honors, and emoluments is multiplied. . . . The same malignant aspect in republicanism may be traced in the inequality of fortunes.”
Wealth is power. An extreme concentration of wealth means an extreme concentration of power: the power to influence government policy, the power to stifle competition, the power to shape ideology. Together, these amount to the power to tilt the distribution of income to one’s advantage. This is the core reason why the extreme wealth of some can reduce what remains for the rest—why part of the income of today’s superrich can be earned at the expense of the rest of society. That’s what earned John Astor, Andrew Carnegie, John Rockefeller, and other Gilded Age industrialists their epithet of “Robber Barons.”
An extreme concentration of wealth means an extreme concentration of power: the power to influence government policy, the power to stifle competition, the power to shape ideology.
In much of the twentieth century, the U.S. tax system protected against such extreme disparities. But far from curbing this trend, the tax system in the last four decades has instead reinforced it. The three traditional progressive taxes—the individual income tax, the corporate income tax, and the estate tax—have all weakened. The top marginal federal income tax rate has fallen dramatically, from more than 70 percent every year between 1936 and 1980—in fact, often higher, peaking at 94 percent during the final years of World War II—to 37 percent in 2018. (The income threshold at which this rate kicked was several million of today’s dollars.) Corporate taxes—which are progressive in the sense that they tax corporate profits, a highly concentrated source of income—have declined from about 50 percent in the 1950s and 1960s to 16 percent in 2019. And estate taxes on large bequests are now almost negligible due to a high exemption threshold, many deductions, and weak enforcement.