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Big Wealth makes a comeback in the U.S.

One hundred years after Americans first filed income taxes under the Sixteenth Amendment, Big Wealth is back.
A businessman holding a cellphone and money in downtown Manhattan.
A businessman holding a cellphone and money in downtown Manhattan.

One hundred years after Americans first filed income taxes under the Sixteenth Amendment, Big Wealth is back.

Today, politicians seldom talk about the income tax as a means of redistributing wealth; rather, they emphasize that it’s about making everyone pay their fair share. But reducing America’s concentration of wealth was never far from the minds of those who called for an income tax during the Progressive Era. (An income tax had previously been introduced during the Civil War; repealed during the Gilded Age; revived in 1894 at the prodding of an ascendant Populist Party; then declared unconstitutional in 1895 by the Supreme Court.) 

“The really big fortune, the swollen fortune, by the mere fact of its size,” Theodore Roosevelt declared in 1910, “acquires qualities which differentiate it in kind as well as in degree from what is possessed by men of relatively small means. Therefore, I believe in a graduated income tax on big fortunes.” Roosevelt, out of office but preparing to run against his successor, William Howard Taft, in 1912, saw the income tax as a necessary complement to an inheritance tax, which he also favored. (The federal estate tax was enacted in 1916.)

Taft’s successor, Woodrow Wilson, believed even more strongly that the income tax should be used “not only to raise revenues for a growing government but also to redistribute the wealth of Americans in a way they deemed to be more fair,” Steven R. Weisman observes in his 2002 book The Great Tax Wars. Indeed, enlarging the federal government was itself seen (in part) as a strategy to counter the growing power of private wealth.

Soon after, though, wealth concentration largely disappeared from the political conversation. Partly that was because, as America shifted from an agriculture-based economy to an industrial one, income was becoming the relevant currency, not property. Increasingly, the disparities that mattered concerned how much you had to live on, not how much land you had to farm.

Just as important, though, were the serial shocks of World War I, the Great Depression and World War II, which greatly diminished the country’s great fortunes. In his much-discussed new book Capital In the Twenty-First Century, economist Thomas Piketty notes that all accumulated private wealth in the U.S. was, in 1910, about four and one-half times greater than the nation’s collective income. By 1950 that had fallen to a little more than three and one-half times the nation’s collective income. The wealth change was even more dramatic in Europe, falling from nearly seven times national income in 1910 to not quite two and one-half times national income in 1950.

When Piketty refers to the shocks that external events dealt to the world economy between 1914 and 1915 (punctuated by an 11-year boom from 1918 to 1929) he means the shrinking of private fortunes not only through war and depression, but also through more redistributionist government policies made politically possible by the upheavals. The income tax, for instance, rose during World War I in the U.S. to pay for the troops, and again during World War II. How these policies and events interacted would be hard to untangle, but the result was that accumulated or inherited wealth came to play a less dominant role in American society.

Since about 1970, though, wealth has been staging a comeback in the U.S. (In Europe, wealth’s comeback began earlier -- almost immediately after World War II -- and has progressed further.) In 1970, accumulated private wealth in the U.S. was a bit more than three and one half times the nation’s collective income. Now it’s slightly more than four times, which is nearly as high as it was when the modern income tax was born.

In the U.S., growing income inequality has many causes, but when we talk specifically about the growing disparity between the top 1% in the income distribution and the bottom 99%, we’re talking mainly about capital income, which derives from wealth. Thus far, the main beneficiaries are not those who have inherited wealth so much as high-ranking executives (Piketty calls them “supermanagers”) and high-flying financial professionals. But as wealth once again grows more concentrated in the U.S., a few voices are starting to talk about taxing wealth more directly.

The income tax, Piketty argues, is a somewhat inefficient way to tax the rich because they have lots of ways to shift assets and minimize their exposure. He proposes imposing a global wealth tax—a notion even he concedes is fairly quixotic in the current political climate. At an April 14 breakfast meeting with reporters at Washington’s Brookings Institution, Piketty argued that its effects would resemble those of moderate inflation. “A progressive tax on wealth,” he quipped, “is a civilized form of inflation.”

Alternatively, the U.S. could impose its own wealth tax. Daniel Altman, an economist previously on the editorial board of The New York Times, has pointed out that a flat wealth tax of 1.5% would generate enough income to replace existing income, gift, and estate taxes. (Like Piketty, Altman would prefer the tax be progressive.) Stanford economist Ronald McKinnon has proposed adding a 3% wealth tax to the existing income tax but exempting the first $3 million.

More practical in the current political environment would be an increase in the inheritance tax. As recently as 2001, all estates totaling $675,000 or more were subject to the tax, and the top rate was 55%. But a political movement to drastically reduce the estate tax (newly christened the “death tax”) was already underway, and under President George W. Bush the threshold shot up and the top rate came way down; today, the taxable threshold is $5.34 million and the top rate is 40%. In his latest budget, President Obama proposed lowering that threshold to $3.5 million and bumping up the top rate to 45%.

The estate tax remains hugely unpopular, but a 2013 study by a team led by Columbia economist Ilyana Kuziemko found that after respondents were informed that only one out of every thousand estates was subject to the tax, support for raising it rose dramatically. Indeed, Kuziemko found respondents to be much more open-minded about increasing the inheritance tax than about taking other measures to reduce inequality.

It’s probably doubtful the U.S. will do much anytime soon to increase dramatically its taxation of wealth, as opposed to income. But as capital continues to accumulate in the U.S. relative to income, we may find that policies to address income inequality require a parallel effort to control growing wealth concentration. The alternative might be a return to the sort of plutocracy that Teddy Roosevelt deplored.