New figures released by the U.S. Census Bureau in September revealed that income inequality in the United States, measured on a zero-to-one scale known as the Gini index, has reached its highest level ever.
At the same time, the nation is in the midst of its longest uninterrupted streak of job growth following the Great Recession in 2008. GDP growth is at a record high and continues to climb. And the unemployment rate is hovering around 3.5 percent, its lowest level since 1969.
Source: Census Bureau
But according to Diane Swank, chief economist at Grant Thornton LLP, the aggregates often disguise the dirt in the details: "Wealth has gone up, most notably in the equity markets, but there's a greater concentration of it in fewer households."
It is a tale of two economies. Lurking beneath the headline numbers of GDP and unemployment are reminders that the country's gains have been unevenly distributed. America today is wealthier and less equal than it has ever been.
Economic Parity in the 20th Century
Progressive Era reforms in the early 1900's produced a period of relative economic parity in the middle of the 20th century. Incomes in the U.S. across the income distribution grew at nearly the same pace from the late 1940's through the early 1970's.
Source: EPI analysis of data from the Congressional Budget Office (2018).
Beginning in the 1970's, two shifts emerged. First, income disparities widened: The top one percent's share of income increased steadily, while wages for the bottom 90% of income earners stagnated. Second, stock market wealth began flowing disproportionately to the most affluent households. In 2019, the richest one-tenth of Americans own roughly 84% of the value of stocks.
Not only have the richest households seen an upsurge in incomes, but also an accumulation of net wealth in the form of property, assets and stocks. These two trends have ended the era of shared prosperity that existed in the middle of the century.
How Did We Get Here?
Economists argue that a number of developments over the past 40 years have contributed to the widening income gap, including increased trade and globalization, and the rise of the skill premium.
Policy experts contend that U.S. government policies created an institutional framework that produced greater economic inequality.
While there is merit in both arguments, the fact that a similar trend has not been observed in most other developed nations indicates that it is the distinct policies of the U.S. that have exacerbated wealth inequality.
In his rise to the Presidency, Ronald Reagan championed supply-side economics, a philosophy that has become a cornerstone of conservative fiscal policy, which is rooted in the belief that tax cuts for investors and corporations provide incentives to save and invest, and produce economic benefits that trickle down into the overall economy.
America's economy grew during Reagan's presidency. But the policies that were enacted weakened labor unions, cut social welfare programs, and aided big business with tax cuts and looser regulations. More importantly, Reagan established a precedent that influenced a generation of federal policies which limited the government's role in ensuring a level playing field for Americans.
The share of national income going to the top 1% in the U.S. has risen from just over 10% in 1980 to more than 20% in 2016. Meanwhile, the share collected by the bottom 50% has fallen from more than 20% to about 13%. (WID)
In Western Europe, the bottom 50% still own a larger share of national income than the top 1%. (WID)
In 1980, the top 1 percent's share of income was about 10 percent in both Western Europe and the United States. But since then, the two have severely diverged. The United States has regularly had the highest Gini index and a lower rate of economic mobility than any affluent democracy, including France, Germany, Sweden, Canada, Finland, Norway, and Denmark. Each of these countries have also had to contend with globalization, increases in trade and technological advancements.
Addressing Inequality in 2020
Democrats generally agree that the government should play some role in shaping the markets to facilitate greater equality. Most of the Democratic candidates running for President support the following measures: Reversing the excesses of the Trump tax cuts for corporations, raising the federal minimum wage, addressing gender and racial pay disparities, protecting and strengthening workers' rights to bargain collectively, and ending residential segregation.
The two most progressive candidates, Senator Bernie Sanders and Senator Elizabeth Warren, don't think these policies do enough to address the root cause of rising inequality over the past 40 years. They are advocating for structural change in economic policy, and are proposing the most dramatic shift in tax policy in over a century.
The Wealth Tax
In their paper "Progressive wealth taxation", economists Emmanuel Saez and Gabriel Zucman define a wealth tax as an annual levy on the total value of personal assets, which amounts to the sum of all financial assets (checking account, corporate equity) and non-financial assets (e.g. real estate, art collections) minus debts.
The United States has never had a wealth tax. Sanders' "Tax on Extreme Wealth" is the more aggressive of the two plans. It calls for an annual 1 percent tax on net worth above $32 million, with increasing marginal rates topping out at 8 percent on net worth over $10 billion. This would impact about 180,000 households in total, or the top 0.1 percent.
The structure of Warren's plan is simpler. Her plan would implement a 2 percent tax on assets over $50 million, and a 3 percent tax on fortunes worth over $1 billion. (*Update: Warren has proposed doubling the billionaire wealth tax from 3% to 6% in order to help fund "Medicare for All")
Source: Bernie 2020; Warren for President. (Business Insider)
While there are differences between the two plans, the fundamentals are the same — they will tax accumulated wealth, not just income. Sanders's tax is projected to raise $4.35 trillion over a decade, while Warren's is projected to raise $2.6 trillion over the same time period. According to their campaign websites, the revenue brought in from the wealth tax would be used to pay for student debt relief, universal access to child care, Medicare for All, and other social programs.
Public Response
Polls have found widespread support for the idea of taxing wealth.
But the idea of a wealth tax has been met with backlash from opponents who question its constitutionality and how it would be administered, and who believe it would adversely affect the economy.
"The wealth tax has a fatal flaw: valuation. It has been estimated that 62% of the wealth of the top 1% is 'non-financial' — i.e., vehicles, real estate, and private business. Even the rich don't know exactly what they're worth in any given moment." — Robert Frank, The Wall Street Journal
Beyond the administrative challenges and inevitable roadblocks to getting a wealth tax passed, skeptics also warn of economic stagnation and depressed business confidence.
Lawrence Summers, former Treasury secretary under President Bill Clinton, warned that wealth taxes would sap innovation by putting new burdens on entrepreneurial businesses while they are starting up.
"Turning the tax code into a vehicle for confronting what some call 'oligarchic drift' would undermine business confidence, reduce investment, degrade economic efficiency and punish success in ways unlikely to be good for the country or even to be appealing to most Americans." — Lawrence Summers
The Case for a Wealth Tax
The rapid appreciation of assets held by the wealthy is one of the key factors fueling the current wealth gap in America. Wealthy individuals who own a disproportionate share of all assets are not held to the same tax burden as low-income and middle-income Americans, who are forced to pay annual taxes on their income, which comprises a greater share of their overall wealth.
A bill proposing a wealth tax would undoubtedly face significant backlash in Congress, and it seems unlikely in the current political climate for such a bill to get through the House, let alone the Senate. That does not mean it is not the right policy to address wealth inequality in a meaningful way.
With the right provisions, the objections raised about administering a wealth tax can be overcome.
In his plan, Senator Sanders details several steps to enforce the tax, including creating a national wealth registry and increasing funding for the IRS, an agency which already assesses net worth of very wealthy individuals in order to impose the federal estate tax.
According to Saez and Zucman, a wealth tax is one of the few policies that could stem the tide of rising economic inequality: "If well enforced, wealth taxation would curb the rise in wealth concentration that has taken place in the United States in recent decades."
Saez and Zucman also disagree with the notion that a wealth tax would diminish innovation: "Most innovation is produced by young individuals who would not be impacted by a high-exemption wealth tax. A wealth tax that only collects taxes from established business owners would actually increase competition from smaller players in the market and thus spur innovation."
Mobilizing Support
In The Age of Acquiescence: The Life and Death of American Resistance to Organized Wealth and Power, author Steve Fraser fumes that what's gone wrong with political discourse in America is that the left has become unknowingly complacent.
Fraser argues that while Progressive Era muckrakers ended the first Gilded Age by drawing on an age-old tradition of dissent to criticize prevailing economic, social, and political arrangements, today's left doesn't engage in dissent; instead, "…it engages in consent, urging solutions that align with neoliberalism, technological determinism, and global capitalism."
There are several policies that would generate more opportunities for low-income Americans — from investing in education and ending residential segregation, to building assets for working families and enacting policies that favor labor unions.
But at some point, we should ask ourselves if we want to live in a country that is among the wealthiest in the world, yet is home to 50 million people living in poverty. And if we decide we want to address the wealth inequality crisis in a meaningful way, bold solutions are needed. Heeding Fraser's advice, Democrats should not acquiesce to incremental tax reforms if it means continuing to perpetuate the growing wealth divide.
Getting policymakers to prioritize this policy will depend on the actions of advocates, voters and other supporters with a vision for a more just and inclusive society.