As we have hinted earlier, the strong underlying philosophy that is guiding us through these selected postings and accompanying commentary is that expressed by the French economist Thomas Piketty in his seminal book Capital in the Twenty-First Century. Not only was he, together with Emmanuel Saez, the first to discover the heretofore hidden financial data that has revealed the unbelievable extent of the economic inequality that exists in the world, and, in particular, in this country, but he has been able to explain it to us, unschooled in the esoteria of higher economics, in a way that is both vivid and clear. Piketty is, after all, a professor at the Paris School of Economics.As we are close in our reading to the end of the book and he is beginning to delve into possible solutions to rectify this huge wealth disparity in the civilized world, we will be posting more frequent blogs directly related to his discussion. We will begin this morning with a two-part excerpt from that book that deals with America’s wild pendulum swing from the country that led the way in taxing the rich, starting in the 1930s, to the modern country with the most favorable tax rates for the wealthy, beginning in the 1980s.
Taxation of Excessive Income: An American Invention, Part I
When we look at the history of progressive taxation in the twentieth century, it is striking to see how far out in front Britain and America were, especially he latter, which invented the confiscatory tax on “excessive” incomes and fortunes. Figures 14.1 and 14.2 are particularly clear in this regard. This finding stands in such sharp contrast to the way most people inside and outside the United States and Britain have seen these two countries since 1980 that it is worth pausing a moment to consider the point further.
Between the two world wars, all the developed countries began to experiment with very high top rates, frequently in a rather erratic fashion. But it was the United States that was the first country to try rates above 70 percent, first on income in 1919-1922and then on estates in 1937-39. When a government taxes a certain level of income or inheritance at a rate of 70 or 80 percent, the primary goal is obviously not to raise additional revenue (because those very high brackets never yield much). It is rather to put an end to such incomes and large estates, which lawmakers have for one reason or another come to regard as socially unacceptable and economically unproductive—or if not to end them, at least make it extremely costly to sustain the and strongly discourage their perpetuation. Yet there is no absolute prohibition or expropriation. The progressive tax is thus a relatively liberal method for reducing inequality, in the sense that free competition and private property are respected while private incentives are modified in potentially radical ways, but always according to rules thrashed out in democratic debate. The progressive tax thus represents an ideal compromise between social justice and individual freedom. It is no accident that the United States and Britain, which throughout their histories have shown themselves to value individual liberty highly, adopted more progressive tax systems than many other countries.
The Gilded Age: Right and Left
Other more specific factors also mattered. During the Gilded Age, many observers in the United Stated worried that the country was becoming increasingly inegalitarian and moving farther and farther away from its original pioneering ideal. In Willford King’s 1915 book further. He chose to devote his presidential address to the question of US inequality and in no uncertain terms told his colleagues that the increasing concentration of wealth was the nation’s foremost economic problem. Fisher found King’s estimates alarming. The fact that “2 percent of the population owns more than 50mpercent of the wealth” and that “two-thirds of the population owns almost nothing” struck him as “an undemocratic distribution of wealth” which threatened the very foundations of US society. Rather than restrict the share of profits or the return on capital arbitrarily—possibilities Fisher mentioned only to reject them—he argued the best solution was to impose a heavy tax on the largest estates (he mentioned a tax rate of two-thirds the size of the estate, rising to 100 percent if the estate was more than three generations old). It is striking to see how much more Fisher worried about inequality than Leroy-Beaulieu did, even though Leroy-Beaulieu lived in a far more inegalitarian society. The fear of coming to resemble Old Europe was no doubt part of the reason for the American interest in progressive taxes.
This article will be completed tomorrow