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Economic inequality in America has been rising steadily since the Reagan era. Why? A new research paper identifies what it say is the main culprit: the fact that we’ve stopped taxing the rich.
There are, of course, many contributing factors to the post-Reagan Age of Inequality that has finally grown so dire that it is warping our electoral politics past recognition: the decline in union bargaining power, the influence of money on politics, the deregulation of the financial industries, fortunes spawned by new technologies, and more. But a new National Bureau of Economic Research paper, by economists from Yale and from Stockholm University, says that the most important factor of all has been the decline of progressive income taxes.
What’s the scale of the problem? The paper notes that in the U.S., “the share of overall wealth held by the top 1% has increased from around 25% in 1980 to over 40% today; for the top 0.1% it has increased from less than 10% to over 20% over the same time period.” Economic mobility has severely declined during the same time period as well, which means that our country today is far more unequal and offers far less opportunity than it did a generation ago. When the very wealthy double their share of the pie at the same time when it is harder than ever to achieve a better living standard than your own parents, people will naturally get frustrated, even if they can’t put their finger on who or what is thwarting their dreams.
The new study uses an economic model to examine several possible drivers of inequality in the past 35 years, including the decline of progressive taxation (meaning that the rich are being asked to give less of what they earn back to the public), increases in wage inequality (the growing gap between how much high and low earners are paid), and the rise of the capital share of income (how much of our national income comes from capital, rather than from wages for labor). Their findings: It’s the taxes, stupid.
[The] marked decrease in tax progressivity is by far the most powerful force for increasing wealth inequality. First, other things equal, decreasing tax progressivity spreads out the distribution of after-tax resources available for consumption and saving. Second, decreasing tax progressivity increases the returns to saving, leading to higher wealth accumulation, especially among the rich for whom wages (earnings) play a smaller role in their decision-making….
[The] main contribution [of our research] is the conclusion that the most important factor—by far—behind the developments is the significant decline in tax progressivity that began in the late 1970s.
For your reference, here is a chart illustrating that tax decline:
This may seem like dry subject matter, but its implication is incredibly important—namely, that the most effective way to combat the inequality plaguing our society is to just raise fucking taxes on the people who have all the money. Who woulda thought???? The authors also note that “The prediction from the present paper is that, barring reverses in the tax code, wealth inequality will go up even further.”
Unfortunately, we just elected a leader who is planning to do the exact opposite. Thus we see how the frustrations caused by inequality may express themselves in less than fruitful ways.