Friday, August 14, 2009

Eat the rich

The federal income tax was enacted by constitutional amendment in 1913 at the peak of the progressive era. It was enacted to meet several goals. The first goal was simply to raise money to cover government expenditures, such as the cost of building a larger navy. The second goal was finding a better source of revenue. Tariffs and consumption taxes, for a variety of reasons, were not meeting the needs of government. The third goal, and the most idealistic of the three, was to reduce income inequality. For over a decade, populist farmers and laborers had been demanding an end to the concentration of wealth into the hands of banking and corporate elites. In part, it was the popularity of the social engineering aspects of an income tax among farmers and laborers that made it possible for thirty six state legislatures to pass bills in favor of an income tax. Did it work?

In a word, yes. There is a chart floating around the blogosphere today showing the increase in income inequality over the last thirty years. The chart comes from an update of a paper by Emmanuel Saez, an economist at Berkeley. Since 1978, the amount of the national income controlled the top ten percent of the population has risen from thirty-four percent to fifty percent. the rise in the wealth of the top one percent and the top one one-hundredth of a percent has risen even faster. Saez's chart for income share of the top ten percent is in black below. I've added the top tax rate in red.

The match isn't perfect because things other than the federal income tax influence the distribution of wealth. There are other taxes that the red line doesn't show including state income taxes. In boom times, the middle classes do well. The lowest percentiles will have a larger share of the national income during times of low unemployment. In addition, how that top bracket is applied has changed over the years. But in general, the trend is clear; if equality is our goal, the progressive income tax is a proven success.

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