Tax Analysts Blog

Piketty Is Wrong: Americans Don’t Have a ‘Passion for Equality’

Posted on May 6, 2014

In his new and unlikely bestseller, French economist Thomas Piketty describes the rise of "arbitrary and unsustainable inequalities" that pose a threat to democratic institutions around the globe. He also lays out a plan for curbing those inequalities with a global wealth tax.

It's a remarkable and widely hailed achievement. And indeed, Piketty has provided a rich historical context for the contemporary debate about inequality. But along the way, he misconstrues the political history of American taxation. Despite what he says, Americans have never shown a sustained “passion for equality.”

As Piketty correctly points out, Americans did pioneer the use of soak-the-rich taxation, experimenting with very high, nearly confiscatory rates long before most other nations gave it a shot. The original U.S. income tax of 1913 had a top rate of just 7 percent. But only five years later, the top bracket rate was 77 percent.

What's the explanation for that steep climb? According to Piketty, it’s all about a search for equality. "When a government taxes a certain level of income or inheritance at a rate of 70 or 80 percent," he writes, "the primary goal is obviously not to raise additional revenue (because these 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, then at least to make it extremely costly to sustain them and strongly discourage their perpetuation."

In that passage, Piketty misreads the political history of American taxation. While a few political leaders of the 1910s were eager to squeeze large incomes out of existence, most had tamer goals. In particular, they supported high rates as a means to redistribute the tax burden, not wealth.

To some extent, that’s a distinction without a difference; very heavy taxes designed to redistribute the tax burden will, along the way, often accomplish some meaningful wealth redistribution, too. But intentions matter. Calling for an end to concentrated wealth is far more radical than calling for a change in tax distribution tables.

The importance of that distinction became obvious after World War I. If rates north of 70 percent were intended to end large incomes – and recast American society– then why did they disappear so quickly once the shooting stopped? By 1925, the top bracket rate had fallen to just 25 percent.

Did Americans fall in love with wealth redistribution during the war, only to fall out of love just a few years later? Not really. Americans were willing to support high rates as an element of wartime mobilization –as a form of shared sacrifice. But they were on board only for the duration; when the emergency disappeared, so did political support for high rates.

World War I taxation, in other words, tells us a lot about the politics of war, but less about the politics of wealth.

New Deal Taxes

Piketty’s argument works better for the New Deal era. After all, President Franklin Roosevelt memorably defended his tax agenda in starkly redistributive terms.

"Social unrest and a deepening sense of unfairness are dangers to our national life which we must minimize by rigorous methods," FDR declared in 1935." People know that vast personal incomes come not only through the effort or ability or luck of those who receive them, but also because of the opportunities for advantage which Government itself contributes. Therefore, the duty rests upon the Government to restrict such incomes by very high taxes."

Congress seemed to agree. During the 1930s, lawmakers pushed rates skyward, and by 1936 the top rate had reached 79 percent. World War II later pushed it higher still; in 1944 it was 94 percent.

The postwar history of federal tax policy seems to further bolster Piketty’s argument. While rates dropped slightly after the end of World War II, they remained very high for decades. As Piketty notes: "All told, over the period 1932-1980, nearly half a century, the top federal income tax rate in the United States averaged 81 percent."

So maybe Piketty is really on to something -- maybe Americans really do have an affinity for redistributive taxation.

Or maybe not. By focusing on headline figures -- especially the top bracket rate -- Piketty’s argument obscures the deep political turmoil that surrounded federal tax policy throughout this period.

To be sure, during moments of crisis – including both the Great Depression and World War II – Americans were willing to tolerate and even embrace sky-high rates. But conservative opposition remained powerful. In recent years, several scholars, most notably the sociologist Isaac Martin, have made clear just how vibrant the nation’s antitax culture remained during Piketty’s long half-century of soaking the rich.

Sure, the high wartime rates survived. But their durability had a lot to do with legislative inertia and vested interests. Congress, for instance, did a brisk business in shopping tax preferences to overburdened taxpayers

The power of conservative tax ideas -- and their persistence throughout the postwar years -- became clear in the 1970s, when Republicans used them to build a new electoral majority. Piketty views the years after 1980 as an aberration of sorts, or at least a premature departure from the U.S. tradition of taxing the rich. But in fact, the rate cutting revolution of the 1980s did not appear suddenly in the person of Ronald Reagan. Rather, Reagan gave expression to a dormant but always powerful tradition of antitax U.S. politics.

Ultimately, Piketty tells an easy but oversimplified story about U.S. fiscal politics. The United States has never been a pro-tax country, or at least not solely a pro-tax country. Calls for redistributive taxation have been a constant of U.S. politics, but they have shared the stage with conservative insistence that taxes be used "for revenue only."

Told correctly, American tax history is a story about conflict, not consensus. Liberals were on the winning side of that battle for a long time. But conservatives never gave up.

Read Comments (1)

emsig beobachterMay 6, 2014

If I remember history correctly, wasn't there a major tax cut during the
Kennedy Administration? JFK was never considered a Conservative.

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