Tax Analysts Blog

Wealth Taxes to Cure Inequality? How About Tax Reform Instead.

Posted on Jul 23, 2013

What are the prospects for a new federal tax on wealth? Pretty good, if you think surging inequality will trigger a populist revolt. But not so good if you think history has anything to teach us.

According to some observers, a wealth tax is just around the corner. "If you’d like to know where American political debates are headed, the data suggest a simple answer," observed economist Tyler Cowen in a recent New York Times article. "The next major struggle — in economic terms at least — will be over whether taxes on personal wealth should rise — and by how much."

Cowen's got a point, at least when it comes to the data. Drawing on a paper by economists Thomas Piketty and Gabriel Zucman, Cowen pointed out that wealth around the world is growing faster than income. That's not necessarily a problem, except that wealth is highly concentrated, making for a rising tide of inequality. And inequality can trigger strong political reactions -- like a wealth tax.

But will it? History suggests otherwise.

At various times, inequality has played a key role in shaping federal tax policy. In the early 20th century, for instance, it helped drive the movement for a permanent federal income tax.

Likewise, tax policy in 1930s was clearly driven by distributional worries. "Great accumulations of wealth cannot be justified on the basis of personal and family security," declared President Franklin Roosevelt in a speech defending the aptly named Wealth Tax Act of 1935. "In the last analysis such accumulations amount to the perpetuation of great and undesirable concentration of control in a relatively few individuals over the employment and welfare of many, many others."

But if Roosevelt was interested in redistributing wealth, he was even more focused on redistributing the tax burden. The 1935 revenue act certainly targeted wealth, chiefly through an increase in income tax rates. But it also took aim at tax avoidance, as did almost every other piece of New Deal tax legislation.

As I argue in my recent book, Their Fair Share: Taxing the Rich in the Age of FDR, Roosevelt believed that tax avoidance was morally corrupt even when it was legally permissible. If taxes were the price of civilization, then too many rich Americans were getting their civilization at a discount, Roosevelt charged.

FDR was careful to make the connection between the distribution of the tax burden and the distribution of the nation's wealth. "Our revenue laws have operated in many ways to the unfair advantage of the few," he explained, "and they have done little to prevent an unjust concentration of wealth and economic power."

The framing here was key: Roosevelt did not simply ask Congress to take from the rich and give to the poor, although that was part of his message. He also wanted lawmakers to eliminate loopholes, thereby ensuring that high statutory rates didn't exist solely in theory but also in practice.

Americans responded well to Roosevelt's campaign against loopholes; Congress passed laws in 1936 and 1937 that were designed to broaden the tax base, especially at the top of the income scale. Inequality and widespread economic distress certainly gave these laws a boost in the Depression-wracked politics of the mid 1930s. But time and again, Roosevelt framed the measures as an attack on special privilege, not wealth itself.

As Cowen suggests, today’s rising inequality might plausibly spark a populist attack on wealth, including some sort of national wealth tax. But the history of New Deal taxation suggests that more tepid reforms might be the more likely response.

Base broadening is not exactly the stuff of populist legend. Calls to curb tax preferences won't get the blood pumping like a full-throated campaign to soak the rich with some sort of new levy on wealth.

But thanks to Roosevelt, base broadening does have a certain pedigree. And even important, an undeniable record of political success.

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