This may come as a surprise, but the great income and wealth divide that we are experiencing now in the U.S. has not always been the case. The excesses of the Gilded Age followed by the Great Depression resulted in progressive laws, policies and regulations, which put constraints on the excesses of the rich and super-rich. Income taxes were enacted in the early 1900s with top marginal tax rates of 20% for the richest Americans. This increased gradually to a marginal tax rate of 90% starting in the mid 1940s to the mid 1960s. Today the top marginal bracket is taxed at 37%, but there are all sorts of exclusions so that the super-rich pay about the same average rate, close to 25% of income, as everyone else. The inheritance tax became law about the same time with estates of more than $1 million taxed at 40% beginning in the early 1900s. An estate now can be as high as $12 million before the 40% tax comes into play. Takeaway here: taxes are a vehicle for leveling the playing field by redistributing income but no longer play the role they have in the past. Republican sponsored legislation “to starve the beast” by lowering taxes on upper income people has been successful.
Following World War II, economic productivity increased from year to year and management and workers’ incomes increased at close to the same rate averaging around 4% a year. That all changed beginning around 1980. Since then, the average pay for workers has stagnated adjusted for inflation, and the pay for most management and higher income workers and professionals increased in pace with productivity and faster than inflation. Salaries of “stars” in business and in entertainment and sports became crazy. Celebrities and CEOs make fortunes. The difference between CEO pay of a typical Fortune 500 company and the average worker in that company was around 20 to 1 in 1960. It is almost 400 to 1 today.
Unions were strong in the early 1900s and became the base of the Democratic Party, which under Franklin Roosevelt became the party of the working class. Most workers could make a living wage, and their lives were improving. Most white workers, that is. Today due to the global economy where owners can move jobs overseas more easily, anti-union laws, and technology that eliminates jobs, the working class is hurting.
Of course all was not hunky dory during the first part of the 20th Century. During this period Jim Crow laws ruled the South, and segregation was embraced in the North as well. Redlining prevented African Americans from buying homes in decent neighborhoods, and even the early public housing projects were segregated. Many unions were also segregated by race.
This situation prevailed from the late 1930s to the late 1950s. Brown versus Board of Education happened in 1954, which ignited the civil rights movement, which began in earnest with the Montgomery Bus boycott in 1955-1956 followed by the Greensborough sit-ins and the Freedom Rides in 1961 with major protests continuing throughout the 1960s.
The dilemma that happened beginning in the mid 1960s with the passage of the Civil Rights Act of 1964 was the conflict between the white working class, which had managed significant economic gains due largely to strong unions and to Democratic presidents and majorities in Congress, and African Americans who up to that point had been essentially excluded by law and by custom from participating in economic gains. It should not have been viewed as a zero sum game, but to many in the white working class it felt like one. The gains that then were being made by African Americans were viewed by many in the white working class as hurting them—hence the pushback by people who felt that policies like busing and school desegregation were coming mainly at their expense, not at the expense of people who they felt looked down on them and who they suspected were not all that affected by integration–white people living in fancy neighborhoods and sending their kids to private schools and good colleges.
Then along came Barak Obama in 2008. Having an African American president was for many the last straw.
But it was not just working class and poor whites who resisted civil rights legislation and were uncomfortable with an African American president. Many middle- and upper-class white people did as well. Old fashioned racism, it turns out, is tough to kill. A lot of white people in all income groups were fearful of racial change. There is a lot of guilt to be spread around.
Regarding regressive legislation that allowed the rich to keep more of what they earned, there are other players as well. “Traditional conservatives” and libertarians were fearful of large government, higher taxes and regulations that they believed hindered capitalism and free enterprise. Barry Goldwater and Ronald Reagan were their heroes. The country became divided pretty much down the middle in the 1980s and remains that way today.
The year that the pushback against liberal and progressive actions came into its own was the election of Ronald Reagan in 1980. In 1981 Congress passed the Economic Recovery Tax Act (ERTA) which reduced the highest marginal tax rate to 50% (from 70% at the time), cut taxes in other ways and stimulated commerce and economic growth but also resulted in growing inequality. ERTA was the first of many tax “reforms” that followed under subsequent Republican presidents and elected officials that enhanced income for business and reduced income for workers and for social safety net programs. For the higher income workers income has kept pace with productivity. For some at the top it has skyrocketed. The top 20% of households now account for more than half the income today. In the meantime, the percent of households below the poverty line has remained between 12% and 15% of the population with no significant improvements, and it is impossible in most states and cities for a family with only one wage earner to make ends meet on a 40-hour week job earning $12-$16/hour .
Almost every Republican president has tried to cut taxes and to cut safety net programs. Trump’s major tax cut in 2017 favored the rich big time, did little for his working class supporters, and resulted in the loss of almost trillion dollars in tax revenues. Today the top marginal rate is 37%, compared to 90% in the 1950s and 1960s. Inheritance taxes do not start until the value of estates reaches $12,000,000. Many large corporations pay no taxes at all.
So there is no wonder that discontent and unrest exist in our country right now. The rich and well off are getting richer, and most everyone else is hobbling along about the same or are worse off. We are the wealthiest country on the planet but are behind many developed countries in how wealth and incomes are distributed and the strength of social safety nets. We are less equitable than we were decades ago and getting worse.
Many Republicans complain about safety net subsidies, saying they disincentivize work, but it turns out that more “welfare” goes to the well off than the poor. The number one culprit is the tax deduction for mortgage interest, which amounted to $193 billion in non collectible tax revenues in 2021 compared to the $53 billion spent by HUD on public housing, Section 8 Housing, and Housing Choice vouchers combined—almost four times as much. But there are many more subsidies you also don’t hear many of us in the “privileged class” complaining about. The biggest is the private health care subsidy. When companies provide coverage for health care for workers, this is not considered taxable income for those who obtain the insurance and benefit from it. This amounts to about $316 billion dollars a year in subsidies. According to Mathew Desmond in his new book, Poverty By America, the government subsidies received by an average tax payer in the top 20% of wage earners was over $35,000 in 2021 (mainly in tax subsidies) compared to average subsidies of just over $25,000 per tax payer in the bottom 20% (mainly in social safety net programs).
You get the idea. There is something wrong with this picture. And on top of this, we are more divided on the social and cultural issues than ever—abortion, gender identity issues, “wokeness,” and book censorship, among others. Good heavens! Is there a way out?
The next post tries to deal with this question.