Wealth Inequality: the American Dream?

According to a recent poll by Atlantic Monthly, none of us really knows the degree of income and wealth inequality in the U.S., nor do we know how it has dramatically worsened in recent times.  I think this is partly because each of us (except possibly for a few Buddhists) craves a bit of inequality for ourselves.

How much income and wealth inequality is too much?  Here is a chart that shows how income inequality has changed over the last 100 years:

You can see that a dramatic drop in inequality began in the late 1930’s, leveled out in the 1960’s, and then began surging again in the early 1980’s.

There is much dispute among experts as to the cause of this dramatic increase in wealth and income inequality.  But generally, the increase in wealth inequality has been attributed to the following:  monetary policy, tax policy, deregulation of certain industries, effective lobbying by highly paid interest groups, the greater role of large campaign donations in electoral politics, failures in the public education system, and the simple but true notion that wealth begets wealth.

In fact, once the wealthy have accumulated enough to not care about health care costs, mortgage debt, or even the economy, and once every election is determined solely by campaign spending, then you say goodbye to any semblance of capitalism tempered by democracy, as envisioned by Adam Smith, who not only believed in the invisible hand of the market, but in progressive taxation, stating:  “The rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

While there is dispute about just how much tax policy has contributed to the increase in wealth and income inequality, there is no question that tax policy is one result of it.  Here is a chart showing how our U.S. Senate has in recent times dealt with lobbying efforts on behalf of various income groups:

As you can see, the poor actually were served by our Senators with negative responsiveness.  Not only were their efforts useless, they were in fact, better off not making them.  Only the wealthy were highly effective in accomplishing their objectives.  This is another example of how wealth paves the way for the wealthy to achieve their legislative and policy goals, so that they in turn can become more wealthy.  So, if we look at tax policy as a result of wealth and income inequality, the result should be that tax policy helps the wealthy accumulate even more wealth.  Clearly, this has been the case, as shown in the chart below:

From this chart you can see that the top .01% (that’s point zero one percent) have seen the most dramatic drop in their income tax rates, with their rates dropping by more than half since the 1970’s.  Coupled with this drop in tax rates are special tax breaks that only the wealthy can avail themselves of:  a zero percent tax on capital gains under certain circumstances; a low 15% rate on the rest of their dividend and capital gain income; and favorable estate taxes allowing each wealthy couple to pass $10 million tax free to their heirs, and that’s the value after employing costly estate planning strategies that only the wealthy can afford.  With favorable tax policy comes a favorable regulatory environment, and with more money to spend on elections, and no one to put a cap on campaign donations, thanks to the Supreme Court, the momentum for wealth and income inequality is fully underway.  What can stop it now?

Sources:  Wikipedia article: “Wealth Inequality in the United States“, The Wealth of Nations by Adam Smith, The Atlantic Monthly.

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