What a new 'gilded age' may bring
It's an odd phenomenon. Before Memorial Day in May, the Senate Republican leadership plans to have a go at repealing or minimizing the estate tax - the "death tax," as they like to call it. Yet economist after economist note that the only families likely to benefit are billionaires and multimillionaires, and that both income and wealth in the United States are increasingly being concentrated at the top.
Some warn that by its actions, Washington is contributing to an economic climate that is leading to less tolerance, greater xenophobia, and more inequality in political representation.
The richest 1 percent of Americans now get about 15 percent of total US income, close to the 18 percent the same small group had in 1913. In a way, the days of the robber barons, the tycoons, and the Gilded Age are back - after the Great Depression, World Wars I and II, and progressive taxation had trimmed their share to 8 percent in 1963.
In contrast, the vast majority of American incomes have not kept up with inflation for the past six years.
"It's very troubling," says Benjamin Friedman, a Harvard University economist. "Inequality by some measures is very high by historical standards."
Undoubtedly the rich, with their fat investment portfolios, were hit by the bursting of the stock-market bubble at the start of this century. The Bush tax cuts alleviated some of that pain.
Nonetheless, the market collapse did not stop the trend of the past 25 years toward greater income inequality. A recent Congressional Budget Office report shows that, between 1979 and 2003, the top 1 percent of households enjoyed a 129 percent gain in after-tax income after inflation. That compares with 15 percent for the middle one-fifth of all households and 4 percent for the bottom fifth.
So much of the fruits of economic productivity growth from 1966 to 2001 went to the top 10 percent that little was left for the other 90 percent, notes a new paper by Northwestern University economist Robert Gordon and student Ian Dew-Becker. Productivity is the source of growth in real per-capita income.
This research also shows that the richest of the rich, the top 1/1,000th, enjoyed a 497 percent gain in wage and salary income between 1972 and 2001. Those at the 99th percentile, who made an average $1.7 million per year in 2001, enjoyed a mere 181 percent gain.
A recent visitor to Antigua saw one consequence of this income shift: a row of 80-foot American-owned yachts lined up at a wharf. One of a dozen crew members on one ship said the owner only came aboard for about two weeks in the winter and again in summer - when the yacht is docked in southern France.
The New York Times recently reported a boom in building mega-yachts, some as long as a football field. Big yachts have multiplied from 4,000 a decade ago to 7,000 now. Only a few slips can accommodate the biggest boats, each of which can cost $200 million. (Many boat owners use tax breaks, some provided in a 2003 tax bill, to slash costs.)
Most Americans still believe in their own potential to climb the income ladder. But growing income inequality still worries Edward Wolff, an expert at New York University: "It makes our democracy very fragile.... Eventually the American people are going to catch on. Politically it is going to create a major backlash." He's not predicting revolution, rather "reactionary tendencies."
Dr. Friedman, author of an excellent new book, "The Moral Consequences of Economic Growth," agrees.
Here are some consequences the two economists and others foresee:
• The white middle class may grow less tolerant of affirmative action and other efforts to help minorities - African-Americans, Hispanics, and Asians.
• Reflecting public opinion, Congress could shrink programs for the poor.
• Efforts to limit immigration, already growing, could expand further.
• Reactionary politicians could win more votes and offices.
• The class system in the country could become more rigid. As it is, because education is primarily paid by property taxes, children in wealthy communities get a better education than those living in poor towns. For children, education is a prime determinant of future income and class. Recent economic research finds that income mobility has already declined in the US.
• With their wealth, the new "oligarchy" could maintain excessive influence in Washington through campaign contributions and support for lobbyists.
It could make the political system more unfair, says Professor Wolff.
Some economists blame the concentration of wealth and income on extremely high pay for some CEOs, entertainment celebrities, sports stars, and Wall Street financiers - the "working rich," as they are dubbed. At the bottom, deunionization and globalization have depressed wages. Progressive taxation no longer restrains wealth much.
University of Texas economist James Galbraith attributes most of the rising income inequality, at least through 2000, to soaring stock prices. Some new wealth, he suspects, may not be as willing as old wealth to leave money to charitable foundations. So ending federal estate taxes, if it happens, may also wither the philanthropic culture that has done so much for the nation.