When the constitutional convention was held in 1787, one of the participants' major worries was that a democratic government based on majority rule could pose a threat to minorities. They were especially worried that majority rule could encourage a largely landless electorate to expropriate the property of people like themselves. They thus adopted a system of divided government, replete with "checks and balances" and indirect elections, to minimize this risk. But while the Constitution ensures that the federal government will move slowly, it cannot prevent change forever. As the government grew, for example, the Constitution was amended in 1913 to permit an income tax.
Nonetheless, the Founders' fear that democracy would allow the poor to expropriate the property of the rich has never materialized. Explaining this fact is one of the greatest puzzles of American politics. The logic that led the Founders to see majority rule as a threat to wealth was certainly impeccable. Indeed, American social scientists still rely on models in which voters are expected to behave in exactly the way the Founders feared. These models require only one assumption: that voters dislike paying taxes. If that is the case, candidates should be able to increase their share of the vote by promising to raise tax rates for the rich, of whom there are few, while lowering tax rates and offering benefits for the rest of the population, which is far more numerous.
However, as incomes in the United States have become more unequal, so has political influence. The most affluent Americans are not only able to avoid high taxation on themselves that might in turn yield equality-enhancing social investments, they also enjoy disproportionate political influence generally. As a consequence, a vicious circle of economic and political inequality allows the well-off to dominate agendas and dissuades others from expecting much from politics. This Prospect special report explores several aspects of this conundrum.
The Congressional Budget Office (CBO) is now the best source of data on income distribution in the United States. According to the CBO, the richest 1 percent of all American households received more pre-tax income than the poorest 40 percent throughout the late 1990s. Federal taxes reduced these rich households' disposable income by 33 percent. Raising their effective tax rate from 33 percent to 41 percent would have allowed Congress to eliminate all taxes on the poorest 40 percent, raising the incomes of these millions of families by about a tenth.
Normally a policy that benefits 40 percent of potential voters while harming only 1 percent would be a sure political winner. In reality, however, tax policy has been moving in precisely the opposite direction. The richest 1 percent (hereafter just "the rich") doubled their share of pre-tax income from 9 percent in 1979 to 18 percent in 2000. If we adjust for inflation, their average household income rose from an annual $454,000 to $1.3 million. Because the federal tax system is moderately progressive, income increases of this magnitude should have raised the effective tax rate for rich households. Taxing the rich should also have become more politically attractive, as raising rates at the top allows Congress to raise more money without making any new enemies. But that was not what happened. In 1979-80, before the first tax cut of the Reagan administration, federal taxes reduced the disposable incomes of the rich by 36 percent. By 1999 that figure had fallen to 33 percent. The Bush tax cuts will continue this trend.
Why does tax policy increasingly favor the rich? Conservatives might argue that Congress just recognized that taxing the rich would reduce investment, discourage entrepreneurship, and slow long-term economic growth. But even if we assume that most legislators believe these arguments, Congress is not notorious for giving up short-term political advantages in order to do what is best for the country. A plausible answer must therefore explain why taxing the rich would have reduced legislators' chances of re-election.
The most obvious explanation is that legislators were becoming ever more dependent on large campaign contributions. As the rich got richer in the 1980s and '90s, they were increasingly willing and able to provide such contributions. Candidates need money to run for office. If newcomers cannot appeal to donors who can write big checks, their chances of success are slim. If incumbents alienate big-money donors, their chances of facing a well-financed challenge increase. Legislators who catered to the interests of the rich therefore became more numerous. This logic applied to Democrats as well as Republicans.
Candidates raise more money from special-interest groups partly because government has grown, so more interest groups have a big stake in election outcomes. The rich have more to spend because the rich now get 18 percent of the nation's income instead of 9 percent. That means a candidate can expect carefully selected telephone calls and fat-cat dinners to raise twice as much as before.
There is still some controversy about the degree to which rich donors' contributions directly affect legislators' behavior. Legislators who get big contributions from a specific interest group certainly tend to vote the way the group wants them to vote. But interest groups give mainly to legislators who already share their views, not to legislators whose views they hope to change. Rather than buying votes, interest groups may just be increasing the chances that those who vote their way will get elected over and over. Still, legislators also know that their voting record will affect their chances of attracting money from well-heeled groups. If a congressional committee is voting on legislation that affects an industry's profits, and if committee members know that the industry rewards its friends, those members would have to be saints for this knowledge not to affect their votes on low-profile questions that the general public will never hear about.
A big contribution also often ensures that a legislator will meet with the contributor to discuss the contributor's views. Some skeptics claim that this kind of access does not change legislators' votes. But access clearly influences what legislators -- and, importantly, their staffs -- hear and know. Such information may not affect the way legislators vote on high-profile issues where both sides flood Congress with information, but most issues are settled in an information vacuum. When that is the case, access can often determine what legislators believe, and what they believe may well determine what they do. There is also strong evidence that big contributions influence the amount of time and energy that legislators and their staffs devote to a specific issue. A legislator's willingness to spend time on an issue can, in turn, affect whether Congress does anything at all.
Anyone who wants to understand how money influences the legislative process should read Showdown at Gucci Gulch by Jeffrey Birnbaum and Alan Murray, which describes the evolution of the Tax Reform Act of 1986 as it worked its way through Congress. Five years earlier, President Reagan's 1981 tax legislation famously turned into a bidding war between Republicans and Democrats to offer tax preferences to business interests. The 1986 legislation was meant to be a tax-simplification and base-broadening measure, but the politics of base broadening led to lowering taxes on the poor and raising taxes on the rich. This legislation did not pass because powerful outside interests favored it. Indeed, they fought hard to preserve their privileges, and in many cases they succeeded. But a few powerful individuals in the White House, the Treasury Department, and Congress wanted to restructure the tax system, and the compromise that emerged was moderately progressive.
The rich can influence legislation indirectly, too, by shaping other people's ideas about what is desirable and -- perhaps even more important -- their beliefs about what is possible. During the 1950s and '60s, the East Coast "establishment" that dominated both parties saw itself as anti-communist but socially progressive. Even corporate leaders often gravitated to the political center, supporting groups like the Committee for Economic Development. In this respect they resembled today's European corporate leadership. The East Coast establishment's conception of "progress" was shaped by the trauma of the Great Depression, by the retrospective success of the New Deal, and by the Second World War. In 1964, when the anti-Goldwater landslide handed the Democrats a liberal majority, there was broad consensus that progress meant broadening the welfare state to include medical care, deepening it to help the poor, and ending "separate but equal" in the South. Those who opposed this agenda, while numerous, had no coherent alternative, and they came across to much of America as defenders of a dying social order.
A decade later, of course, the liberal consensus was unraveling, a new conservative agenda was taking shape, and the right had begun its campaign to take back control of the government. Money poured into conservative think tanks and magazines, changing what opinion leaders, journalists, and legislators read and heard. In due course, conservatives also began to buy or create newspapers and radio and television shows that influenced what ordinary voters read, heard, and saw. All of this required money. As the share of income going to the rich grew, they could afford to hire more and more people to disseminate their views.
The big unanswered question is now whether this cycle can be reversed. The optimistic view, to paraphrase Abraham Lincoln, is that you can fool most of the people some of the time and some of the people most of the time, but eventually most voters figure out what serves their interests. Yet there is also another possibility.
The share of income going to the rich today is roughly the same as it was between 1913 and 1929. The share of income going to the rich was cut in half between 1929 and 1959, with most of the decline coming between 1929 and 1945. It stayed low during the 1960s and '70s. It has climbed steadily since 1980. The pessimistic view is that the present level of inequality is the "normal" condition of a big, diverse country like the United States, at least when it pursues laissez-faire economic policies. According to this view, the years between 1929 and 1959 were an aberration.
How might we explain this normative change? The Depression destroyed a lot of wealth. World War II compressed the distribution of earnings, partly because it created an acute labor shortage, driving up wages at the bottom, and partly because the government used wage and price controls to hold down inequality. Labor unions were a powerful political force postwar, and they helped maintain the wage distribution that had been created during the war.
The Depression was also important because it showed millions of middle-income Americans that anyone could lose their job and that unemployment need not be evidence of laziness. The war threw together people from all walks of life in situations where character counted for more than education or family background, and it exposed them all to an institution in which nobody hoped to get rich. Men advanced through the ranks by risking their lives in dangerous places, and generals were paid like civil servants, not corporate chieftains.
The passing of the generation that came of age during the 1930s may well have played a role in the unraveling of these social norms. In this issue, Theda Skocpol traces the way in which labor unions and cross-class membership organizations -- like the PTA, The American Legion, and the General Federation of Women's Clubs -- declined while professionally managed interest groups -- like Common Cause and AARP -- expanded. One result was that the skills needed for political action became increasingly concentrated in the upper-middle class. Labor unions also declined, widening class differences in political participation. Harold Meyerson's article describes how the Los Angeles labor movement prospered by mobilizing Mexican immigrants, but his portrait of quiescent Houston is more representative of the Sun Belt -- and the nation. The main exception to this pattern has been the rise of evangelical churches, which often bring together people from diverse economic backgrounds. But these churches bring their members together around a conservative social agenda, not an egalitarian economic agenda.
But there also seem to be deeper institutional and cultural forces at work here. Studies by economists like Thomas Piketty, Emmanuel Saez, and Tony Atkinson have shown that from 1913 to 1980, the share of pre-tax income going to the rich followed much the same trajectory in Great Britain, Canada, France, and the Netherlands as in the United States. After 1980, the share of income rose sharply in Australia, Great Britain, Canada, New Zealand, and the United States, but not in France, the Netherlands, or Switzerland. This divergence could mean that Great Britain and the United States, where the elections of Margaret Thatcher and Ronald Reagan led to a big change in public rhetoric, influenced all the English-speaking countries. Or it could mean that all the English-speaking countries had been deeply influenced by John Locke and Adam Smith.
The difference between the English-speaking nations and western Europe was not just a matter of making different policy choices. Wages are more equal in western Europe than in the English-speaking nations, partly because European governments make unionization easier and union wage settlements often apply even to non-union workers. But union contracts seldom cover the top 1 percent of the income distribution. Rather, European elites operate in a different social and political environment. If a European firm wants to restrain wage growth among its unionized workers, it knows that giving big raises to top executives will make demands for wage restraint among ordinary workers less palatable both to its workers and to the general public. If social norms of this kind play a major role in setting wages for those near the top of the distribution, it becomes easier to see how the elections of Thatcher and Reagan could have set off a feeding frenzy among the rich. Once the rich realized that their critics were on the defensive, they began demanding tax cuts as well.
One might hope that rising levels of education would help voters understand their economic interests, but the evidence on this score is discouraging. The correlation between higher income and voting Republican has risen as the Republican Party has become more homogeneous, but it is still relatively weak because voters care more about issues like race and abortion than about economics. More than half the low-income voters who might benefit from electing a Democratic senator or president do not bother to vote at all, a troubling reality explored here in Richard Freeman's article.
All of this suggests that the American political system may not be capable of reversing the growth of economic inequality. On the other hand, that is exactly what sensible critics would have concluded in 1928, and they would have been wrong.