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. …