Condemned to plutocracy? The relentless rise of US inequality

As Barack Obama’s presidency was coming to a close, Jason Furman, then chairman of the president’s council of economic advisers, laid out the strides his administration had made to curb the nation’s exorbitant income inequality in “the largest investments in reducing inequality since the Great Society”.

Indeed, by the end of 2016, taxes and transfers cut the share of income accruing to the richest 1% of households by just over a fifth, according to estimates from the congressional budget office (CBO), more than under any government since at least Jimmy Carter’s. They raised the slice of income going to the poorest fifth from 3.9% to 7.9%, the highest share since at least 1979.

Those were the days.

As Elon Musk is anointed the world’s first trillionaire, following the public offering of shares of his internet to AI conglomerate SpaceX, that moment, just 10 years ago, when the government bragged about its efforts to curb America’s lopsided distribution of prosperity, might give us some hope that we are not condemned to plutocracy; social and political forces can stop inequality’s relentless rise.

Benjamin Franklin liked to talk of America’s “happy mediocrity” – a country with “few … so miserable as the poor of Europe … few that in Europe would be called rich”. And yet, America’s history of combating inequality is rather grim. Obama’s track record as the United States’s most committed equalizer in over half a century underscores the ultimate lack of interest of the nation’s political coalitions in bringing about a more equitable distribution of the fruits of prosperity.

Supposedly a populist champion of the working stiff, Donald Trump’s priorities quickly turned elsewhere. His Tax Cuts and Jobs Act of 2017 offered massive tax cuts to Americans in the upper percentiles of income. By the end of his first presidency, the share of income accruing to the richest 1% of households – after taxes and transfers – had drifted back up to 13.2%, from 12.5% the year Obama left office.

The $2.2tn Cares Act that Trump signed into law as a response to the economic shock from the Covid pandemic did improve the lot of the poor. In 2020, the share of national income accruing to the poorest fifth of households reached a multi-decade high of 8.2%. Yet by 2022, under Joe Biden and the last year for which the CBO has crunched data, it had dipped to 7.4%.

Redistribution is nowhere to be found on Trump’s priority list. Notwithstanding some shiny goodies targeted at his base – such as tax deductions for tips, overtime and seniors – Trump’s One Big Beautiful Bill Act skewered the working class by slashing spending on Medicaid, food stamps and health insurance subsidies, largely to pay for corporate tax cuts.

According to the CBO, the legislation reduced the annual income of the poorest tenth of households by 3.1% on average – about $1,200 – while boosting the income of households in the top decile by 2.6%, a cool $13,600. The tax blow came on top of tariffs that took a disproportionately large bite from the disposable income of the working class.

And still, it’s critical to understand that the United States’s deep inequality – and its general disinterest in doing anything about it – is hardly Trump’s fault. The lopsided distribution of prosperity is a feature of American society that has persisted across administrations, whether Democratic or Republican.

It is embedded in a simple, rock-solid truth: Americans dislike paying taxes. And this is particularly true at the very top of the ladder. Research by economists at the University of California, Berkeley estimated that the 400 richest Americans pay a smaller share of their income in taxes than the average Jane, largely due to the many ways oligarchs can move money around to minimize their tax bills. Over the past half-century or so, taxes and transfers have never trimmed the share of income flowing to the one percenters by much more than a fifth.

The Gini index is a common measure of inequality. It ranges from zero, when income is distributed equally, to one when a single individual takes all. America’s Gini is among the highest in the Organization for Economic Cooperation and Development. What’s most concerning, though, is that taxes and transfers have done less to reduce inequality in the US than in almost every other country in the OECD.

Musk is surely happy to have reached trillionaire status against this backdrop, a landscape where his riches are likely to go largely untouched by redistributive efforts. The wealthiest 1% of Americans hold nearly 32% of the country’s net worth. That money passes down the generations largely untouched.

The plutocracy’s main trick is to have as little taxable income as possible. Steve Jobs famously took $1 in wages when he returned to Apple in the 1990s. Meta’s Mark Zuckerberg, Oracle’s Larry Ellison and Google’s Larry Page have done the same. Their wealth comes from appreciating stock. Since they only have to pay capital gains taxes when they sell it, they don’t– financing their lifestyle with loans that roll over endlessly, using stock as collateral. Unrealized capital gains account for 55% of the largest estates. They are bequeathed tax-free.

Musk’s accountants, moreover, are more skilled than most. According to an investigative report by ProPublica, Musk’s wealth increased by $13.9bn between 2014 and 2018. But he paid only $455m in taxes on reported income of “only” $1.52bn. In 2015, Propublica found, Musk paid $68,000 in federal income tax. In 2017, he paid $65,000, and in 2018 he paid none.

It more than a little ironic that these experts at tax avoidance are at the helm of a technological revolution that could drive inequality to new, unprecedented heights. As artificial intelligence displaces much of human labor and further rewards the owners of capital, it is expected to further shrink the share of the nation’s income that accrues to workers.

Will redistribution be up to the task of helping ordinary Americans cope with such an unequal economic landscape? It’s not heartening that Obama’s efforts, the most strenuous since Lyndon Johnson’s Great Society, look today like minor blips in the long arch of American indifference toward its massive disparities.

Eduardo Porter is a journalist focused on economics and politics. He writes the newsletter Being There on Substack