Against the American Aristocracy

By Christopher Farrell Equality has long been a central value in American society. The 19th century social philosopher Alexis de Toqueville emphasized equality of conditions. Capitalist theorist Milton Friedman wrote eloquently about equality of opportunity. Political commentator Mickey Kaus emphasized equality of civic space.

Yet, America has long been a society with an unequal distribution of income and wealth. An academic cottage industry has grown up studying the rise in income inequality over the past few decades. Although the figures can be cut in different ways, researchers broadly agree that the gap between the rich and poor has grown since the 1970s. The concentration of wealth has been remarkably stable in recent decades, however, despite the go-go years of the dot-com boom and the legions of newly minted zillionaires.

That could change if the Bush Administration gets its way and permanently eliminates the estate tax. Call it the revenge of the rentier class.

NOT AS BAD. The existing estate tax is deeply flawed, crying out for reform. But instead of eliminating the tax, it would be far easier to reduce the amount that is exempt so that only the most rarified have to take the tax into consideration. It's bad public policy to actively encourage the creation of an aristocracy of privilege and inherited wealth, especially in a high-tech, integrated global economy that values meritocracy, entrepreneurship, and human capital.

Although inequality still exists in the American system, it's not as bad as it used to be. The top 1%, although a small fraction of the population, used to hold almost 40% of the nation's household wealth. That's according to a recent study "Top Wealth Shares in the United States, 1916-2000: Evidence from Estate Tax Returns," by Wojciech Kopczuk of Columbia University and Emmanuel Saez of the University of California.

The early part of the study focuses on the opulent era when the wealthy heirs of Vanderbilt, Astor, Peabody, Duke, and others summered in mansions in Newport and socialites put on ostentatious balls in New York. The rentier class portrayed by Edith Warton in The House of Mirth scorned the newly rich. Horrors, they made money in business.

MORE STOCK PLAYERS. Wealth is far less concentrated today. Kopczuk and Saez say the figure for the amount of the nation's wealth held by the richest 1% has been fluctuating between 20% and 25% over the last three decades. Here's an alternative measure to capture the same dynamic. America's richest man in 1918 was John D. Rockefeller who owned 0.54% of the nation's total net worth. In sharp comparison, at the peak of the stock market boom in 2000 it took the combined fortunes of Bill Gates, Larry Ellison, Paul Allen, and one-third of Warren Buffett to equal 0.52% of net worth, according to the scholars.

What happened? The big transformation in the concentration of wealth in America came from the economic shocks of 1929 to 1945: The Great Depression, the New Deal, and the Second World War II. The rentier class has never managed to reconstitute its preeminent economic position over the last half century. The authors argue the two most important factors behind that failure were the progressive income tax and estate taxes.

The authors also highlight the democratization of stock market ownership in recent years. The top 1% of individuals no longer holds a significantly larger fraction of their wealth in stocks compared to the average person in the U.S. economy with a 401(k) plan and a college savings account.

Of course, the progressive income tax system is under assault as tax law increasingly favors capital at the expense of labor. The elimination of the estate tax would only worsen the situation. Henry Simon, the University of Chicago economist and proponent of a progressive income tax system, memorably remarked that extreme inequality is "unlovely." Equality of opportunity is too important a concept to sacrifice to the whims of the rentier. Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over Minnesota Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online