The Central Claim

Taxing the rich in the USA could be an attempt to fix a situation of neglected fiscal citizenship. People and firms that benefit the most from the foundation of the economy (property laws, courts, infrastructure, educated workforce, financial system, public research and social stability) should contribute substantially to maintaining it. Extreme private wealth depends on public systems and without a fair contribution from the wealthiest, those systems will decay faster than they can be rebuilt.

We know that the wealthy in the USA are not demonstrating genuine fiscal citizenship, but even if they did, it is also important to know that taxation is not the best or only route to take to ensure greater income equality. Taxation is necessary for fiscal fairness, public investment and slowing the growth of corporate profits vis a vis worker salaries, but it is insufficient as the sole means of reducing inequality because inequality is generated before taxation.

The American debate over inequality has often been stuck within a narrow frame of reference involving “taxing the rich.” This is understandable as the income gap has become outrageous, the rich are not paying their “fair share” and because taxation is one of the few means currently available that the federal government can employ to draw from income gained by the wealthy. Yet it is critical to understand that the widening gap between the wealthy and everyone else is not primarily fixable through taxpolicy.

Income inequality is primarily a problem of how income is generated, distributed and protected. By the time we get to taxes, the inequality has already been established. The real battlefield we should focus on should be pretax inequality and it is essential that the average American citizen understands this.

Generating, Distributing and Protecting Income

Here’s the crux of the problem: Money made from owning things that can make money now grows much faster than money earned from working. Since the 1980s income from “capital” (owning businesses, stocks, property or patents) has risen far more quickly than wages. The problem in a nutshell is that means have not been taken to address or balance this situation out in any meaningful way.

When investment income grows ten or fifteen percent a year while paychecks rise only two or three percent, the gap expands. Taxes can trim from the top and be applied back into the system for infrastructure needs, but taxes can’t change the basic mechanism which is generating the inequality. The system creates a huge amount of inequality long before taxes are assessed.

If we want to fix income inequality we need to, obviously, shift more of this massive income toward workers. When companies make huge profits but wages barely move, inequality is inevitable. An obvious fix is to push more of the economic pie toward labor. For example, stronger unions, higher guaranteed wages and worker representation on corporate boards can all contribute to this.

Reducing the rewards of owning assets also means preventing capital income from outpacing wage income so forcefully that the top sector pulls away from everyone else. In fact, taxation is not something we should dismiss as inconsequential because even though taxation doesn’t lead to income equality, if used intelligently it can slow capital accumulation down.

The Goal Is to Strengthen Labor’s Share and Slow Capital’s Automatic Acceleration.

For example, taxing very large inheritances would prevent massive fortunes from moving across generations. Taxing buybacks (when a company uses its profits to buy its own stock to push the price up instead of raising wages) could stop firms that use profits to inflate share prices instead of paying their workers more.

Taxing capital gains (the extra money someone gets when they sell an asset like property or a stock for more than they paid for it) ensures that windfalls from selling assets contribute to the public systems that make those gains possible. Again, these measures don’t eliminate the structural capital advantages, but they help curb a significant problem.

Here are some examples of strengthening labor’s share:

Sectoral bargaining is when workers negotiate wages and conditions across an entire industry rather than shop by shop. This raises pay broadly and prevents employers from undercutting each other by driving wages down.

Codetermination is when workers hold binding seats on corporate boards, and it ensures that decisions about investment, wages and profit allocation include the people who actually produce the value. These mechanisms change the balance of power inside the firm.

Again, banning buybacks or taxing them heavily forces profits back into the real economy, toward pay, training and expansion.

Mandatory profitsharing ensures that when firms do well, workers do well automatically. This ties labor income to the same means that drives capital income.

When a handful of firms dominate a market, workers have nowhere to go, wages stagnate and productivity gains are captured entirely by capital. Breaking up monopolies, blocking predatory mergers and regulating dominant platforms reopens the economy. Workers can switch jobs, small firms can enter markets and wages rise because employers must compete for labor rather than trap it.

A system that positively channels productivity gains into wages, through wage boards, job ladders (training to help workers keep rising higher) and binding wage standards, ensures that economic growth translates into worker income rather than shareholder windfalls.

A public wealth fund that owns national assets and pays dividends to everyone gives workers a direct share of the returns that currently flow almost entirely to the top. This is a structural redistribution of ownership and when workers own part of the capital stock, they will receive part of the capital returns.

Taken together, these mechanisms can change the structure of the economy in regard to who owns productive assets, who decides how profits are used, how wages are set and how much power dominant firms can accumulate.

Unionization

Labor unions are essential to bridging the income inequality gap, yet the collapse of labor bargaining power has become a sad reality. For much of the twentieth century, unions acted as a counterweight to capital, ensuring that productivity gains translated into wage gains. Unionism in the private sector has fallen to historic lows and workers have little leverage to negotiate wages or benefits.

As a result, inequality expands with income creation. Scandinavian countries demonstrate this clearly as they maintain relatively moderate tax rates yet achieve far greater equality because workers have greater institutional power. The American model, by contrast, leaves workers alienated and firms unconstrained. This is the crux of laborpower erosion in the USA.

We can, however, rebuild unions by changing the legal environment so organizing is actually possible again. We can make it illegal for companies to stall, intimidate or retaliate. We can make union elections fast, simple and binding. We can let workers bargain across entire industries instead of one workplace at a time, because bargaining shopbyshop is one of the ways employers broke union power in the first place.

We can force companies to share productivity gains with workers, so wages rise automatically instead of only when workers threaten to strike. We can stop firms from treating gig workers as “independent contractors” and classify them as employees with full rights. Finally, we can make it easier for workers to walk away from bad jobs by strengthening unemployment insurance.

Basically, we can fix the loss of bargaining power by changing the rules so workers can actually bargain again.

What Other Nations Are Doing

Once you compare nations in regard to income inequality, the American model stands out as unusually permissive toward inequality long before the tax system even gets involved.

In Nordic countries, unions negotiate pay for entire sectors, not just individual workplaces. So a nurse, a bus driver and a midlevel technician all earn roughly similar wages, not wildly different ones. And people at the top can’t pull away with huge salaries because social norms and labor institutions keep top pay from exploding. Because of all that, the income people earn before taxes is already pretty equal.

Sectorwide bargaining sets pay ranges for entire industries so that a company can’t just decide to pay its executives ten times more than anyone else, because the negotiated range already covers everyone in that sector, including management. Unions sit across the table from employers and can say: “Here is the wage ladder for this industry which we feel is fair and right.” That ladder often has small gaps between the bottom and the top. Companies are expected to follow it.

On top of that, Nordic countries have strong norms against runaway executive pay. If a CEO tries to grab a huge salary, unions, workers, and even other executives push back. Media calls it out, boards don’t approve it as it is seen as socially unacceptable.

Germany maintains relatively low pretax inequality through codetermination, strong unions in key sectors and a regulatory environment that limits runaway executive compensation. German firms cannot simply funnel disproportionate gains to the top because workers have institutional representation and wage norms are anchored by collective agreements. Taxes matter, but they are not the primary mechanism and thus the wage structure is less unequal.

France and Italy show yet another pattern as their pretax inequality is higher than in the Nordic countries but lower than in the United States. Labor protections, restrictions on layoffs and limits on certain forms of financial trickery (financial maneuvers to extract value without producing anything) prevent firms from extracting disproportionate value at the top.

The United Kingdom is closer to the American model and since the Thatcher era, labor institutions have weakened, finance has grown dominant and capital income has become a major driver of inequality. Pretax inequality in the U.K. is significantly higher than in continental Europe, though still lower than in the U.S. because the British economy is less dominated by winnertakeall tech and intellectualproperty giants. But the pattern is similar: inequality is generated at the point of income creation, not at the point of taxation.

In Japan wages are held down at the top because of shuntō (the spring wage offensive), where unions across major firms coordinate demands. Basically, every spring, unions across the big companies (Toyota, Hitachi, Panasonic, etc.) negotiate at the same time, using the same demands. Because they move together, they create a national wage pattern that other firms follow.

It’s not full sectorwide bargaining like the Nordics, but it creates national wage norms. Japanese firms also have longstanding expectations of seniority pay, internal promotion and lifetime employment, all of which compress wages. Executive pay is culturally restrained and CEOs simply do not take Americanstyle compensation packages. The result is that pretax inequality is lower than in the U.S. or U.K., but higher than in Scandinavia.

South Korea has stronger inequality pressures because of chaebol dominance, large conglomerates like Samsung, Hyundai, LG. These firms generate huge profits and have more room to reward executives and capital owners. Unions are powerful in some sectors but fragmented overall, so wage compression is weaker. Still, Korea has strict layoff rules and strong worker protections, which prevent the extreme topheavy extraction seen in the U.S. Pretax inequality ends up midrange…higher than Japan, lower than the U.S., and similar to France/Italy.

The United States is the bizarre outlier. It has the highest pretax inequality among major developed economies because it combines weak labor institutions, permissive monopoly policy, and policy that aggressively rewards capital formation. The wage distribution is extremely stretched (lowend wages barely move, middle wages stagnate, and top wages shoot upward), executive compensation is unconstrained and capital returns dominate the top of the income ladder (people at the top make most of their money from owning things, not from working). Again, taxes enter the picture only after the system has already produced extreme disparities.

U.S. pretax inequality is unique because the American economy combines all of the structural drivers of inequality at once, at full intensity, with almost no countervailing institutions. Only the United States stacks the entire set together. That is why the gap is so large before the IRS ever enters the picture.

The U.S. economy rewards size, intellectual property, and financial trickery more aggressively than any other major economy. American firms can grow to global dominance without encountering the kinds of constraints…sectoral bargaining, codetermination, wagecompression norms…that limit topend extraction in Europe. When capital earns doubledigit returns and wages grow slowly, inequality expands and this is the structural mechanism behind American style capitalincome dominance.

A History of Kleptocracy in the USA

In the Gilded Age, industrialization created enormous fortunes through railroads, steel, oil and finance and wages for ordinary workers lagged far behind. Capital accumulation was unconstrained and labor had little bargaining power. This period established the basic American pattern that when capital is allowed to increase without government established limits, inequality expands rapidly. The Progressive Era attempted to counteract this through antitrust laws, early labor protections and regulatory oversight, but these reforms only partially compressed the wage gap.

In the New Deal and postwar era, pretax inequality fell sharply as the structure of income creation changed. Strong unions, sectoral bargaining, regulated finance and constraints on corporate power compressed wages and limited topend extraction. The economy rewarded broadbased productivity rather than concentrated capital gains. Pretax inequality reached its lowest point in American history during the 1950s and 1960s. The primary mechanism was governmental as workers had power, firms had limits and capital was regulated.

Another phase begins in the 1970s and accelerates under Reagan. Labor power collapses, antitrust enforcement weakens, financialization accelerates (the economy becomes centered around making money from money instead of making money from producing things), and capital gains become central to the economy (the economy starts rewarding ownership instead of labor). Income begins to flow upward at the point of creation, wages stagnate, executive compensation explodes and capital returns dominate the top of the distribution. This is the era in which capitalincome dominance becomes the defining feature of the American economy.

The fourth phase is the digital and globalized economy of the 1990s onward. Technology firms increase globally with minimal labor, intellectual property becomes a major source of wealth and winnertakeall markets emerge (e.g. Google builds a search engine that’s slightly better than everyone else’s and because it’s better, more people use it. Because more people use it, advertisers flock to it. Because advertisers flock to it, Google gets more money to improve it further so that one company ends up with almost the entire market, while dozens of competitors die). This is the era in which laborpower erosion seemingly becomes irreversible.

The fifth phase is the present. The American economy produces inequality automatically because its government rewards capital, size and monopoly power while offering almost no counterweights to help workers. The system generates inequality faster than the tax code can redistribute it. This is the culmination of structural capital advantages built up over decades.

History shows that pretax inequality rises when labor is weak, capital is unconstrained and markets reward sheer size. It falls when the government takes action to compress wages, regulate capital and distribute bargaining power. The United States has moved decisively toward the former model. That is why pretax inequality is so high today, and why tax policy alone cannot reverse it.

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