Victoria Heist, Charlie Tarazona, and Junwei Lu
Introduction
When trying to understand income inequality in the United States, it is important to look at changes throughout American history. The focus of this chapter will be on the early 20th century through today. We will be analyzing the effect of changing tax structures on income inequality in the United States by looking at important wars and presidencies. This paper will be split up into three sections in order to extensively analyze the effect of tax structures on income inequalities in different time periods. Section I will focus on World War I and World War II, Section II will focus on the 1980s and Reagan’s presidency, and Section III will focus on the changing tax structure in the 21st century under former presidents George W. Bush and Barack Obama, and current president, Donald Trump. We find that there is a relationship between changes in tax structure and income inequality in the United States.
Early 20th Century – World War I and World War II
World War I and World War II have both had great power in altering the American economy. Changing tax structure in America during the early 20th century has contributed to the rise in income inequality in the United States.
World War I shifted the American economy from a dominating global power to the strongest economic power in the world. One of the defining moments in taxes during World War I was with the passage of the sixteenth amendment in 1913. Prior to 1913, there were some calls for a federal income tax, but they proved unsuccessful (Jensen 1107). It was in the 20th century when Roosevelt and Taft both called for the implementation of the income tax amendment. Jensen argues that the sixteenth amendment was intended to shift “the tax base from consumption to income, and thereby tying tax burdens to ability to pay” (1109). The income tax was supposed to reach the wealthy, but it was different from a wealth tax (1128). World War I dramatically changed the federal taxation system by implementing a progressive tax system and an income tax for federal revenue, and the 1920s followed this pattern with high and progressive tax rates. Anne L. Alstott argues that World War I helped shape the taxation in the 1920s because there was federal debt generated from the war and “debate over the nation’s financial obligations to World War I veterans” (Alstott 374). Higher taxes were implemented at an attempt to combat the debt acquired from the war (375). Before World War I, “the share of total income received by the top 1% was about 18%” (Piketty and Saez 9). Further, the top 1% share declined with World War I, went up in the early 1920s, and declined again with the Great Depression and World War II (9). Wars affect the top incomes because there are increases in taxes during times of war in order to pay for them (9-10). Shocks play a major role in income inequality because they affect capital income (9). In the early 20th century, “the top 0.01% earned i