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LIFETIME EARNINGS

Could a wealth tax end David Koch’s era of inequality?

David Koch, left, running for vice president on the libertarian ticket in 1980.
AP Photo/Randy Rasmussen
David Koch, left, running for vice president on the libertarian ticket in 1980.
  • Tim Fernholz
By Tim Fernholz

Senior reporter

When David Koch was born in 1940, the world was on an egalitarian trend. As he leaves this world after 79 years, that trend has almost completely reversed.

Koch, who with an estimated net worth of nearly $50 billion was perhaps the 11th richest person on the planet, came with his brother Charles to personify the political power of the ultra-wealthy. For decades, they backed libertarian and conservative political causes, lobbying to protect the family oil business from regulation, and their wealth from taxation.

During the 2016 elections, the brothers reportedly spent nearly $900 million backing Republican candidates, on par with the totals spent by each national political party. Their lifetime support for conservative causes would be difficult to measure because so much of their spending was laundered through opaque front-groups and nonprofits.

The causes of rising inequality are diverse, ranging from globalization to de-industrialization. But public policy is not an exception. Even as the top 1% of Americans now own 37% of the country’s wealth, other advanced economies have maintained more egalitarian societies while facing the same economic and competitive concerns. Since Koch was born, the annual top marginal income tax rate has been cut by 54%.

We can zoom in on the US thanks to a study by three economists at the University of Bonn. Its most telling finding is that since the 2008 financial crisis and resulting recession, the wealthiest Americans have not only recovered their wealth but also exceeded it, while the other 90% still have yet to return to their pre-collapse gains. Consider the trend since 1970:

The essential cause for recent inequality, these researchers argue, is that lower-wealth Americans built assets in their homes, which they may have lost during the crisis or simply found themselves further indebted. Wealthier Americans, meanwhile, have more money in the stock market, which has benefited them throughout the decade-long bull market since the crisis.

While the potential of a looming market correction may reverse those trends, it’s worth noting that not one of the recent economic crises—the housing collapse, the end of the first tech bubble, the 1990s savings and loan crisis, or Black Monday in 1987—meaningfully halted the inequality trend. With the 2017 tax law widely assessed as advantaging the wealthy, it’s reasonable to expect this trend to continue.

What might end it, however, is a federal wealth tax. Massachusetts senator Elizabeth Warren is the most vocal proponent of this approach among the 2020 presidential contenders, calling for a 2% tax on wealth above $50 million and an additional 1% tax on wealth above $1 billion. Other candidates, including Vermont senator Bernie Sanders, have called for higher taxes on inherited wealth; currently, the first $11 million of an individual’s estate is exempt, and any further inheritance is taxed at 40%.

Critics argue that such taxes are unconstitutional, but there is good reason to believe that they are in accordance with how American tax laws are now implemented. Others fear that tax avoidance would become a major problem under these rules, but that is already a problem and one that might be easier to solve in a new rubric. As long-time Democratic policy advisor Gene Sperling put it, “Why not explore whether an annual wealth tax is more enforceable than when there is a lifetime to do estate planning?”

Beyond its direct effect in reducing inequality, the backers of the wealth tax hope it allows the government to provide a more egalitarian economy through a robust economic safety net and make productive investments in infrastructure and research that have gone wanting in recent years.

One thing is clear, however: There will be plenty of money spent to ensure a wealth tax never comes to pass.

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