INCOME DISTRIBUTION

The Great Depression and the New Deal had a paradoxical effect on the distribution of income in the United States. On one level, even though the incomes of the rich declined precipitously as the economy fell apart, the Depression exacerbated economic inequality by increasing the numbers of the poor; the New Deal and economic recovery in the late 1930s only slightly mitigated this rising inequality. But although the reforms of the New Deal did not greatly reduce economic inequality—either by lowering unemployment or by creating a more progressive tax system—they did create the political architecture that would permit the reduction of economic inequality during World War II and the postwar era. In addition, the very wealthiest fraction of the American population lost their control over the national income during the Depression and World War II, a loss from which they never completely recovered. In 1915, the top .01 percent of the population earned incomes 400 times the national average. In 1970, they earned 50 times the average income, and by 1998 they still had not regained the control of the pre-World War I era, earning "only" 250 times the average income.

During World War II the United States saw truly progressive income taxes for the first time. This economic redistribution through the tax system was one feature among many (including steady increases in the minimum wage, high levels of unionization, and low unemployment) that would lead to the remarkably equal distribution of economic growth during the 1940s, 1950s, and 1960s. While the New Deal did not directly create this progressive tax system, the political and intellectual framework that was built during the 1930s made the progressive tax system and the liberal political economy of the postwar period possible.

Income distribution in the United States was becoming steadily more unequal during the early years of the twentieth century. During the 1920s, income inequality widened rapidly, and during the early years of the Depression, the distribution of incomes became more dispersed as poverty spread, reaching its peak for the century. But in the late 1930s income inequality began to decline, and during World War II it narrowed rapidly. After the war, the distribution of incomes remained fairly stable, though it continued to narrow slightly throughout the postwar economic expansion. In the mid-1970s, income inequality began to expand once again, a trend that accelerated in the 1980s and 1990s. Clearly, something happened during the 1930s and 1940s that created a stable political economy of equally distributed economic growth. The questions concern what and when these changes took place.

Throughout the twentieth century, there have been two distinct tax systems in the United States. The first and older one is a regressive system of sales taxes (and, later, payroll taxes) that fall equally on everyone in society regardless of income, and thus penalize the poor more heavily. The second, newer system is progressive taxation that seeks to tax wealthier people at a higher rate than poor people in order to collect an adequate revenue base for the government. Prior to the New Deal, the federal taxation system was heavily skewed towards regressive taxes on "sin" or "luxury" products. This did not change in the early years of the New Deal, when early federal expenditures, such as the Federal Emergency Relief Administration, were funded out of sales taxes and deficit spending.

Early in the Great Depression, populists and liberal reformers began to call for tax reform and a reduction of economic inequality. Louisiana governor Huey Long started a network of "Share Our Wealth" clubs, which sought to tax the rich and redistribute the income in a plan dubbed "Every Man a King." Long's staff claimed that there were 27,000 such clubs in the South. The Townsend movement's calls for monthly old-age pensions, the radical writer Upton Sinclair's EPIC campaign against poverty in California, Father Charles Coughlin's National Union for Social Justice, and the new strength of the Farmer-Labor Party in the Midwest all created rising political pressure on Roosevelt for a program that seemed to address the maldistribution of income.

Historians and political writers, at the time and since, have pointed out that these various proposals lacked economic sense and wherewithal. Even if all of Long's proposed taxes were enacted, the income produced would not have been adequate to provide the riches he promised it would purchase for ordinary people. But the importance of these movements is not their blueprints for social policy. It was that they mobilized millions of people around the issue of income distribution, and so helped to bring about major changes in the tax system.

In the Revenue Act of 1935 (otherwise known as the "wealth tax"), President Franklin Delano Roosevelt sought to meet these populist critics. The law boosted the top personal income tax rate from 63 to 79 percent, expanded estate taxes, and increased the corporate income tax to fall more heavily on large corporations. Even though the law in reality affected a very small number of people, and did not dramatically expand the federal government's revenues, the wealth tax generated tremendous opposition from business to Roosevelt and the New Deal. The law coincided with the Wagner Act and the legislation creating Social Security and the Works Progress Administration. Taken together, even though the immediate fiscal effect of the tax law was small, it seemed to promise a new day in government, and businessmen were frightened. As one Congressman said of the Revenue Act of 1935, "This is a hell raiser, not a revenue raiser." In some ways, the anti-tax politics that would characterize so much business mobilization against liberalism throughout the rest of the twentieth century began in the crusade against the wealth tax of 1935.

The question of economic distribution was also addressed in one of the great failed initiatives of the New Deal, the Temporary National Economic Committee (TNEC). This congressional committee was established late in the 1930s, purportedly to study issues of monopoly and economic power. The committee produced many excellent surveys of the state of industry in the late 1930s, a boon to later historians. However, whatever legislative impact the TNEC might have had was scuttled by the war, and the committee quietly fizzled to a close.

During World War II, the personal income tax was applied to the general population for the first time, becoming, as historian Mark Leff puts it, no longer "an indicator of affluence" but instead "a token of citizenship." The withholding system was established during the war. Prior to the war, the income tax had affected at most 5 percent of the population, but during the war, 74 percent of Americans began to pay tax. After the war, Congress brought back some exemptions and lowered tax rates slightly, but the basics of the system were in place. This system, along with the strength of labor unions, the full employment policies of the postwar period, and other interventions in social policy, such as increasing Social Security payments and steadily raising the minimum wage, contributed to the relatively more egalitarian—albeit still skewed—economic growth of the postwar period.

The dramatic arguments over income distribution and economic power during the 1930s cast a long symbolic shadow. The memory of the time when a president railed against "economic royalists" would long survive in the hearts and minds of businessmen, helping to fuel their ultimate reaction against liberalism and the New Deal. But the tax policies of the New Deal era are of more than symbolic importance. Although the postwar liberal system did not come about during the New Deal, the philosophy of the New Deal created its intellectual framework and political architecture. Roosevelt's willingness to change the tax system in response to mass political pressure and to levy taxes on the incomes of the rich helped make it possible to use the progressive income tax more broadly as the basis for federal revenues and social wealth.

INCOME DISTRIBUTION

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