Taxing the rich more in the USA would address a situation of neglected fiscal citizenship. Those that benefit the most from the foundation of the economy (property laws, courts, infrastructure, an educated workforce, the financial system, public research, and social stability) should contribute fairly to maintaining it. Private wealth depends on public systems, and without a fair contribution from the wealthiest, those systems decay faster than they can be rebuilt.
The wealthy are not demonstrating genuine fiscal citizenship, but even if they did, taxation is not the best route to take toward greater income equity. Taxation is necessary for fiscal fairness, public investment and slowing the growth of corporate profits, but inequality is generated before taxation.
The American debate over inequality has often been within a narrow frame of reference involving “taxing the rich” because the income gap has become outrageous, the rich are not paying their “fair share” and taxation is a means available that the federal government can employ to draw income from the wealthy. Yet it is critical to understand that the widening gap between the wealthy and everyone else is not primarily fixable through tax‑policy.
Income inequality is a problem of how income is generated, distributed and protected. By the time we get to taxes, the inequality has already been established.
Generating, Distributing and Protecting Income
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. Means have not been taken to balance this situation in any meaningful way.
When investment income grows 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 infrastructure needs, but taxes can’t change what generates the inequality. The system creates a huge amount of inequality long before taxes are assessed.
We need to 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. Stronger unions, higher guaranteed wages and worker representation on corporate boards can contribute to this.
We need to prevent capital income from outpacing wage income or capital income pulls away. Yet, 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.
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. These measures 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.
Co‑determination 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, changing 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 profit‑sharing ensures that when firms do well, workers do well. This ties labor income to the same means that drives capital income.
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.
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. Scandinavian countries maintain relatively moderate tax rates yet achieve far greater equality because workers have greater union power.
We can 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 let workers bargain across entire industries instead of one workplace at a time.
We can force companies to share productivity gains with workers, so wages rise automatically. We can stop firms from treating gig workers as “independent contractors” and classify them as employees with full rights. We can make it easier for workers to walk away from bad jobs by strengthening unemployment insurance.
We have to help workers to actually bargain again.
What Other Nations Are Doing
In Nordic countries, unions negotiate pay for entire sectors. So a nurse, a bus driver, and a mid‑level 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. So, the income people earn before taxes is already pretty equal.
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 say: “Here is the wage ladder for this industry which we feel is fair and right.” That ladder often has relatively small gaps between the lowest and highest salaries.
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 as it is seen as socially unacceptable.
Germany maintains relatively low pre‑tax inequality through co‑determination, strong unions in key sectors and a regulatory environment that limits runaway executive compensation. Workers have representation and wage norms are anchored by collective agreements.
In France and Italy, pre‑tax 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. Pre‑tax 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 winner‑take‑all tech and intellectual‑property giants.
In Japan, wages are held down at the top because of shuntō (the spring wage offensive), where unions across major firms coordinate demands. So, unions across the big companies (Toyota, Hitachi, Panasonic, etc.) negotiate at the same time with the same demands, creating a national wage pattern that other firms follow.
Japanese firms also have long‑standing 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 American‑style compensation packages. The result is that pre‑tax 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 and 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 strong worker protections, which prevent the extreme top‑heavy extraction seen in the U.S. Pre‑tax inequality is higher than Japan, lower than the U.S. and similar to France/Italy.
The United States has the highest pre‑tax inequality among major developed economies because it combines weakened labor, permissive monopoly policy and policy that aggressively rewards capital formation. Low‑end 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).
The American economy combines all of the structural drivers of inequality at once with almost no countervailing institutions. 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, co‑determination, wage‑compression norms…that limit top‑end extraction in Europe. When capital earns double‑digit returns and wages grow slowly, inequality expands.
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. 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 worked partially.
In the New Deal and postwar era, pre‑tax inequality fell sharply as income creation changed. Strong unions, sectoral bargaining, regulated finance and constraints on corporate power compressed wages and limited top‑end extraction. The economy rewarded productivity. Pre‑tax inequality reached its lowest point in American history during the 1950s and 1960s. Workers had power, firms had limits and capital was regulated.
In the 1970s, labor power starts collapsing, 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.
In 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 winner‑take‑all 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). Labor‑power erosion seemingly becomes irreversible.
Now, the American economy produces inequality because our 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.
Pre‑tax inequality rises when labor is weak and capital is unconstrained. It falls when the government takes action to regulate capital and assist bargaining power. The United States has moved decisively toward the former model, and that is why pre‑tax inequality is so high today and why tax policy alone cannot reverse it.
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