The American Revolution was in part a revolt against hereditary wealth and aristocratic privilege, and the Constitution enshrined this spirit – directly, by prohibiting titles of nobility, and indirectly, by creating a Congress with far broader citizen representation than Britain’s Parliament.
Thomas Jefferson believed more was needed to protect against hereditary wealth. And so, a few months after he and the Continental Congress proclaimed, “We hold these truths to be self-evident, that all men are created equal,” Jefferson called on Virginia to abolish its system of entail. That was the feudal device that allowed landowners to keep estates intact for generations – from eldest son to eldest son, in perpetuity, while shielding entailed land from creditors. He aimed to erase “every fiber … of ancient or future aristocracy” so as to build “a foundation … for a government truly republican.”
Two generations later, the French observer Alexis de Tocqueville declared Americans had ended landed aristocracy and, by dispersing fortunes, opened the way for mobility among families. Distinctions of wealth, like slavery, persisted. But the Revolutionary egalitarian ideal, with its antipathy to hereditary wealth and privilege, remained powerful.
The Gilded Age challenged that ideal. Assisted by legislatures and courts, masters of capital amassed vast fortunes and concentrated economic power. The byproduct was massive inequality.
In response, the public’s cry for progressive reform brought antitrust legislation to curb monopolies. A permanent income tax was codified in the Constitution and an estate tax was enacted and together slowed the accumulation and inheritance of boundless wealth. Theodore Roosevelt, a Republican, won national regulation of industries, and Woodrow Wilson, a Democrat, secured national regulation of banking.
Some strong protections for hereditary wealth remained, including trusts that helped preserve wealth across generations, but there were also safeguards to help ensure opportunities for those without inherited wealth. Strongly progressive taxation, Social Security and unionization, combined with the economic dislocations of the Depression and World War II, fostered greater economic equality while restraining the formation of hereditary wealth and privilege so contrary to the founders’ ideals.
Today, however, as Americans arrive at the brink of a new Gilded Age of wealth and inequality, calls for intervention are going unheeded. Wages have stagnated. Executive compensation has ballooned from about 20 times the average wage income to nearly 300 times: A mere 25 hedge fund managers paid themselves as much as 440,000 median income families in 2010. And just 400 Americans possess more wealth than half of all Americans combined. Put another way, those 400 people have accumulated as much as the combined wealth of 150 million other Americans.
The economic, social and political consequences of these changes are profound. Piketty’s analysis – that as capital accumulates, the rate of return on capital increases faster than the rate of economic growth – points to a future dominated by great inherited wealth, the same hereditary plutocracy condemned by the Revolutionary generation.
The legal and political conditions for this future are in place. They do not rest on entailed estates but on tax and trust laws permitting the creation and protection of dynastic wealth. Across America, states seeking trust investment business have repealed or crippled rules limiting the duration of private trusts, while enacting new rules to shield trust assets from creditors. A few wealthy families have used their influence to have estate taxes, now condemned as “death taxes,” cut or repealed. Congress has capped income tax rates far below rates signed into law by Presidents Eisenhower and Reagan. It has also cut taxes on capital gains – the form of income typical of accumulated wealth – below rates for middle-class earned income. Carried-interest rules give huge tax subsidies to hedge fund managers who pocket as much as all of America’s kindergarten teachers combined – and those teachers pay income taxes at higher rates.
Entails once preserved the British aristocracy. Now, new devices allow possessors of great wealth to transmit riches across generations.