The Inequality Machine
American wealth inequality has returned to Gilded Age levels. The political system designed to address it has instead accelerated it. Here is what the data actually shows.
The Federal Reserve's Survey of Consumer Finances, published every three years, is the most comprehensive snapshot available of the distribution of American wealth. The most recent edition, released in 2023 with data through 2022, found that the top 1 percent of American households held approximately 31 percent of total household wealth. The bottom 50 percent held approximately 3 percent.
These numbers are striking but perhaps more legible in historical context. In 1989 — the earliest year for which the SCF is available — the top 1 percent held approximately 24 percent of wealth, and the bottom 50 percent held approximately 4 percent. In the thirty-three years since, the top 1 percent's share has increased by seven percentage points; the bottom 50 percent's share has remained essentially flat.
By the measures available for longer historical comparison — estate tax records, tax return data, the work of Thomas Piketty and Emmanuel Saez — US wealth inequality is now at levels comparable to the pre-income-tax era of the early twentieth century. The compression of inequality that occurred between roughly 1930 and 1980 — produced by progressive taxation, union power, and the specific economic conditions of the post-war boom — has been substantially reversed.
Why this happened
The drivers of increasing inequality over the past four decades are multiple and interact in complex ways; no single-cause explanation is adequate.
The most documented driver is the shift in labor market institutions. The decline of private sector unions, from approximately 35 percent of the private sector in 1970 to 6 percent today, has reduced the bargaining power of workers relative to capital. The minimum wage has declined in real terms since the 1970s. The erosion of these institutions has produced a labor share of national income that has declined from approximately 68 percent in the 1980s to approximately 63 percent today — a shift worth roughly $1.5 trillion annually from workers to capital owners.
The second driver is capital income and asset appreciation. The period since 1980 has been, with the exception of some sharp corrections, one of sustained asset price appreciation — in equities, in real estate, in bonds. Asset ownership is highly concentrated in the upper income distribution; asset appreciation therefore disproportionately enriches the wealthy. The interaction of low interest rates (which raise asset valuations), generous capital gains tax treatment, and the tax-advantaged accumulation structures available to high-net-worth individuals has compounded the concentration effect.
The third driver is what economists call the "superstar" dynamics of skill-biased technological change. Technology has simultaneously increased returns to high cognitive skills and reduced returns to routine manual and cognitive tasks, widening the wage gap between the highest earners and the median. The specific mechanism — whether technology is substituting for routine work, complementing creative work, or simply shifting bargaining power — is contested, but the outcome is visible in the rising wage premium for high education and the stagnation of wages for workers without college degrees.
The tax dimension
Federal income taxation has become less progressive over the same period in which inequality has increased. The top marginal income tax rate was 70 percent through 1981, 50 percent from 1982 to 1986, and 37 percent since the Tax Cuts and Jobs Act of 2017. The capital gains rate, which applies to the primary form of income for the wealthiest households, is a maximum 23.8 percent — substantially below the top rate on ordinary income.
The effective federal income tax rate for the 400 highest-income Americans — those with average income above $200 million annually — was approximately 23 percent in the most recent years for which data is available, according to analysis by Piketty, Saez, and Zucman. This rate is comparable to or lower than effective rates paid by many middle-class families, reflecting the composition of ultra-high-income households' income (mostly capital gains and unrealized appreciation) rather than any mechanical tax structure.
The specific distortion of the "buy, borrow, die" strategy — using appreciated assets as collateral for loans rather than realizing gains (thus incurring no tax), and holding assets until death (when the stepped-up basis rules reset the cost basis to the date-of-death value, eliminating any capital gains tax) — allows wealthy families to extract current consumption from appreciated assets without ever recognizing them as taxable income. This is not a loophole in the conventional sense; it is a structural feature of the tax code that has been explicitly designed and legislatively protected.
Metaculus forecasts a 29 percent probability that the US will adopt a wealth tax or a minimum effective tax rate on very high income households comparable to Saez and Zucman's proposed 25 percent minimum — a structural rather than marginal reform — before 2030. Twenty-nine percent is probably about right: the policy proposal has significant academic support, some political backing, and a concentrated and powerful opposition.
What the political responses have actually done
The political responses to increasing inequality over the past twenty years have been extensive in their stated ambitions and modest in their structural effects.
The Affordable Care Act reduced inequality in healthcare access, which is a real and significant equity achievement. The American Rescue Plan's expanded Child Tax Credit reduced child poverty rates to historic lows — temporarily, before it lapsed. The Inflation Reduction Act's clean energy investments and drug price negotiations will have modest redistributive effects over time.
None of these interventions has significantly altered the structural drivers of inequality: labor market institutions, capital income taxation, asset accumulation dynamics. They have ameliorated the symptoms while leaving the underlying mechanisms intact.
The political economy of structural change is unfavorable. The wealthy have more political access, more information, and more organizational capacity than any other interest group; they exercise that access consistently and effectively. The politicians who have proposed structural redistribution have generally been unable to sustain the coalition necessary to enact it against sustained elite opposition.
Kalshi was trading a contract on whether any G7 country will enact a comprehensive wealth tax before 2028 at 26 percent. The directional movement toward greater taxation of wealth is visible; the enacted policy changes remain modest.
Elena Vasquez is a contributing writer at The Auguro covering education, labor markets, and inequality.