Why Tax the Rich?

America’s History Shows That Fair Taxes Build a Stronger Nation

Taxes are bound to come up in any economic discussions. They have a great effect on people's lives and livelihoods, but not always in the way it’s portrayed.  The way a country taxes its  citizens reflects its vision for the future. Taxes provide funding for a significant portion of public life. Taxes are used to fund roads, schools, healthcare systems, and other essential community resources. Some of America’s strongest periods of growth happened when taxes were at their highest, especially for the wealthy and history teaches us that when everyone pays their fair share, the nation as a whole benefits. This blog is about how taxing the rich has contributed to building shared prosperity and why it remains crucial for creating new opportunities in America.

From the Gilded Age to the Great Depression: Boom, Bust, and the Birth of Fair Taxation

The Gilded Age, which spanned from the 1870s to 1900, saw some individuals accumulate enormous fortunes, resulting in a wide gap between the rich and the poor. Business titans such as Carnegie, Rockefeller, and Vanderbilt built powerful companies, but their wealth and lives stood in sharp contrast to those of the working-class American. By 1900, the richest 1% had acquired nearly half of all U.S. wealth, and at that point, there was no federal income tax in place. Most government revenue came from tariffs and excise taxes, which primarily affected ordinary people rather than the wealthy, due to businesses' ability to pass on those expenses, leading to the increased cost of day-to-day goods.

Historian Richard White wrote in The Republic for Which It Stands, “The Gilded Age created immense wealth for the few, but left the many without security or voice.” Another observer summed it up: “With all the people who have to lie awake nights contriving to spend their time and money, and all the others who lie awake wondering how they may get food, there’s danger in the air.” (1)  This gap led to growing public anger, which ultimately resulted in the passage of the 16th Amendment in 1913.   Congress could, for the first time, collect a federal income tax. The first rates were low—just 7% on incomes above $500,000 (equivalent to over $15 million today)—but the idea was novel: those who gained the most from the economy should contribute the most to its support.

In the “Roaring Twenties”, the economy grew quickly, but inequality again increased. Presidents Harding and Coolidge cut the top tax rates from 73% to 25%, saying that lower taxes would encourage investment. Instead, wealth became even more concentrated. By 1928, the top 0.1% had acquired almost a quarter of all national wealth, a level not seen again until 2007, just before the Great Recession, according to UC Berkeley economist Emmanuel Saez.

At the end of the 1920s, America seemed unstoppable. The stock market was strong, new technologies were common in homes, and tax cuts for the wealthy were seen as a path to prosperity. However, beneath the surface, the economy was weak, relying on easy credit, speculation, and growing inequality. The stock market kept rising...  Then it crashed.

The Great Depression: When the System Collapsed

When the stock market crashed in October 1929, the economy suffered a severe collapse. Banks failed, businesses closed, and unemployment reached 25%. Between 1930 and 1933, over 9,000 banks closed, resulting in widespread financial losses for many individuals. Without a federal safety net like unemployment insurance, Social Security, or deposit insurance, ordinary families suffered the most.  The previous system of low taxes on the rich and minimal regulation had failed.

President Franklin D. Roosevelt’s New Deal changed the course by raising the top income tax rate from 25% to 63%, then to 79% by 1936, and introducing the first estate and corporate excess-profits taxes.

FDR was explicit about why: “Taxes shall be levied according to ability to pay. That is the only American principle.”

These changes were not designed to punish wealthy people, but to create balance and help restore the economy. Those with higher incomes paid more, and the money funded public works, social programs, and jobs through projects like the Civilian Conservation Corps and the Works Progress Administration, which built many of our great public infrastructure projects.

These investments helped the country recover from the crisis and also set the stage for the growth of the middle class after the war. Roads, bridges, dams, and power lines constructed in the 1930s remain vital today. The New Deal proved that when everyone shares the burden, everyone benefits from the recovery.

As historian David M. Kennedy wrote in Freedom From Fear, “The New Deal taxed wealth not to destroy it, but to make democracy work.”

The Great Compression and the High-Tax Consensus

During World War II and the years that followed, Americans understood that shared prosperity meant shared responsibility. To fund the war, top tax rates reached record highs, up to 94% in 1944, according to the IRS. Rather than slowing growth, these high rates coincided with a period known as the Great Compression, from the 1940s to the early 1970s, during which income inequality decreased and the middle class expanded.

In the early 1960s, under Eisenhower, the wealthiest Americans paid a 91% tax rate on their highest earnings. Even so, the economy grew by about 4% each year. Many people shared in this prosperity, showing how taxes supported a social contract.

The Economic Policy Institute notes that this era featured strong unions, responsible corporations, and major public investments in interstate highways, schools, and the GI Bill. This period showed that taxing the wealthiest Americans could help the country grow without harming innovation or ambition.

From Kennedy to Reagan: The Great Reversal

In 1964, President John F. Kennedy approved a tax cut that lowered the top rate from 91% to 70%. He believed that targeted cuts could boost demand while still being fair. By the late 1970s, though, the national mood changed. Inflation, global competition, and corporate lobbying made people question progressive taxation.

President Ronald Reagan went even further, cutting the top tax rate from 70% to 28% by 1988, the lowest since the 1920s. Supporters referred to this approach as “supply-side economics,” while critics argued that it primarily benefited the wealthy.  And wouldn’t you know it, but inequality started to grow again.

Where are we today?

Today, the highest federal income tax rate is 37%, which is less than half of what it was during the mid-1900s. Still, the wealth gap is as wide as it was in the Gilded Age. The richest 1% now own more than the bottom 90% combined, according to the Federal Reserve. Years of tax cuts for the wealthy and corporations have led to reduced public investment, leaving infrastructure, healthcare, and climate programs underfunded as inequality persists.  

So why tax the rich?

When we talk about taxing the rich, we’re really talking about what kind of country we want to live in. Federal taxes fund the backbone of American life, Social Security, public education, food assistance, infrastructure, healthcare, and worker training programs that give people a fair shot at opportunity and a decent life.

According to the Center on Budget and Policy Priorities, Social Security and health programs account for about 40% of federal spending, while the rest supports national defense, transportation, housing, and community services. In the 1950s and ’60s, high top tax rates helped build the highways, schools, and civic infrastructure that powered decades of growth and upward mobility. Those investments made it possible for families to find good jobs, affordable food, and reliable public services, the essentials of a functioning democracy.

Today, many of those same systems are under strain. Public schools and universities face chronic underfunding, roads and bridges are aging faster than they’re being repaired, and rural food systems and job-training programs struggle for resources.  Moving back to a more progressive taxation supports stability and opportunity for everyone by funding the roads that move our goods, the teachers who shape our future, and the workers who keep our communities running.  And in turn, these help business...

The story of American taxation is really about how we choose to share prosperity. When wealth is used for the common good instead of just private gain, everyone benefits.

Citations:

(1) What made The Gilded Age Gilded? - Recollections Blog https://recollections.biz/blog/what-made-the-gilded-age-gilded/