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How Tax Policy Created the 1%

... It’s true that the tax code’s preferential treatment of capital gains reflects the fact that both Democrat and Republican policymakers have prioritized the interests of the wealthiest in recent decades. But that’s not why the capital gains preference exists in the first place. Nor does it explain its remarkable endurance. For nearly a century, the tax code’s preference for investment gains has enjoyed the support of shifting and often surprising coalitions. And for nearly a century, the tax break for capital gains has persisted because it advanced the accumulation of white wealth.

The Revenue Act of 1921 introduced a preferential or reduced tax rate on income from capital gains into the U.S. tax code, in a reversal of how policymakers had thought about different forms of income for several decades. When Congress deliberated over adjusting the tax code to peacetime conditions after the First World War, even Treasury Secretary Andrew Mellon, a champion of austerity, argued that reducing the tax rate on earned (wage) income relative to unearned (capital gains) income would spur industry and thrift amongst the working classes.

But Mellon’s remedy for postwar depression, inflation, unemployment, and radicalism was out of step with new ways of thinking about the relationship between citizenship and investment. Millions of Americans had purchased some form of federal bond during the First World War. The Liberty bond and War Savings sales campaigns broadcast a new model of the economy that put investors in the drivers’ seat. Building upon longstanding and widely-held beliefs that broad-based property ownership secured the independence and virtue of citizens, the Liberty bond and War Savings drives stretched the meaning of property to encompass financial investments and championed the ideal of a mass-investment society.

So when Congress deliberated over the Revenue Act of 1921, investment income no longer seemed as plutocratic as it once had. In Congressional hearings, a consensus that the income tax code should “be trying to protect . . . the investor” emerged. Based upon this consensus, the Revenue Act of 1921 separated different forms of income and honored investors with a 12.5 percent rate on capital gains income, well below the top rate of 50 percent for ordinary income from wages and salaries.

This tax break survived the Great Depression and the Second World War, thanks largely to the efforts of the nation’s foremost stock exchange and conservative southern Democrats. These critics of the New Deal came to view investors as a constituency that might be mobilized across the Mason-Dixon line. ...

Read entire article at Dissent Magazine