This will be a very short post on the way the US used to not allow extreme income inequality during the Golden Age of Capitalism.

The idea was quite simple: Going into WWII, income tax rates on the highest bracket  reached levels around 90% which meant that wage earners had little incentives to increase their annual income above the highest bracket. At the same time, that bracket was set at 100 times the lowest bracket:

fredgraph(2)

The latter was at least 1.5 times personal income per capita although it reached even close to being 3 times larger. The very high level of the top income tax rate remained roughly constant for two decades (40’s and 50’s).

fredgraph

That meant that the highest income allowed was somewhere between 150 and 280 times that of average personal income depending on the specific year. As a result, extreme inequality was reduced through tax incentives. This is in contrast to today when CEO pay hovers around 300 times that of the typical worker:

CEO to typical worker pay

It is quite evident that fiscal (and more specifically tax) policy can be used as a tool for a society to place specific limits on the level of extreme inequality allowed within it.

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