Economy

The Founding Fathers Backed Thomas Piketty—And Feared a Powerful 1 Percent

On this patriotic holiday weekend, remember the founding fathers' warnings about inequality.

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Many of America’s Founders believed that excessive wealth inequality would be incompatible with having a representative republic. They did not expect wealth to be identically distributed, but many did envision a thriving middle class with very broad-based capital ownership and they supported muscular government policies to allow citizens to acquire property on an ongoing basis. Following their lead, our principal strategy to deal with wealth inequality should be to make every citizen a capitalist by encouraging meaningful broad-based profit sharing and employee ownership and remaking our tax system to make this possible.

In his 1787 book, “A Defense of the Constitutions of the Government of the United States,” John Adams, later the second U.S. president, wrote: “If all power be suffered to slide into hands not interested in the rights of property  … one of two things cannot fail to happen.” His first prediction was that the majority  “will unite against” those with property. His second prediction was that the dependence of the majority “will render them mercenary instruments of wealth.”

Adams opened this passage by asking his readers to imagine a nation with a population of 10 million where 1 or 2 million owned most of the property and 8 or 9 million had very little wealth. How prescient! Today, for total U.S. wealth and many specific asset classes of wealth, such as all capital gains, America is approaching a situation where the top 10 percent or the top 20 percent hold far more wealth than the 80 percent of land held by the English aristocracy at the time of the American Revolution.

As half of the country spends its time criticizing Thomas Piketty for doing his research and the other half spends its time figuring out what to actually do next, it is time to examine how some major American historical figures considered how to balance the tension between economic development and our democratic ideals of equality. There is much to be learned about what America’s early leaders thought about these problems, how they struggled to resolve them, how their favored solution – shares of property – has evolved in American history and how it could address the inequality dilemma that is top-of-mind today.

Soon-to-be president George Washington said that “America will be the most favorable country of any kind in the world for persons of industry and frugality, possessed on moderate capital… and the lowest class of people because of the equal distribution of property.” At the Constitutional Convention in Philadelphia, James Madison, later the fourth president, echoed the fears of Adams and recognized that the combination of unequal property plus widespread voting suffrage could lead to redistribution laws – not unlike the global wealth tax we have heard so much about since Piketty’s book hit the American press.

Some Founders tragically held on to the evil compromise with slavery and the widely accepted civil elimination of womens’ rights by limiting who could be a citizen. John Adams wrote if landed property was broadly distributed, so would be political power and the conflict between a majoritarian political system and wealth concentration could be lessened. Thomas Jefferson wrote that “legislators cannot invent too many devices for subdividing property,” a principle that he practiced, at least for those who were citizens then, in buying almost a million square miles of the Louisiana Territory from France to create, as he wrote, “an empire of liberty” where citizens had an opportunity for significant plots of land, then the major form of capital. Madison wrote that broad-based property ownership was the best way to resolve this dilemma and he laid out specific policy suggestions to advance the interests of the middle class to acquire property. President Abraham Lincoln pushed the Homestead Act through Congress in 1862, making 10 percent of the entire U.S. land mass and 20 percent of public land capital easy for citizens to acquire with some sweat equity if they improved the land.

Then, as manufacturing replaced agriculture as the country’s key economic driver, leaders began to consider how the vision for widespread capital ownership could be fulfilled with the new forms of wealth embodied in corporate property. In 1902, Republican Galusha Grow, the Speaker of the House of Representatives who managed the Homestead Act through Lincoln’s Congress, recognized that the future of the broadening of capital ownership was in shares for employees in corporations because, unlike American land, corporate assets were limitless. Then, many wealthy capitalists and others stepped in and tried to adapt the Founders’ ideas on property to the modern industrial corporation. William Cooper Procter of Procter & Gamble studied profit sharing and employee share ownership in his political economy class at Princeton University and made Procter & Gamble (as it still is today) a corporation that offered capital shares through profit sharing and employee stock ownership broadly to its employees. Many pioneers in shares across the political spectrum followed.

Today, America has a silent but potentially fertile share sector. In the 1970s, law professor and investment banker Louis O. Kelso invented the Employee Stock Ownership Plan (ESOP), where employee trusts, using the company as collateral, could borrow funds to buy stock that turned workers into meaningful capital owners. ESOPs now cover thousands of mostly closely-held small businesses nationwide and millions of workers who have a regular wage and then another income from capital. About half of the Fortune 100 Best Companies to Work For in America have modest to serious share plans, like Southwest Airlines, which recently allotted 30 percent of its profits to its workers.

How does America turn the share idea into one credible response to wealth concentration? The good news is that the idea of capital shares has the potential to be a true bipartisan solution that many smart managers and even unions know how to practice, and which, as research  now suggests, can improve corporate performance with a supportive corporate culture. The bad news is that every administration since President George H.W. Bush has scaled back tax incentives for shares covering all workers.

We can create a credible share economy in America with a package of nonpartisan tax incentives and tax cuts paid by curbing corporate tax deductions under the little-known 1993 Internal Revenue Code section 162(m). A 162(m) allows stock market companies to take advantage of virtually unlimited corporate tax deductions for many stock option, restricted stock and profit-and-gain sharing plans for the small group of top five executives in public companies. Yet a small business owner or a large corporation that wants to offer an ESOP or other kinds of shares beyond the C-suite to middle-class workers often has only a very modest tax deductions that are tightly capped and controlled. This means that companies currently have aggressive incentives to give shares to the C-suite, while modest to no incentive to give shares to middle-class workers.

Share policies must be far-reaching, they must be potentially accessible to every kind of business and every kind of citizen, and they must make decent-sized capital within reach of most people. We need tax incentives serious enough so that every large corporation and every small business entrepreneur will at least consider going the share route. If we cannot implement shares then the alternatives are either the strange kind of creeping crony capitalism with a Constitution to which we are gliding, or demands for various versions of wealth taxes and systems of redistribution that have many barriers to implementation, but that many of the Founders themselves knew would actually come up for discussion. Where we tax wealth and income today and in the future, there should be attention-getting deductions for companies and individuals who implement share plans for all of their middle-class workers.