Income inequality has gotten worse under President Barack Obama. But it would be worse still if President George W. Bush’s tax policies remained in place — which makes it almost certain that inequality would be worse today had John McCain been elected president in 2008 or Mitt Romney in 2012.
These findings come from the nonpartisan Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute, two Washington nonprofits, and via The Washington Post’s Wonkblog.
“Don’t Think Obama has reduced inequality? These numbers prove that he has,” reads the Post headline, a sentiment repeated in the fourth paragraph of the story. But the numbers do no such thing. Income inequality hasn’t decreased during Obama’s presidency, according to the numbers. If it had, why on earth would the president talk about it as much as he has? Income inequality has increased.
The top one percent gobbled up 22.46% of the nation’s collective income in 2012, the last year for which we have data. The comparable figure for 2009 was 18.12%. (I use 2009 as a starting point because it takes at least a year for any president’s economic policies to show results.)
That’s one measure of the rise in income inequality. Another is the Gini index. The Gini measures equality of distribution on a scale of zero to one. Zero would mean everybody received the identical income; one would mean a single person received all the income, leaving nothing for anybody else. For U.S. households, the Gini was 0.477 in 2012. In 2009, it was 0.468. That’s a significant increase.
These calculations are all based on market income, before taxes and transfers are taken into account. What difference was made by the 2013 tax increase, which raised the top marginal income-tax rate from 35% to 39.6%? According to Tax Policy Center data cited by the Post, the 2013 tax law lowered the ratio of income for the top 1% relative to the bottom 20% from 99:1 in 2012 to 84:1 in 2013. But income inequality still remained higher by this measure than in 2009, when the ratio was 79:1.
In truth, taxes and transfers don’t do all that much to alter income distribution in the United States, especially compared to taxes and transfers in other comparable nations. For all the GOP hysteria it generated, the 2013 income-tax change was a minor one, and its impact on income distribution will be small. Even among tax changes, alterations to the personal income tax don’t have as much impact on income distribution as changes in the capital gains rate, which Obama would like to raise. The Republican House won’t let him (though Obama did sneak a new payroll tax on investments into the health care law).
Also more significant, distributionally, than the personal income tax is the business tax, which has a top rate Obama would like to cut (in exchange for eliminating deductions).
Of potentially much greater significance will be the implementation of the Dodd-Frank financial-reform law and its enforcement by the Securities and Exchange Commission and especially by the Fed (led by chairman, Janet Yellen, who will stick around longer than Obama). As noted by the Washington Post writer, Obamacare will reduce income inequality substantially, though not in a way that will show up in most future inequality calculations.
Restoring long-sought legal protections to labor unions would also make a substantial difference in the income distribution. But not even liberals are talking about that.
The Tax Policy Center data show that the top 1% would get 6.5% more in income if Bush administration tax policies were still in place, while the bottom 20% would get 1.2% less. Relative to an imaginary Republican president, Obama has reduced income inequality. That’s something to be grateful for.
But take a look at this chart, based on calculations by the Vanderbilt political scientist Larry Bartels. It shows that from Harry Truman to George W. Bush, income gains under Democratic presidents have been greatest for those at the bottom and tapered off as you moved higher up the income distribution. Precisely the opposite has occurred under Republicans: The income gains were greatest at the top and tapered off as you moved further down the income distribution. The difference evaporated above the 95th percentile; the top 5% did about as well under Democrats as under Republicans. Still, below the 95th percentile the partisan difference was dramatic. I know no stronger evidence that Republicans are the party of the rich and Democrats the party of the middle class and the poor.
Obama’s presidency is a break with this tradition. Under Obama, income gains have been concentrated at the top and nonexistent (or, if you count taxes and transfers, quite small) in the middle and at the bottom. That’s not really Obama’s fault; he has done what he can, most notably with Obamacare and Dodd-Frank.
The real problem is that the economic forces at work since 1979, hugely exacerbated by decades of conservative government policies — of which tax policy is only one, and hardly the most important — have gotten steadily more difficult to change. Inequality is now extremely difficult to reverse, even for a president who’s made reversing it a top priority.