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posted: 7/27/2014 7:39 AM

Obama tax changes reduced income gap

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  • President Barack Obama addresses the crowd at Los Angeles Trade-Technical College in Los Angeles on Thursday July 24, 2014.

      President Barack Obama addresses the crowd at Los Angeles Trade-Technical College in Los Angeles on Thursday July 24, 2014.
    Associated Press

 
The Washington Post

Today, the average after-tax income of a member of the top 1 percent of earners is $1.12 million. The average after-tax income of someone in the bottom 20 percent is $13,300. That means the average person at the top takes home 84 times as much as the average person in the bottom tier.

Now, consider what it would be like if none of President Barack Obama's tax policy changes had happened: not the upper-income tax hikes negotiated at the beginning of last year, not the upper-income tax increases imposed by the Affordable Care Act, not the low-income tax credits enacted in the 2009 stimulus and later renewed.

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In this alternative universe, the average member of the top 1 percent would take home $1.2 million, or 6.5 percent more in income, according to a new analysis. The average member of the bottom 20 percent would bring home $13,100, or 1.2 percent less in income. As a result, the average member of the 1 percent would take home 91 times what the average person in the bottom would bring home.

If you've wondered whether Obama has made any headway at reducing income inequality, here's evidence that he has. Based on tax policy alone, he has slightly increased the income of the poor and more significantly reduced the income of the rich. That's according to a new, exclusive analysis by the nonpartisan Tax Policy Center, conducted at the request of The Washington Post, that compared today's income distribution with what it would look like if President George W. Bush's tax policies were still in place.

But looking just at tax policy is incomplete. In some ways, it overstates the reduction in inequality. In others, it understates it.

* First, the overstatement. There's no question that the tax code does more today than it used to do to reduce inequality. But that is after-tax inequality. To measure overall inequality, you have to think about both pretax and after-tax inequality. If the economy is dramatically boosting the incomes of the rich and leaving the incomes of the poor stagnant, after-tax inequality will widen, unless the tax code becomes more progressive.

From 2004 to 2006, according to analysis of Tax Policy Center data, both pre- and post-tax inequality increased. It then began to level off as the economy started to weaken, and it fell significantly when the economy entered recession. Inequality started widening again after the shock of the financial crisis faded, and the economy began to recover.

Several factors explain this trend. For starters, the collapse in the financial markets wiped out a lot of income for the top 1 percent, people own large amounts of financial assets. The poor did not suffer these losses, and they also received income support in the form of refundable tax credits. In fact, in 2009, the bottom 20 percent received more in tax refunds than they paid in taxes. That explains why that year, the ratio of average after-tax income taken home by top earners to bottom earners fell to 79, a recent low.

After the financial crisis ended, inequality picked up as many of the benefits of the recovery accrued to the wealthy.

This changes in 2013, when the upper-income tax hikes, and the Affordable Care Act taxes took effect. The ratio of the top 1 percent's average after-tax income to the bottom 20 percent's fell from 99 in 2012 to 84 in 2013. This is still above the ratio in 2009, meaning that after-tax inequality was higher.

* Now, the understatement. Starting this year, and for the next several years, the government will do more to shrink inequality as a result of Obama policies. That's because this year, Americans earning up to 400 percent of the poverty line will start receiving subsidies to pay for health insurance. In addition, Americans earning up to 133 percent of the poverty line will be eligible for expanded Medicaid. The total value of the subsidies and the Medicaid expansion will be worth about $140 billion in 2016, as the Affordable Care Act ramps up.

Given that the expansion of low-income tax credits under Obama provided a noticeable boost to the poor at a cost of $25 billion a year, the Affordable Care Act subsidies and Medicaid expansion will provide another boost, well over $1,000 a year per household. As a result, inequality will shrink further.

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