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 the income that the average person in the bottom takes home.
Now, consider what it would be like if none of President 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.
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.
The new analysis -- the first time anyone has published results showing the cumulative impact of Obama's tax policy on income distribution -- is an estimate based on the center's widely-respected computer model. It makes vividly clear that one of the legacies of Obama’s presidency is a redistribution of income from the rich to the poor.
As you can see in the chart above, the tax code already reduces inequality due to the very fact that it is progressive. Obama's tax policies reduced inequality further. The gap between the rich and the poor narrowed the most. The gap between the rich and the middle class has also narrowed, albeit slightly. I've summarized post- and pre-tax income under the Bush and Obama policies here:
But looking 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 pre-tax and after-tax inequality. If the economy is dramatically boosting the incomes of the rich and leaving the incomes of the poor stagnant, then after-tax inequality will widen unless the tax code becomes more progressive.
This is illustrated in the following chart. It graphs the ratio of the average income of the top 1 percent to the average income of the bottom 20 percent over time, based on the Tax Policy Center's historical tables. The higher the ratio, the more inequality. You see both pre- and post-tax inequality rise from 2004 to 2006, level off as the economy starts to weaken, and fall significantly when the economy enters recession. Inequality starts widening again after the shock of the financial crisis fades and the economy begins 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, who owned 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. The tax code continued to bolster the incomes of the poor, but it was not that significant for overall inequality. In fact, the tax code's effect on inequality was fairly stable from 2004 through 2012. It's a good reminder that while Obama has long talked about reducing the income gap, it wasn't his immediate focus in the recession and the aftermath.
This changes in 2013, when the upper-income tax hikes and the Affordable Care Act taxes take effect. The ratio of the top 1 percent's average income to the bottom 20 percent's income fell from 99 in 2012 to 84 in 2013. This is still above the ratio in 2009, meaning that after-tax inequality in 2013 was higher than it was 2009.
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 $40 billion this year, $80 billion next year, and $140 billion in 2016, as the ACA 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 ACA subsidies and Medicaid expansion will provide another boost, well over $1,000 a year per household. It will expand the income of not just the poor but the middle class as well, though a great deal of the benefits will go to lower-income Americans.
As a result, inequality will shrink further. (It should be noted, of course, that this isn't income in the traditional sense but government payments for health services. That is not a very important distinction, however, because everybody needs health care.)
Jason Furman, the chairman of the Council of Economic Advisers, has estimated that overall, the health care programs and Obama's tax policies should undo years of growing inequality.
"Just the tax changes we made in this administration undid about half a decade of the increase in inequality," he said in a press briefing last week on an unrelated topic. "If you add in the Affordable Care Act, it’s more than a decade of inequality that was undone. "
He said future work must tackle the pre-tax inequality, by doing things like raising the minimum wage, which would immediately increase the income of the poor, and improving educational attainment, which could reduce inequality over the long run.