During his first term, Obama tried repeatedly to raise taxes on the wealthy, proposing to levy more than $1.6 trillion in new taxes on the rich over 10 years. At the same time, Obama sought to keep taxes on the middle class steady and he cut taxes for low income Americans. This approach made plenty of sense if his goal was to reduce income inequality. While the U.S. economy doesn’t produce much more inequality than other countries, other countries use their tax systems and their safety nets (transfers) to reduce inequality far more than the U.S. government does, according to Janet Gornick, a professor of political science and sociology at the City University of New York. (In the end, the president ultimately succeeded in getting only a relatively modest increase in tax rates – a little over $600 billion in the “fiscal cliff” deal.)
Perhaps an equally illustrative and less appreciated example of Obama’s focus on redistribution is the Affordable Care Act. We often think of the health care law as just that – an initiative to provide insurance coverage to those who can’t afford it and fix other problems in the health care system – but it is also a significant effort to reduce inequality. That’s because the law levies new taxes on wealthy Americans in order to expand Medicaid and offer insurance subsidies, which will mainly help those whose incomes are low enough that they qualify for help. A Brookings Institution analysis this week found that Americans in the bottom tenth of the income distribution would see their incomes rise 7.2 percent as a result of the ACA, while those in the bottom 20 percent overall will see a nearly 6 percent increase in their income.
Why the change? Politics is part of the story, of course. It’s hard to believe Republicans would allow Obama to raise taxes further. And some Democrats are even nervous about the language of income inequality, worried that it is difficult for voters to relate to. But there is also something deeper going on. Obama doesn’t seem to believe that the tax-and-transfer approach that Democrats have advocated for decades has much public resonance anymore. He recently told David Remnick in the New Yorker:
The appetite for tax-and-transfer strategies, even among Democrats, much less among independents or Republicans, is probably somewhat limited, because people are seeing their incomes haven’t gone up, their wages haven’t gone up. It’s natural for them to think any new taxes may be going to somebody else, I’m not confident in terms of how it’s going to be spent, I’d much rather hang on to what I’ve got.
Jason Furman, the chairman of Obama’s Council of Economic Advisers, has occasionally made a similar point in the context of new efforts to reduce poverty -- which is a different phenomenon from income inequality, but the government can attack both through redistribution. Furman recently noted that the government safety net has dramatically reduced poverty over time – but now the key is to reshape the economy so natural market forces are pushing up people’s incomes, rather than government redistribution.
I think realistically a lot of what you’re going to be able to do is defend the gains you’ve made. Make sure you’re not making large cuts to [food stamps], make sure you are extending the gains we made in the Earned Income Tax Credit. The progress we’re going to need to make is on market incomes, on wages, and, an important part of that, there’s a lot of parts, but one part is the minimum wage.
That helps explain why Obama, as he moves away from a focus on the government redistributing income, will focus so much on the minimum wage. Many economists agree the minimum wage is less efficient than redistributing income directly -- for example through an expansion of the Earned Income Tax Credit, a kind of cash bonus for low-wage workers with families. But if the age of government redistribution of income is over, turning to the minimum wage is understandable. It's also an act of redistribution -- moving money from companies and consumers to workers, though its exact effects are hard to know. It is by no means a fix for the nation’s growing inequality, but would be another step toward shrinking the gap.