Jason Furman is chairman of the White House Council of Economic Advisers.
Everyone talks about income inequality these days. President Obama has actually done something about it.
In terms of the talk, the broad outlines of the story are familiar: In 1979, the top 1 percent of U.S. families received 7 percent of all after-tax income. By 2007, that share had more than doubled to nearly 17 percent. The falling share of income going to everybody else, together with slower productivity, led to disappointing income growth for working- and middle-class families.
The Obama administration’s success in undoing some of this inequality, although reflected in the recent, welcome census report, is less well-known. Most notably, tax changes enacted during this administration have increased the share of income going to the bottom 99 percent of families by more than the tax changes in any administration since at least 1960.
Under Obama’s leadership, Congress expanded the earned-income tax credit, increased the child tax credit for working families, and created a new tax credit for students and families paying for college — steps that together benefit 24 million households annually. At the same time, Congress reinstated Clinton-era tax rates for high-income Americans, restored the estate tax and applied Medicare taxes to the investment income of high-income households, putting unearned income on greater parity with earned income. All of these changes have increased the tax code’s progressivity.
The Affordable Care Act has also had a significant impact on inequality. Because of the law, 20 million more Americans have health insurance, gains that have reduced the uninsured rate to the lowest level on record. The law has sharply reduced inequality in health insurance coverage by age, race and income. The financial assistance that made this coverage expansion possible has also reduced inequality in after-tax incomes.
Taken together, these policies will boost incomes for families in the bottom fifth of the income distribution next year by 18 percent, or $2,200, equivalent to more than a decade of average income gains, according to a new report by the Council of Economic Advisers. Partly as a result of these policy changes, the top 1 percent’s share of income after taxes was 12 percent in 2013 (the most recent year for which data are available), well below its 2007 peak and roughly equal to its share in 1997.
The distribution of income before taxes also matters. The 2009 Recovery Act and other fiscal stimulus measures, along with a forceful response to stabilize financial and housing markets, prevented a deep recession from turning into another Great Depression. Without the preexisting social safety net and expansions of it in the Recovery Act, the poverty rate would have increased during the recession by about nine times as much as it actually did.
Much current commentary takes as a given that wages in the United States remain stagnant. And given that average annual wage growth was only 0.1 percent annually from 1980 to 2007, that sentiment is understandable. However, a recent but unambiguous uptick in wages has shown that stagnation in workers’ pay is anything but inevitable. Average real wages for production workers have grown by nearly 6 percent since the end of 2012, more than all the wage growth from 1973 to 2007. And the Census Bureau reported that in 2015 the typical household saw its income grow by $2,800, or 5.2 percent, the fastest rate on record. Last year also saw the largest single-year reduction in poverty since the 1960s.
Moreover, these wage increases have been broadly shared. In fact, workers at the 10th percentile (who earn about $20,000 a year) have seen the strongest wage growth, in part because millions of workers have gotten a raise in the 18 states and the District — as well as the more than 50 cities and other local governments — that have raised the minimum wage. This is in part why households toward the bottom of the income distribution had record income gains last year that exceeded the gains by any other income group.
Nevertheless, the sheer size of the increase in inequality since the 1970s means that substantial work remains, both to address inequality and strengthen real wage growth. A number of proposals — including raising the federal minimum wage, expanding the earned-income tax credit for workers without dependent children, expanding access to high-quality child care and early education, limiting tax breaks for high-income households, and increasing investments in research and infrastructure — would further reduce inequality and boost real wage growth.
The president has described reducing inequality as the “defining challenge of our time.” Our success to date should embolden us to help ensure that it will not be the defining challenge of the next generation, too.