The CBO’s bottom line is that the nation’s progressive income tax system and means-tested benefit programs such as Medicaid (expanded via Obamacare) and nutritional assistance significantly counteracted the increasingly upwardly skewed distribution of income that the market alone delivered, via wages, salaries and investment earnings, between 1978 and 2016. Consequently, the U.S. Gini coefficient — a broad measure of income inequality in which 1.0 is the highest inequality score and 0.0 the lowest — stood at 0.42 at the end of 2016, after accounting for taxes and transfer payments. This was the highest Gini coefficient of any industrial democracy; it was slightly lower, though, than at the end of President George W. Bush’s term. Perhaps most important, the trend was downward, implying decreasing inequality as Mr. Obama left office.
The CBO has not yet been able to measure what has happened in the past two years. However, all signs point to regression. The biggest policy change in that interval — the Trump tax cuts, which took effect on Jan. 1, 2018 — tilted the distribution of income after taxes upward. Some 27.2 percent of the benefits from changes to individual taxation in that law accrue to the top 1 percent of households, according to the Center on Budget and Policy Priorities.
As for transfers to the poor, the most aggressive efforts by the Trump administration and the Republican Congress to cut (or, in the case of Obamacare, eliminate) them legislatively have indeed been prevented. On July 23, though, the White House proposed a regulatory change, through executive action, that would remove 3.1 million of the 40 million people currently on the rolls of Supplemental Nutrition Assistance Program, eliminating about $2.5 billion a year in transfer payments. So the administration is not finished looking for ways to shrink federal programs that transfer money downward in the distributional scale.
To be sure, there is some encouraging evidence that the labor market is starting to work in a more equitable manner: Wage growth for the lowest-paid 10 percent of workers over age 25 has been increasing faster than that of the median worker since the beginning of 2017. That trend is mostly due to the tight labor market, which pre-dates Mr. Trump’s term and, indeed, his tax cuts, which he credits for boosting employment further. Higher state and local minimum wages, opposed by Republicans, may also play a role.
Market capitalism is the best system for producing wealth and income the world has ever known; it takes wise government policy, however, to make sure its fruits are shared widely and fairly. U.S. income inequality does not have to be the worst in the industrialized world, and with better policies, it wouldn’t be.