Inequality may be the “defining challenge of our time.” But you wouldn’t know so from Monday evening’s presidential debate, in which neither candidate directly addressed the issue.
But the Obama administration seems to be in full gear—with an op-ed piece by chair of the White House Council of Economic Advisers Jason Furman and an extensive report by the Council of Economic Advisers (pdf)—celebrating its own “historic achievement in reducing inequality.”*
Tax changes enacted since 2009 have boosted the share of after-tax income received by the bottom 99 percent of families by more than the tax changes of any previous Administration since at least 1960. President Obama has also overseen the largest increase in Federal investment to reduce inequality since the Great Society, largely reflecting the coverage provisions of the Affordable Care Act (ACA) and expanded tax credits for working families.
And the results? Together, the changes in tax policy and the ACA provisions will increase the share of after-tax income received by the bottom quintile in 2017 by less than one percentage point and reduce the share received by the top 1 percent by all of 1.2 percentage points.
That’s something, it is true, but it does not reverse the spectacular growth in inequality the United States has witnessed in recent decades (when the share of income captured by the top 1 percent rose from 9 percent in 1971 to 22 percent in 2015), and it doesn’t even touch the even-more-dramatic inequality in the distribution of wealth (such that in 2013, the last year for which data are available, families in the top 10 percent of the wealth distribution held 76 percent of all family wealth, families in the 51st to the 90th percentiles held 23 percent, and those in the bottom half of the distribution held no more than 1 percent).
So, what’s the problem? We already know, thanks to a 2015 Brookings Study (pdf), that the effect of changes in top individual tax rates (including a redistribution of all new revenues to household in the bottom 20 percent of the income distribution) are “exceedingly modest.”** And, of course, changes in tax rates on income have little if any effect on the unequal distribution of wealth.
The fact that the current administration can cite its own policies as a “historic achievement” just confirms how little other administrations have done to moderate growing inequality in the United States over the course of the past three decades.
They also confirm the fact that, unless and until the United States decides to tackle the issue of wealth ownership and the resulting unequal market distribution of income— especially the ability of the tiny group at the top to capture and invest for their own sake the enormous surplus created by everyone else—it’s clear that economic inequality will remain the “defining challenge of the next generation, too.”
*The same issue has been taken up on the other side of the pond, about whether the last Labor government did anything to reverse “the rise of inequality seen under the previous Conservative administration.” According to the data cited by Simon Wren-Lewis, the best that can be said is Labor did not continue the previous rise in inequality, although it certainly didn’t reverse it.
**Here’s the authors’ conclusion:
In this analysis we have simulated the effects of increasing the top income tax rate under three possible reforms: (a) raise the top individual income tax rate from 39.6 to 45 percent; (2) raise the top individual income tax rate from 39.6 to 50 percent; and (3) raise the top individual income tax rate to 50 percent for income greater than $1 million for joint filers, $750,000 for single filers. We calculate the resulting change in income inequality under these scenarios assuming an explicit redistribution of all new revenue to households in the bottom 20 percent of the income distribution. The resulting effects on overall income inequality are exceedingly modest, with changes in the Gini coefficient of less than 0.01.
That such a sizable increase in the top personal income tax rate leads to a strikingly limited reduction in overall income inequality speaks to the limitations of this particular approach to addressing the broader challenge. It also reflects the fact that the high level of U.S. income inequality is characterized by a wide divergence in income between higher-income households and those at the middle and below.