By: Ian Reifowitz
November 5, 2013
Income and wealth inequality is a festering wound on our society. And it's grown worse in the past five years as our economy has suffered through the worst crisis since the Great Depression. Nobel Prize winning economist Joseph Stiglitz has explained that the income and wealth gap is hurting our economy, "squelching our recovery." Although President Obama has condemned economic inequality as both "morally wrong" as well as "bad economics," it's a fair question to ask what he's actually done about it. The answer may surprise you.
First, a bit of history. After decades in which our country experienced robust economic growth with prosperity shared across the economic spectrum, Reaganism birthed a new era in which income and wealth inequality have increased significantly. Tax rates fell on the wealthy after 1980, while their incomes skyrocketed.
But how strong is the correlation between falling tax rates on the wealthiest among us and economic inequality? Plenty strong, according to a detailed analysis conducted by Andrew Fieldhouse for the Economic Policy Institute.
Fieldhouse demonstrates that a good chunk of the recent growth of economic inequality results from a major shift in how Americans earn money. More and more of our national wealth comes from investment income -- earned largely by the few at the very top -- and less and less from income earned through work. The tax preferences for capital income, combined with reductions in marginal income tax rates that mostly benefited the wealthy have exacerbated the concentration of wealth at the top. In particular, these tax changes have resulted in a "zero-sum, nonproductive shift of income from nonsupervisory workers to managers and executives." Thus, Fieldhouse argues that reversing these Reaganist policies by raising taxes on the wealthiest would reduce economic inequality without harming the economy at all.
Regarding Fieldhouse's conclusion and Barack Obama, first there is the stimulus package passed in 2009. Although its measures were temporary, there were a number of important ones -- most notably those relating to the earned income tax credit -- that did shift the tax burden in a more progressive direction. There were also the temporary increases in government spending that shifted money predominantly to those below the median income level (increased food stamp benefits, extended unemployment benefits, etc). But still, inequality has worsened during the president's first term, despite these measures. What about going forward?
Also, two big sets of changes are hitting the federal tax code. Neither of them are surprises to anyone who follows politics, but I want to discuss them together, to assess their combined impact. On January 1, 2013, the federal marginal rate went up from 35 to 39.6 percent on income over $400,000 for individuals and $450,000 for married couples (indexed for inflation going forward). Additionally, people earning above those levels will see the tax they pay on capital gains and qualified dividends rise from 15 to 20 percent. No one else's tax rates went up. To be technical about it, President Obama signed into law an income tax cut for everyone below those levels. That's one major shift toward greater progressivity in the tax code.
The other, more easily ignored shift results from Obamacare. Also as of this year, there is a 0.9 percent increase in Medicare taxes on income above $250,000 for married people filing jointly, $125,000 for married people filing separately, and $200,000 for everyone else. Additionally, people earning above those levels will pay a new Medicare tax of 3.8 percent on certain kinds of investment income.
And where does this money go? It goes right out to people earning less than four times the poverty rate (about $46,000 for individuals and $94,000 for a family of four) as subsidies to help them pay for health insurance premiums. Additionally, Obamacare funds the expansion of Medicaid (most recently pushed through in Ohio) to millions of Americans who did not previously qualify. In other words the law directly attacks economic inequality, in addition to providing health insurance and, it appears thus far, reducing overall health care costs in America.
These two major changes to the tax code have not kicked in yet. But once they do, they should have a significant impact on economic inequality. On their own, are they enough to reduce three and a half decades of damage caused by Reaganite thinking on taxes as well as globalization and the other factors driving that inequality? Of course not. But they will have a real and positive effect.
Why am I writing about this now? Part of it relates to the rollout of Obamacare, and my thinking about its long-term impact. Was it the kind of health care reform I wanted? No. But it will help people, of that I have no doubt.
Also, I was inspired to take on this topic after seeing the announcement of the Sunday's reader forum in the NYT. The forum asks for responses to an initial letter from someone who voted for Obama twice, but who is disappointed in what he's been able to achieve compared to other Democratic presidents such as FDR and LBJ. I take such concerns seriously, and by no means do I argue that Barack Obama has been a perfect president.
As a historian, I recognize that comparisons across eras are tricky, to say the least. The New Deal and the Great Society, as well as LBJ's Civil Rights and Voting Rights laws, were tremendously important accomplishments. Without going into too much historical detail, I'll just say that I would have loved to see what Barack Obama could have done with a three-fourths Democratic majority in both houses of Congress like the one FDR had in his first two terms, or even the two thirds majority LBJ had after 1964. Also bear in mind the difference between today's Republicans -- people who can't even stand to look at the president, and the Republicans of the past. Three-quarters of congressional Republicans voted for Social Security, and half of Congressional Republicans voted for Medicare (which Ronald Reagan claimed at the time would be the end of freedom for Pete's sake!). Barack Obama's 60 Senate Democrats in 2009-10 included one (Joe Lieberman) who threatened to filibuster, thus killing, health care reform if it included a public option.
I'm not here to tear down the accomplishments of past liberal presidents. I'm also not here to say that Barack Obama is above criticism. We should criticize him, from his left, when he needs to act more vigorously in support of progressive goals. But we also need to recognize what he has accomplished as president. We have to be able to do both, because it does the progressive cause no good to engage either in blind hero worship or reflexive dismissal of real achievements.
I chose to discuss income and wealth inequality because the fight against it stands at the center of the progressive movement. There is no other single issue that unites our cause quite so powerfully. The policies enacted by President Obama were not enough to stop economic inequality from worsening during his first term, although I don't even want to think about how much worse it would have gotten during the Great Recession without those policies. They did have a positive impact.
But in the long run, the tax policies contained in the fiscal cliff deal and Obamacare discussed above should have even a greater effect on fighting economic inequality and thus strengthening our economy across the board. We cannot allow disillusionment over what we did not achieve to dull the energy we need to keep fighting. The extremists we are fighting against are simply too dangerous. And the people we are fighting for cannot afford us that indulgence.