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Has President Obama’s tax policy reduced income inequality? It depends on what you are comparing it to.
White House Council of Economic Advisors chief Jason Furman claims that President Obama’s tax policies have sharply reduced inequality. Today’s Washington Post Wonkblog featured some new tables from the Tax Policy Center that show Obama tax policy is significantly more progressive that President George W. Bush’s, not exactly a surprise.
That’s true, of course, but we also compared Obama’s tax policies to those of his Democratic predecessor, Bill Clinton. In other words, suppose Congress had allowed the Bush tax cuts to expire and had not enacted any of the new taxes that were part of the 2010 Affordable Care Act. The answer: Today’s tax code is just about equally progressive as Clinton’s.
To examine this question, we estimated a common index of inequality of the distribution of after-tax income called the Gini coefficient for three different scenarios. A higher Gini coefficient indicates more inequality. It is 0 when everyone has the same income and would be 1 if one household captured all the income. CBO has a nice explanation here (pp. 8-9).
We looked at (1) Obama policy, (2) Bush policy, and (3) Clinton policy. Here are the results:
Inequality of Distribution of After-Tax Income in 2013
Under Current Law and Three Alternatives
|Policy||Gini Inequality Index|
Source: Tax Policy Center
These differences might seem very small, but they are actually meaningful. By our estimate, the pre-tax Gini of expanded cash income (ECI) in 2013 is 0.562. (ECI includes market income as well as cash and cash-like transfers such as Social Security and food stamps.) Thus, Obama or Clinton policy reduces inequality by 0.036 on the Gini scale (or 6.4%), compared with a reduction of 0.031
(5.5%) under Bush policy.
Gini’s are a little hard to wrap your head around, so we show a more familiar distribution chart at right. Obama policy lowered effective tax rates for all but the top 20% compared with extending all the Bush tax cuts. That makes it pretty clear that Obama’s policies are significantly more progressive than his predecessor's.
It’s also apparent that Bush cut tax rates for everyone compared with his predecessor, but he cut taxes the most at the top. Thus Clinton’s tax policy was significantly more progressive than Bush’s, as was widely noted when the Bush tax cuts were being debated.
But if you compare the left and right bars—Obama versus Clinton—in each income group, it is clear that people in most income groups saw tax cuts. The cuts are a little smaller as a share of income at the top, but since that’s where most of the income is, the overall distribution of after-tax income is remarkably similar—at least as measured by the Gini.
Washington wonks love to talk about baselines—i.e., what policy you are choosing as basis of comparison. In the case of President Obama’s tax policies, baseline makes all the difference. Compared to George W. Bush, Obama’s tax policies are extremely progressive. But compared to Clinton, not so much. In other words, when it comes to using tax policy to reduce income inequality, Obama has reversed Bush’s policies, but as of 2013 he’s hadn’t broken much new ground.
Then again, as the Washington Post points out, the ACA subsidies—refundable tax credits that take effect in 2014—are heavily tilted towards those with lower incomes and the ACA surtaxes are designed to hit more and more high-income people over time. So Obama’s assault on inequality has just begun.
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