How Progressive is Obama’s Tax Policy?

By :: July 23rd, 2014

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
  1. Obama
0.526
  1. Bush
0.531
  1. Clinton
0.526

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.

Average-Federal-RatesGini’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.

Follow me on twitter
.

4Comments

  1. Michael Bindner  ::  11:58 pm on July 23rd, 2014:

    Equality is as much about power as it is about money and Obama has barely made a scratch. He has done a bit to reverse Bush’s anti-union policies but his automotive bailout did nothing to mandate employee democracy when the opportunity to do so was so deliciously available. Of course, such things are hard to quantify except for the number of union households compared to the prior regime.

    Adding Clinton is a nice touch, however, while we are at it, we should also add Bush senior, who came as close as anyone to achieving a proportional tax system when adding in both employer and employee contributions to Social Security – with a rate of 31% of income. Add Reagan and you have multiple distributions, from the end of his three year, 25% tax cut to the tax reform of 1986 which made the Bush adjustments both necessary and possible by leaving a bubble – and which sewed the seeds of the Great Recession by leaving interest on second mortgages deductible while ending the deductibility of all other debt – thus turning our homes into ATMs as people began to cash out equity in earnest and refinance later.

    The all time comparison, however, is to compare to Carter and previous presidents, who taxed the highest incomes at 70% (with an additional state income tax system so high that an adjustment to not tax over 100% was necessary). That also addressed the power difference, because CEOs who could not pay themselves a bonus for saving money were not so hot to go after the union or its labor contracts – as any bonuses awarded for doing so would become tax payments in their entirety. Of course, during the time before Carter there were extreme instances of structural inequality having to do with discrimination and lack of education. Of course, sadly, there still are.

  2. AMT buff  ::  11:48 am on July 24th, 2014:

    It seems to me that the Fed’s negative real interest rates since 2001 have created more inequality than any government action in our history. Money is in effect confiscated from small savers and given to large borrowers and banks. People with large investments in assets other than debt have been benefiting tremendously.

    This is why prime real estate is now above its pre-crash peak, and so is the stock market. People not rich enough or risk-tolerant enough have been left behind. When the Fed gives away trillions of dollars to the wealthy, fiddling with the tax rates will not offset that. The likely outcome of a tax increase would be further damage to the same non-millionaires who were left out of the helicopter money drop.

    As a wise man said above, baseline makes all the difference. Nobody knows how the economy would have performed without all the stimulus, but we have to acknowledge that it had a high price. It made some very rich people much richer, and millions of non-rich people who benefited much less will have to pay back all that debt.

    Compared to this unprecedented transfer of wealth to the rich, under a President who claims to oppose inequality, changes in tax rates are small ball. But any comparison of income tax rates after the 1986 Tax Reform should start with the original 1988 (fully phased in) rates. Baseline makes all the difference.

  3. Ralph H  ::  4:44 pm on July 24th, 2014:

    I know this is a tax blog but “income inequality” owes little to tax rates. The fact is that with automation, computing and the global economy highly educated or highly talented people make a disproportionate amount of money while people with limited skills or education are commodities. This has become much worse during the Obama administration, mainly due to the globalization. His (and Bush’s) immigration non-enforcement has hurt lower skilled Americans, and the insanely low interest rates have also facilitated financial leverage that benefit the wealthy. Meanwhile we seem to have forgotten to enforce anti-trust. I am not sure what tax policy can do to overcome this. Most 1% ers do not realize income (wages, capital gains, etc) as their wealth grows. Mr Gates and Buffett have “earned income” of only a few percent of their fortune and seem intent to give it away with little resulting tax liability. Meanwhile, many politicians give lip service to income inequality while continuing the policies that make it worse — all the while hitting up the 1% for campaign donations.

  4. Mimi Beckinridge  ::  10:55 am on July 25th, 2014:

    The answer to your first question depends on whether you count Obamacare as part of his general tax policy. If the ACA is part of it, then I’d say NO…my premiums doubled, I make less then $30,000 a year so I’m hardly rich. Where’ the equality in that?