Taxing Our Way To Equality

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Zachary Goldfarb presents the findings of a Tax Policy Center analysis showing that by one measure, income inequality has declined appreciably in the Obama era:

Today, the average after-tax income of a member of the top 1 percent of earners is $1.12 million. The average after-tax income of someone in the bottom 20 percent is $13,300. That means the average person at the top takes home 84 times the income that the average person in the bottom takes home. Now, consider what it would be like if none of President Obama’s tax policy changes had happened: not the upper-income tax hikes negotiated at the beginning of last year, not the upper-income tax increases imposed by the Affordable Care Act, not the low-income tax credits enacted in the 2009 stimulus and later renewed.

In this alternative universe, the average member of the top 1 percent would take home $1.2 million, or 6.5 percent more in income, according to a new analysis. The average member of the bottom 20 percent would bring home $13,100, or 1.2 percent less in income. As a result, the average member of the 1 percent would take home 91 times what the average person in the bottom would bring home. If you’ve wondered whether Obama has made any headway at reducing income inequality, here’s evidence that he has.

For Jordan Weissmann, this finding illustrates the importance of measuring inequality both before and after taxes and transfers:

Between the tax changes and health reform, Council of Economic Advisers Chairman Jason Furman argues that the administration has undone “more than a decade” of growing inequality. And he has a point. Liberals prefer talking about pre-tax inequality in large part because it’s a raw reading of how egalitarian our economy is—it tells us how bad the income gap would be were it not for Washington’s intervention. But looking at post-tax-and-transfer inequality tells us how much more work needs to be done to even outcomes—and whether the government’s interventions are having an effect. Both sets of numbers tell us important stories. One says the rich are still pulling away from the rest of us. The other says that the administration has managed, ever so slightly, to pull them back.