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A Little Pre-Election BS From the White House on Income Inequality

By       Message Dean Baker       (Page 1 of 1 pages)     Permalink

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From CEPR

Income Inequality
Income Inequality
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I respect Jason Furman, the chair of President Obama's Council of Economic Advisers. I think he is doing a great job in this position. He has called attention to many of the ways in which government interventions in the market, like professional licensing (think doctors), intellectual property rules (patents and copyrights), and other restrictions are acting to redistribute income upward. He has also attacked silly myths, like the idea that workers in the U.S. are dropping out of the labor market because of our generous disability program and other benefits. (In a recent report, Jason noted that the U.S. has among the least generous welfare supports of any OECD country, yet it ranks near the bottom in labor force participation rates for prime age [ages 25-54] men.)

Anyhow, in spite of my respect, I feel the need to call him out on trying to pull the wool over folks' eyes in a recent column. The column touts many of the positive measures (in my view) to help people at the middle and the bottom under the Obama administration, such as expansion of the earned income tax credit, the child tax credit, and most importantly the Affordable Care Act which has extended health insurance coverage to 20 million people and allows people with serious health conditions to get insurance at the same price as every one else. These measures have been paid for by higher taxes on the wealthy. This is all very positive and the Obama administration deserves credit for these measures, even if I would have liked to see it go much further.

However, the reason my BS detector went off is that Furman tried to claim we had turned the corner in some big way on the upward redistribution of income from the last four decades. He tells readers:

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"Partly as a result of these policy changes, the top 1 percent's share of income after taxes was 12 percent in 2013 (the most recent year for which data are available), well below its 2007 peak and roughly equal to its share in 1997."

The problem with this story is that the 2013 numbers for the top 1 percent are skewed downward in a big way as a result of the tax increase on the rich that the administration put in place in 2012. The wealthiest 1 percent often have considerable control over the timing of their income. They knew the top tax rate would rise from 35.0 percent for 2012 to 39.6 percent in 2013. This gave them a very strong incentive to declare income in 2012 that would have otherwise appeared in 2013. This makes 2012 look really good for the 1 percent and 2013 much worse.

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This shows up clearly in the data. According to the estimates from the Congressional Budget Office (Figure 7), the inflation-adjusted before-tax income of the top 1 percent rose by 37.9 percent in 2012. It then fell back by 22.0 percent in 2013. This is exactly what we would expect from this tax gaming. If we take the average of these two years, the before-tax income of the top 1 percent has risen by 73.3 percent from its 1997 level. On the plus side, it is down by 22.6 percent from the bubble peak of 2007.

I should point out that this tax timing issue is hardly a secret. CBO mentioned it explicitly in the summary of its report:

"In response to tax law changes that went into effect in 2013, some taxpayers--especially those at the top of the income distribution -- shifted some income into 2012 to avoid the higher tax rates on that income in 2013."

Anyhow, it is too early to claim any big victories in turning around the rise in before-tax income inequality. (This is also the view of CBO which projects that the bulk of the wage gains in the next decade will go to high-end earners, as has been the case for the last 35 years.)

The Obama administration deserves credit for some big steps in the right direction, but we still have a very long way to go. This is why I wrote Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer, coming this week to a website near you.

Addendum:

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I should add that Jason is correct to point to the real wage growth of the last two years. This is encouraging and may continue if the Fed does not deliberately slow the economy and the rate of job growth by raising interest rates. Which also points to the importance of the sort of people that Hillary Clinton will appoint to the Board of Governors to the Fed. There are already two vacancies on the seven person board and the chair, Janet Yellen, will be up for reappointment next year.

 

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Dr. Dean Baker is a macroeconomist and Co-Director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. (more...)
 

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