What it Really Takes to Fight Income Inequality: Lessons from President Obama

Income inequality is a big deal, and it should be. But the way we talk about income inequality on the campaign trail has become demagoguery, and can use some truth injection. More than that, we could actually use some current examples of how income inequality can be reduced. And to be certain, the candidate who has built his presidential campaign on railing against income inequality and blaming Wall Street for it, has not been telling the full truth about income inequality or how President Obama has been at the forefront of combating it not just through rhetoric but through policy.

When people like Bernie Sanders yell about how "nearly all" of the income growth in the recent recovery has gone to the top 1%, they leave out an important detail: they are talking about pre-tax, pre-transfer income, not the disparity in actual disposable income. What Sanders leaves out is actual public policy tools of combating that inequality and its effectiveness, namely, the tax code.

But does it matter? Does the tax code actually reduce income inequality in the United States. It sure does. The latest available data shows that in 2012, the tax code reduced a key indicator of income inequality (known as the Gini Index) by about 25% when pre-tax and post-tax inequality are compared. But changes to the tax code since then - namely the tax increases that went into effect in 2013 on very high marginal incomes, inheritences and capital gains thanks to President Obama - are likely to reduce the disparity even more. How do we know this?

A study by Dr. Emannuel Saez, a professor of Economics at UC Berkeley - a researcher whose data Bernie Sanders is very fond of touting - published last year shows that as a result of President Obama's tax code changes that went into effect in 2013, real income of the top 1% was reduced by roughly 15%, while real incomes of the bottom 99% rose slightly, by 0.2%, meaning that the top 1% accrued more than 100% of the total income loss, at least in the year 2013.

One may argue, however, that 2013 was most likely an exceptional year, since, expecting their taxes to increase, the richest 1% - with the luxury of deciding the tax year of their income because most of it comes from investments - would have just moved more taxable income to 2012, leaving less for 2013. This would indeed have artificially lowered the income of the top 1% in 2013, but by the same token and to the same extent, it would have artificially increased their incomes in 2012. And the last reported income inequality measures we have is for the year of... 2012!

This is something you won't hear from the people who will fall over each other to tell that "almost all income gain in the recovery has gone to the top". By a narrow measure, pre-tax income growth for the recovery between 2009 and 2012 did go to the top, but it was mostly due to the recovery of investment assets (the stock market) - which also resulted in the restoration of the value of the retirement portfolios of millions of middle class Americans.

As a matter of fact, the only income group to lose real, after-tax income between 2000 and 2010 (mostly due to the effects of the recession) was the top 1%, while almost every other income group gained 10% or more, with the bottom fifth gaining 20%. The tail end of the Great Recession being included in this period is important, because although almost everyone lost income during the Great Recession, that reason the loss wasn't enough for 99% of Americans' incomes to fall below 2000 levels were President Obama's early investments in the Recovery Act, through massive investments, tailored tax cuts and extended unemployment benefits targeted to the bottom and the middle of the economic ladder.

Because of the President's actions, between 2007 and 2010 (the entire period covering the Great Recession), median income in America fell by less than 1%.

Oh, and another thing. The financial rescue. Without it, the economy would have collapsed into another Great Depression, costing millions more jobs, wiping out the retirement savings of millions more with no hope of ever recovering value, and grinding all financing activity - from business loans to ATM transactions to consumer spending - to a halt. Any guesses as to which income group that would have been the most brutal on?

From the Recovery Act to the auto rescue to the bank rescue, everything President Obama did to combat the effects of the Great Recession saved millions of jobs and helped maintain income through the downturn.

Another key accomplishment of President Obama's that deserves to be talked about in terms of income inequality is the Affordable Care Act. It did not only help the US reach 90% health insurance coverage, and it has not only eliminated the worst abuses of the health insurance industry, banning price discrimination based on pre-existing condition or health status and outlawing coverage limits. It isn't just responsible for bringing us strikingly close to covering every single child.

The Affordable Care Act forms the basis for the largest refundable health care tax credit (you're eligible for subsidies even if you owe no federal income tax) in history for the middle class, while it is partly financed by raising taxes on the high income earners and imposing financial responsibility on large corporations. Put together, these provisions too are likely to lower post-tax, post-transfer income disparity.

So, the question must be asked: why have we not heard any of this from Sen. Sanders on the campaign trail? For any self-described "democratic socialist", Barack Obama's successes in combating income inequality through actual policy should be a proud badge to wear. Why isn't Sanders wearing it and running on it?

Consider the following. Admitting what President Obama has done has worked - not just in a lip-service sense but in a real, specific policy sense - would undermine the two key justifications for the Sanders campaign: the anti-establishment shell, and the revolution-peddling. If he admits that President Obama's specific policies have addressed his core campaign issue, there is no case to be made as to why a drastic course correction (revolution) is needed, nor is there a reason to run against "the establishment" if the current system, with the right leadership, works.

And so, you will hear a lot from Bernie Sanders about a deceptive measure of income inequality. But you won't hear a lot from him about exactly how to effectively combat it other than being very mad at bankers. You will not hear from him that as of the last unemployment report, incomes for the 99% are actually starting to rise thanks to a robust economy. You will not hear that things are being done right now, under the current Democratic president, that combat the effects of income disparity.

This is not to say income inequality is unimportant or that no work remains to be completed. But it cannot be addressed by pumping fists, noun-verb-Wall-Street-ing, or wildly underestimating the costs and stupidly overestimating the benefits of one's own proposals. It can only be addressed through the path that President Obama has shown: with strength of purpose, clarity of vision, and the courage not to hold progress hostage to ideological demagoguery.



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