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Lashing out at the Congressional Republican budget earlier this week, President Obama chastised the GOP for ignoring what he called one of the “big, fundamental issues” of our time: inequality.
“What drags down our entire economy is when there’s an ever-widening chasm between the ultra-rich and everybody else,” Obama claimed. He went on to insist that addressing inequality was not only an important moral cause in its own right but also an economic priority, since “research has shown that countries with less inequality tend to have stronger and steadier economic growth over the long run.” It was a theme Obama has sounded repeatedly in his first term, most famously last December in his speech in Osawatomie, Kansas, in which he claimed that “breathtaking greed” in America was the cause of America’s economic woes and belied America’s national promise that “this is a place where you can make it if you try.”
Obama is not completely wrong. America’s rich have indeed gotten richer. A 2011 report by the Congressional Budget Office pointed out that between 1979 and 2007 after-tax income for the highest-income households grew more than for any other group. Altogether, between 1980 and 2005, 80 percent of the total increase in incomes went to the top 1 percent of American households. But before enlisting in the nearest “Occupy” protest, it’s worth considering some of the complications with the inequality picture presented by Obama.
Authors Peter Wehner and Robert Beschel have done just that in a new essay in the public policy journal National Affairs. One problem with focusing on the increase of wealth at the very top, the authors note, is that it is misleading. The reality is that the income of individual households is not static. People have always moved up and down on the scale of income distribution, and that remains true today. Thus the CBO points out that the population with income in the lowest 20 percent in 1979 was not necessarily the population in that quintile in 2007. Similarly, the authors report, about half of those in the bottom income quintile in 1996 had moved up to a higher income category by 2005, even as 30 percent of those in the top income group in 1996 had fallen down to a lower quintile by 2005. Contrary to what Obama suggests, income distribution is not etched in stone.
Further, an exclusive focus on the rise of incomes among the highest earners ignores the disparate effect of taxes on the rich. Even as the top 1 percent has seen a significant rise in their wealth, they have also paid a disproportionate share of the country’s taxes. The top 1 percent of income earners now pay 40 percent of all federal income taxes, according to the CBO, more than double the less than 20 percent that they paid in the 1970s. While the point is often lost in Obama’s appeals for “fairness” and higher taxes on the rich, the fact is that among the world’s richest nations, America already imposes the largest share of income taxes on its rich, exceeding even socialist countries like Sweden.
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