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Obama budget: restoring income equality in the US?

Liberal economists see the $3.6 trillion proposal as a 'step in the right direction.'

By David R. Francis / March 16, 2009



Between 2003 and 2005, the economy and the Bush tax cuts redistributed $3,660 in pretax income on average from the bottom 109 million households to the remaining 4 million or so richest households.

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The hope of "progressive" Democrats is that the $3.6 trillion budget for fiscal 2010 proposed last month by President Barack Obama will help reverse the trend of the past 20 years or so for the rich to get richer and pay less tax.

During his campaign for the presidency, Mr. Obama famously spoke to Joe the Plumber about "spreading the wealth around." Those words prompted Republican John McCain's campaign to call Obama a closet socialist.

By the usual definitions of "socialist," by economists and political scientists, that label is a gross exaggeration. Nonetheless, Obama's budget would boost the tax burden on the rich and ease it for the middle class and poor. The extra revenues are seen primarily as helping fund national healthcare reform. They also would modestly redistribute income down the income ladder.

"Every step in the right direction is a step in the right direction," says Peter Diamond, an economist at the Massachusetts Institute of Technology in Cambridge.

The analyst of the 2003-2005 data was Jared Bernstein. Then an economist at the liberal Economic Policy Institute (EPI) in Washington, he was using in 2007 the latest available Congressional Budget Office data. Now he's top economist in the office of Vice President Joseph Biden.

Since 2007, today's deep recession has done more to chop wealth – maybe to a lesser extent income – than any government intervention. A survey by the Spectrum Group, a Washington consulting firm, finds the number of US households with a net worth of $1 million or more, not including their primary residence, falling to 6.7 million in 2008, down 27 percent from a record 9.2 million the year before. The number of Americans with a net worth of $5 million or more declined 28 percent to 840,000.

The key culprit is the drop in the price of stocks and most other financial assets. The richest 1 percent of households own nearly half of all individually owned investment assets (stocks and mutual funds, financial securities, business equity, trusts, nonhome real estate). The bottom half of the population, 150 million Americans, own less than 1 percent, note Gar Alperovitz and Lew Daly in a new book, "Unjust Deserts."

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