ECONOMIC SCENE: Obama takes first step to redistribute wealth

Modest effort may still face still opposition in Congress.

Jim Young / Reuters / File
Then-presidential nominee Barack Obama speaking with Joe Wurzelbacher while canvassing in Ohio last October. In a famous exchange with Wurzelbacher — "Joe the Plumber" — Obama said that spreading wealth around was "good for everybody."

In a now-famous exchange with “Joe the Plumber” last fall, presidential candidate Barack Obama got a lot of scrutiny for saying: “When you spread the wealth around, it’s good for everybody.”

Conservatives scoffed. GOP rival John McCain painted him as “redistributionist in chief.” Now the redistributionist has proposed a budget that moves some money from the very rich to the poor and middle class. Is that a bad thing?

Some numbers to consider:

•From 1979 to 2006, the richest 1 percent of US households more than doubled their share of the country’s total income from about 10 percent to nearly 23 percent. By 2006, for every dollar the US produced, 23 cents went to millionaires in the top-earning households.

•During that same period, about 91 percent of all the nation’s income growth went to the top 10 percent of households by income.

•In the new century, most families have experienced stagnant or falling incomes.

The United States has “the highest [income] inequality by far in our history and among advanced nations,” says Lawrence Mishel, president of the Economic Policy Institute in Washington and an author of the biennial book, “The State of Working America,” which contains the numbers above.

President Obama’s budget aims to change that, modestly. The top 1 percent of families would lose some 3 percent of their present share of income by 2012, according to a study by economists at the business-friendly Tax Foundation. That still leaves the top 1 percent way ahead in their share of total income than in any year under President Reagan, who pushed tax cuts for the rich in the 1980s as a way to boost economic growth.

That would cut the income for the top 1 percent an average of $64,000 per household, to a bit more than $2 million by 2012, the Tax Foundation study found. The Obama budget does make for “more even distribution of the economic pie,” the study concluded.
Even this modest adjustment may be difficult to get past Congress. “Send reinforcements,” reportedly joked Jared Bernstein, a liberal redistributionist now at the White House.

The Tax Foundation study is unusual in that it looks at both tax and spending redistribution effects of federal actions. That requires some bold assumptions. For example, defense spending is assigned to each income group in proportion to the income of that group. The rich are assumed to benefit more because they have more to protect.

Optimal redistribution is in the eye of the beholder, says Gerald Prante, an author of the study.

Some conservatives argue that the rich shouldn’t be taxed more because they supply the capital needed to make the economy grow, which eventually benefits the poor. There is a tiny truth to this, finds a new study out of Harvard University’s Kennedy School in Cambridge, Mass.

The “trickle-down” effect is “very small,” says Christopher Jencks, one author of the study.

Based on data from 12 developed nations from 1905 to 2000, the study finds that a one percentage point rise in the income share of the top 1 percent is associated with a “statistically significant” 0.12 percent average rise in the growth rate of national output. But it takes 13 years for that faster growth rate to offset the income loss for the bottom 90 percent. It may never happen if a major recession hits first, Mr. Jencks concludes.

To reduce income inequality and share prosperity goes beyond budget-driven redistribution, says Mr. Mishel. He urges health insurance for all, an increase in the minimum wage, and a restoration of bargaining power to labor unions.

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