Obama budget: restoring income equality in the US?

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

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.

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."

Of course, many of those with little financial wealth have also been hit by pay cuts, unemployment, housing losses, and bankruptcies.

The Obama budget would make the tax code "far more progressive," that is, taxing the rich more than the middle class or poor, states the Committee for a Responsible Federal Budget. It would allow the 2001 and 2003 tax cuts for richer Americans to expire in 2011, raising their marginal income-tax rate back to the Clinton era level (39.6 percent). The estate tax would be fixed at the 2009 level, not hitting anyone who inherits less than $3.5 million, and block the Bush plan for this tax to disappear entirely in 2010. It would not allow hedge fund managers to assume that all their income was capital gains and thus taxed at a low 15 percent rate. It would create or expand a number of "refundable" tax credits that are targeted toward lower earners, including some who do not pay income taxes at all.

John Irons, who describes himself as a "budget geek" at the EPI, found reading the Obama budget "a pleasure" because it was more honest than Bush budgets and proposed various measures that would "at least lean against the wind" [of income concentration at the top].

But what the White House proposes in a budget, Congress disposes. It's reported key legislators want to study more Obama's proposal limiting tax deductions (charity donations, property taxes, state taxes, etc.) by the wealthy to no more than 28 percent of their income. Those in lower income-tax brackets get a reduction in their taxable income of perhaps only 10, 15, or 25 percent of their income.

Any tax hike brings out opposition from those whose "ox is being gored," notes Paul Van de Water, an economist at the Center on Budget and Policy Priorities in Washington. That includes charities. But he calculates the 28 percent limit would affect only the top 1.2 percent of affluent US households and reduce total charitable contributions by about 1.3 percent. Some in the philanthropic community have figured "maybe this isn't the end of the world," he adds.

It could be more important for cultural organizations (museums, opera and ballet companies, etc.). They are often beneficiaries of the rich. The poor and middle class are more likely to give money to religious groups.

Edward Wolff, a wealth expert at New York University, suspects some or most of the Obama tax proposals will pass Congress because he has "political momentum on his side." And these changes will have "a pretty big impact on the inequality situation."