'Other half' now down to one percent

If President Barack Obama is trying to spread the wealth, he doesn't have much to show for it. Republican Mitt Romney has attacked the president for supporting the use of government programs to redistribute income and for a free-spending response to the 2008 financial crisis. Yet since Obama took office in January 2009, wealthy Americans have continued to pull away from the rest of society. In the aftermath of the recession, income inequality in the U.S. reached a new high in 2011, Census Bureau data show. Even as the president has decried the hollowing out of the middle class, the fortunes of labor and capital have diverged on his watch. Quarterly corporate profits of $1.9 trillion have almost doubled since the end of 2008, while workers' inflation- adjusted average hourly earnings have declined. “At the very high end, people got a whole lot wealthier whereas income stagnated at other levels,” said Anne Mathias, director of Washington research for Guggenheim Securities LLC. “Fifty years ago, people talked about the other half, how the other half lived, and now we're talking about the other 1 percent.” The fairness debate erupted on Sept. 17 when Romney was heard on a secretly filmed video telling financial backers that the almost 47 percent of Americans who didn't pay federal income tax last year believed they were entitled to free health care and food and refused to accept responsibility for their lives. A day later, a 1998 tape of then-State Senator Obama appeared in which he said, “I actually believe in redistribution, at least at a certain level, to make sure that everybody's got a shot.” 'Foreign Concept' Romney attacked the president for supporting “a foreign concept that's never been part of the American experience.” The campaign duel over the fairness of the American system obscures the broad popular support for redistribution, which was built into the U.S. tax and entitlement system over several decades. In surveys, the public rejects explicit calls to share or redistribute wealth even while supporting policies that do so, including raising taxes on the wealthy or maintaining programs such as Social Security. By a margin of 60 percent to 37 percent, respondents in an April Gallup poll backed Obama's proposal to levy a minimum tax on millionaires known as the “Buffett rule” for Berkshire Hathaway Inc. Chairman Warren Buffett. Blunting Inequality Taxes and transfer payments blunted the rise in income inequality in recent years, according to the Congressional Budget Office, which uses a broader definition of income than the Census Bureau. By CBO's calculations, which include the value of employer-provided health insurance, taxes and government benefits, inequality in 2009 -- the most recent year available -- wasn't much worse than in 2003. Taxes and transfer payments, such as unemployment insurance and food stamps, reduced pretax income inequality in 2009, Obama's first year in office, by 26.4 percent, not much different than the 24.8 percent in 2003, when President George W. Bush was in the White House, the report said. Government affects income distribution through other channels as well, which would be reflected in the Census Bureau's data. The minimum wage, collective-bargaining rules, stimulus spending and allowing certain types of foreign workers into the U.S. all can shape the way income is apportioned, said economist Dean Baker, co-director of the Center for Economic and Policy Research. Opening Rounds The escalating rhetoric between the presidential contenders represents the opening rounds of a battle over allocating society's burdens and benefits that will intensify after the election, says Mathias. Wealthy taxpayers, hit hard by the financial crisis, have prospered since then as equity markets rebounded. Middle-income families, no longer able to tap rising home values to buttress their living standards, have struggled. The top 1 percent of families garnered 93 percent of the income gains in 2009 and 2010, according to an analysis of Internal Revenue Service data by Emmanuel Saez of the University of California, Berkeley. On Sept. 12, the Census Bureau reported that income inequality had reached a new high, based upon a standard measure called the Gini index. Developed by the Italian statistician Corrado Gini in 1912, the index represents a kind of distributional thermometer, ranging from 0, where each person enjoys an equal share of income, to 1, which represents a complete concentration of wealth. 'Share the Wealth' For 2011, the index rose to 0.463, a 1.7 percent deterioration from the previous year and the first statistically significant annual increase since 1993, the Census Bureau said. It was the widest income gap in more than 40 years. That complicates Republican efforts to tar the president for “share the wealth” views. Mathias expects a successful push to tax the rich during post-election budget talks. “The redistribution argument isn't resonating that much and the practical implication is it is more likely that we'll see taxes going up on the upper-income segment,” she said. Higher-income taxpayers already will get a new 3.8 percent Medicare tax on unearned investment income to help pay for Obama's expansion of health coverage to tens of millions more Americans. The tax takes effect on Jan. 1 for couples making more than $250,000 and individuals with incomes above $200,000. Higher Taxes The president has pressed unsuccessfully for other taxes - - including the Buffett rule's minimum 30 percent levy for millionaires -- to raise revenue and curb inequality. Romney proposes an across-the-board 20 percent reduction in tax rates that even some supporters say could tilt the tax code toward the affluent unless politically popular deductions -- including those for home mortgage interest and charitable contributions -- were reduced or eliminated. Economist John Diamond of Rice University in Houston, whom Romney cited last month as verifying his tax plan claims, said the proposal would face “daunting” political obstacles. “You are going to have to touch the state and local tax deductions, income and property, sales,” said Diamond. “You're probably going to have do something with the home mortgage interest deduction and charitable. I don't think you have to eliminate them completely.” Romney promises not to increase taxes on the middle class and says wealthy taxpayers will still pay the same share they do today. His proposal is designed to spur economic growth, though a Congressional Research Service study concluded that previous rate-cutting had “little association” with saving, investment or productivity, although it did exacerbate the rich-poor gap. “As the top tax rates are reduced, the share of income accruing to the top of the income distribution increases,” the report, released Sept. 14, said. 'Right Way' In an interview with “60 Minutes” on CBS, broadcast on Sept. 23, Romney said it is fair for him to pay a lower tax rate than a worker making the median annual income of about $50,000. “It's the right way to encourage economic growth, to get people to invest, to start businesses, to put people to work,” he said. Still, redistribution has long been part of government tax and entitlement policy. The U.S. tax system is a mix of a progressive federal income tax, designed to take a higher share from richer taxpayers, and regressive state and local taxes, which take relatively more from the less affluent. That means the system is “just barely progressive” overall, according to an April report by Citizens for Tax Justice, which says it opposes tax breaks for corporations and the wealthy. Including all taxes, the top 1 percent of taxpayers pay 29 percent of their income in taxes while middle-income Americans pay 25.2 percent. Staying Afloat Because of increased government tax and transfer payments in the recession, the poorest one-fifth of the nation was able to maintain its position relative to the wealthy in disposable income and consumption even as its earnings and net worth were savaged by the downturn, according to a study by the Federal Reserve Bank of Minneapolis. “Government redistribution in the Great Recession was at historical highs and partially shielded households,” the February study by economists Fabrizio Perri and Joe Steinberg concluded. One example was rising spending on Medicaid, which provides health care for more than 60 million low-income Americans. The federal share of the program jumped to $275 billion in 2011, a 44 percent increase from the $190.6 billion spent in 2007. Widening Gap The Census Bureau study released earlier this month found that four separate measures of income inequality showed the rich-poor gap widening. The richest 5 percent of the nation's households accounted for 22.3 percent of income in 2011, up from 16.5 percent in 1980. The three-fifths of households in the middle of the distribution got 45.7 percent of national income last year, down from 51.7 percent in 1980. That shift represented the equivalent of $884 billion moving from the middle class to the most affluent. To return the rich-poor gap to what it was the year Reagan was first elected president, Obama would have to confiscate $146,000 from each of the nation's richest 6 million households and use the money to send a check for $7,700 to each household in the remaining 95 percent of the nation's income distribution, according to the Census Bureau data. --Bloomberg News--