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With the 50th anniversary of President Lyndon B. Johnson’s declaration of a “war on poverty” triggering new congressional debates on fiscal issues, prominent members of both parties are trumpeting plans to limit poverty. For Democrats, the Wednesday anniversary is entwined with questions about income inequality, a theme the White House says it will emphasize this year.
Some Democrats say a major factor in the unequal impact of the economic recovery is the distribution of federal taxes and the tax breaks they say have helped skew the code unfairly to benefit upper-income earners. But the tax code’s contribution to the growing trend of inequality is unclear. Even before most of the Bush-era cuts expired for upper-income earners at the start of this year, for instance, the top 20 percent of earners paid 69 percent of all federal taxes while taking home 52 percent of pre-tax income. The bottom fifth paid 0.4 percent and took home 5.1 percent of pre-tax income.
The average federal tax rate for all households in 2010 was 18.1 percent, according to the Congressional Budget Office, while the average rate for the richest 1 percent was 29.4 percent. That higher rate at the top is an essential element of the tax code’s progressivity.
But there’s a reason everyone from the new pope to the new mayor of New York seems to be talking about economic inequality: The gap between rich and poor has grown dramatically over the past few decades. And taxes have done little to blunt that trend. Between 1979 and 2010, the bottom 20 percent of households saw real after-tax income increase by 49 percent, while the top 1 percent’s after-tax income grew 201 percent over the same period, the CBO said in a December report on the distribution of federal spending and taxes.
The figures showing after-tax income has grown dramatically for those at the top illustrate that the tax code isn’t as progressive as it seems, said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and a former economic adviser to Vice President Joseph R. Biden Jr.
“I think about the factors driving inequality, the structure of the tax system is on the list, but it’s one of many — there’s globalization, declining unions, minimum wage issues, technological changes ... unemployment.”