Economic Policy of The George W. Bush Administration - Income Inequality

Income Inequality

Many economists are critical of the Bush administration's policies and argue that the economy is only benefiting the wealthy, increasing inequality between the top 1% and the rest of society. Economists Aviva Aron-Dine and Richard Sherman point to recent data from the Congressional Budget Office (CBO), showing that "the average after-tax income of the richest one percent of households rose from $722,000 in 2003 to $868,000 in 2004, after adjusting for inflation, a one-year increase of nearly $146,000, or 20 percent. This increase was the largest increase in 15 years, measured both in percentage terms and in real dollars."

At the same time, the share of overall tax liabilities of the top 1% increased from 22.9% to 25.3%, as the result of a tax system which became more progressive since 2000. According to economists Emmanuel Saez and Thomas Piketty, who reviewed income tax returns for all income groups since 1917, found that in 2005, the top 1% received its largest share of gross income since 1928.

Economist John Weeks asserts that increased income inequality in the U.S., one of only four high-income OECD countries to experience a significant increase in inequality, is largely the result of a less progressive taxation structure, the weakening strength of labor unions, which has resulted in "a growing imbalance in the economic and political power of capital and labor." However, claims of a "less progressive taxation structure" are refuted by the fact that "high-income households pay a modestly larger share of total federal income taxes," which is the generally-accepted measure of progressivity.

In actuality though, the existence of a progressive federal personal income tax, does not refute the claims of an overall regressive tax system. First consider that the prior statement ignores federal payroll and excise/customs taxes, which as suggested by the fact that these taxes are disproportionately carried by the middle and lower classes, are widely considered regressive type taxes.

Moreover, as a percentage of total federal taxes, these regressive type taxes have seen an increase in recent years. To display this, consider that in 2000, 60.8% of the federal taxes collected came from personal and corporate income taxes (i.e. two progressive taxes) whereas only 38.9% came from payroll and excise/customs taxes (i.e. two regressive taxes). This is a ratio of 60.8 to 38.9, with the remaining 0.4% coming from taxes collected from the rest of the world. By 2005, this ratio had changed to 56.4 to 43.1, thus indicating a trend towards a less progressive federal tax system.

Lastly, by taking local and state taxes into consideration, it can be can be fully seen how claims about the strong progressiveness of the American tax system are misguided as local/state tax systems are very regressive. Consider that in the year 2000, 30.1% of all state and local taxes were from progressive type taxes (see above for examples)whereas 64.4% came from regressive type taxes. By 2005, this trend had become exacerbated as only 28.8% now came from progressive type taxes, and 65.0% came from regressive type taxes.

One could say that this has no bearing as state and local taxes make up a smaller portion of overall revenue as a share of GDP. However, examine that in 2005 federal, local and state revenue as a share of GDP was 26.9% and that of this number, 9.3% came from state and local taxes, whereas 17.6% came from federal taxes. This is the closest these two numbers have been since 1959 and further shows the increasing reliance upon state and local tax revenue which have been suggested to come from regressive sources.

Economist Stephen Rose asserts that Piketty and Saez use an older method to adjusting for inflation, exclude government transfers, and they do not address demographic changes. Rose concludes that while inequality did increase, the increase has been exaggerated.

Libertarian economist Alan Reynolds, senior fellow at the Cato Institute, makes similar assertions as Rose Gary Burtless, senior fellow at the centrist Brookings Institution, however, stated that Reynolds did not provide sufficient evidence to dismiss the findings of Saez, which are further supported by the CBO. According to him, "many of criticisms are misguided or unfair given the goals of the Pikkety-Saez project... The CBO handles almost all the problems Reynolds mentions, and its calculations show a sizeable rise in both pre-tax and after-tax inequality since the late 1980s."