It’s now clear that a central theme of President Obama’s re-election will be income inequality. Earlier this week, in a speech in Kansas, Obama said inequality – at “levels we haven’t seen since the Great Depression” — “distorts our democracy.” The president went on to say, “This kind of gaping inequality gives lie to the promise that’s at the very heart of America: That this is a place where you can make it if you try.”
The issue of income inequality has several dimensions to it, some of which I’ll address in the future. For now, though, I simply wanted to make the point that, as this superb analysis by the House Budget Committee demonstrates, the common understanding of government’s role in income inequality has things backwards: Tax reforms have resulted in a more progressive federal income tax, while government transfer payments have become less progressive. Why? In large measure because rising entitlement payments are going to wealthier seniors at the expense of lower-earning young people. For example, in 1979, households in the lowest income quintile received 54 percent of all transfer payments; in 2007, those households received just 36 percent of transfers.
It’s important to understand that while Social Security benefits are progressive, neither Social Security nor Medicare is means-tested (that is, they are not provided to people based on a test of need determined by their income and assets). So, the second-wealthiest cohort (by age) in America is eligible for these programs. “This cohort has grown faster than the population overall,” according to the House Budget Committee analysis, “and the resulting demographic change has reduced the share of transfer payments received by lower-income households while increasing the share received by middle-and upper-income households.”
What we’ve seen, then, is a relatively well-off demographic receiving benefits from non-means-tested programs that have received large increases in spending. (The rising cost of health care has exacerbated this trend.)
In a recent speech to the Heritage Foundation, Representative Paul Ryan put it this way: “The president likes to use Warren Buffett and his secretary as an example of why we should raise taxes on the rich. Well, Warren Buffett gets the same health and retirement benefits from the government as his secretary. But our proposals to modestly income-adjust Social Security and Medicare benefits have been met with sheer demagoguery by leading members of the president’s party.”
In sum: the current structure of our entitlement programs (especially Medicare), much more than the tax cuts of the Reagan and Bush years, have accelerated income inequality. But you would never know that based on the critique of the left, which has come to believe – for reasons that are not entirely clear – that tax increases are an important step towards the moral purification of a society. If income inequality is really what troubled modern-day liberals, they would be leading the effort to reform entitlements along the lines outlined by Ryan. Instead, they are fierce critics of his plan.