How Much Does President Obama's Budget Redistribute Income?

 
 
September 21, 2009

Special Report No. 172

Introduction
Throughout last year's presidential campaign and continuing through President Obama's first two quarters in office, income redistribution has been a hot-button topic among policymak­ers, the media, and the general public. The issue was explicitly brought to the forefront of the campaign debate during the now infamous exchange between then-candidate Obama and "Joe the Plumber," who asked why the candi­date wanted to tax people like him who own a business that makes $250,000. Obama replied, "... I think when you spread the wealth around, it's good for everybody."

How much should the nation's tax and spending programs move money down the in­come scale? Unfortunately, the basic questions needed to inform that debate have not been answered: "How much are we actually redistrib­uting right now?" and "How would President Obama's proposals change the amount of redis­tribution?"

Answering those questions is the purpose of the Tax Foundation's fiscal incidence project, whose initial products are this Special Report and the accompanying working paper. Here we focus on 2012 because that is the first fiscal year (Oct. 1, 2011 - Sept. 30, 2012) during which the full Obama policy agenda is sched­uled to be in effect, including his treatment of the expiring Bush tax cuts. That is also the first year in which Obama wants significant tax rev­enue deposited into his proposed health reform reserve fund. It is also when his climate rev­enues proposal kicks in. The projected budget deficit for FY 2012 is large, $796 billion, but it is actually much smaller than what the admin­istration's budget predicts for fiscal years 2009 and 2010, both of which exceed $1.5 trillion.

In the matter of income redistribution, we conclude that President Obama's proposed bud­get lives up to his campaign promise to collect more tax revenue from high-income people and redistribute it down the income spectrum—what he would call a more even distribution of the economic pie.

On the paying end, we find that during FY 2012, if the new budget's policies are enacted, the amount redistributed from the top-earning one percent of U.S. families will increase by $109,000 per family up to a total of $523,000 per family.2 That is up from $413,000 per family, the redistribution that would prevail in 2012 even if none of Obama's major new initia­tives were enacted. The upper-income families in the 95th through the 99th percentile of earn­ers will lose only slightly more of their income. The large swath of so-called upper-middle-income families, those in the 70th through the 95th percentiles, will continue to have their income redistributed to other families lower on the income spectrum, but Obama's policies will actually decrease the amount they lose.

On the receiving end, Obama's policies will redistribute more income to families in the bottom 70 percent of the income spectrum, with most going to the bottom 30 percent, over $1,000 per family. Income redistribution to families in the 40th-70th percentiles would not change much.

Key Findings:

• Families' share of tax burdens is compared to their share of government benefits, by income class, yielding a comprehensive measure of income redistribution. Customarily, only tax burdens are analyzed by income class. We apply this framework to President Obama's Fiscal Year 2010 Budget released in May, as revised by the Mid-Session Review released in late August.

• In FY 2012, when President Obama's policies have taken effect, income redistribution from the top-earning 1 percent of families will rise by an average of $109,000 per family. Families in the 95th-99th percentiles would pay slightly more, almost $1,000 per family.

• On average, a family in the top 5 percent would have an additional 2.8 percent of its market income redistributed as a result of President Obama's policies (compared to baseline); for the top 1 percent only, that figure is nearly 6 percent.

• President Obama's policies would reduce the amount of income redistribution from families in the 70th-95th percentiles.

• President Obama's policies would increase the amount of income redistribution to families in the bottom 70 percent of the population, especially the bottom 30 percent.

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