Distributional Analysis of President Obama’s Fiscal Year 2011 Budget Policies

February 10, 2010

Download Fiscal Fact No. 209

Fiscal Fact No. 209

This Tax Foundation Fiscal Fact takes a preliminary look at the distributive effects of President Obama’s budget, released last week. Using the Tax Foundation’s Fiscal Incidence Microsimulation Model, we are able to estimate the level of income redistribution in both existing and proposed federal fiscal policies and thereby estimate the change in income redistribution that would come about as a result of a given policy change.

Even though Pres. Obama’s budget is titled “Fiscal Year 2011 Budget,” it includes estimates for his policy proposals over the next ten years (2011-2020). Therefore, this Fiscal Fact looks at fiscal year 2012 so as to avoid complications that come about as a result of the fiscal-calendar year split of the Bush tax cuts set to expire on Dec. 31, 2010. For simplicity, the baseline used in this Fiscal Fact is the same baseline used in Pres. Obama’s budget. Also, due to uncertainty regarding the specifics involved, we exclude from this analysis three “allowance” categories in the president’s budget: jobs initiative allowance, health care reform allowance, and climate change allowance.

Our measure of income redistribution is relatively simple as we ask two hypothetical questions:

(1) How much in federal taxes does a given income group pay under a given set of tax policies?

(2) How much in federal taxes would that income group pay under a benefit principle system of taxation whereby a given family’s tax share was equal to its share of the benefits from government spending?

The difference between the answers to these two questions is our measure of income redistribution. Before we present the results, we should answer two commonly asked questions pertaining to the methodology. First, we assume that national defense benefits each family in proportion to its share of cash income received. Second, we assume that the deficit is borne by today’s families and is financed by a combination of proportional tax increases and proportional spending reductions (entitlements weighted more heavily). For a further discussion of the methods used in this report, see our Special Report released on last year’s budget.

Results

Our results are presented in the three tables below. Table 1 summarizes the average change in income redistribution from Obama’s policies. Table 2 provides somewhat more detail, including a tax and spending breakdown, while Table 3 shows the aggregate effects of federal fiscal policies on the distribution of income.

Overall, the results show Pres. Obama increasing the level of income redistribution to low-and-middle income families, while families in the top 1 percent of the income spectrum would face higher taxes and therefore more redistribution. The primary driver of this result is Pres. Obama’s expiration of the Bush tax cuts for high-income families, as well as his proposed 28 percent value limitation on itemized deductions.

Table 1: Summary of Income Redistribution in Fiscal Year 2012 Pre- and Post-Obama Budget Policies

Market Income

Percentile

Average Income Redistribution
(OMB Baseline)

Average Income Redistribution
(Obama Policy)

Change in Income Redistribution

0-10%

17,467

17,962

494

10-20%

10,299

11,148

850

20-30%

8,759

9,597

838

30-40%

6,105

6,721

616

40-50%

5,331

5,766

435

50-60%

3,172

3,694

522

60-70%

-203

475

678

70-80%

-3,897

-2,952

946

80-90%

-10,720

-9,172

1,548

90-95%

-16,864

-14,316

2,548

95-99%

-48,649

-48,404

245

99-100%

-407,943

-509,257

-101,314

ALL

0

0

0

Exhibit:

Top 20%

-39,965

-43,643

-3,678

Top 10%

-69,279

-78,195

-8,916

Top 5%

-121,345

-141,648

-20,304

Top 1%

-407,943

-509,257

-101,314

Table 2: Distributional Impact on Average Families of Proposed Policies in President Obama’s Budget, Fiscal Year 2012

Market Income
Percentile

Average Market Income

Obama Policy

Change from OMB Baseline

Average Tax

Average Spending


Average Income Redistribution

Average Tax

Average Spending


Average Income Redistribution

0-10%

5,356

1,804

19,766

17,962

-35

459

494

10-20%

19,591

4,066

15,215

11,148

-55

795

850

20-30%

33,244

6,691

16,288

9,597

-126

711

838

30-40%

47,103

9,818

16,538

6,721

-234

382

616

40-50%

63,517

13,052

18,818

5,766

-364

71

435

50-60%

83,606

17,544

21,238

3,694

-539

-17

522

60-70%

107,555

22,929

23,405

475

-758

-80

678

70-80%

136,622

29,757

26,805

-2,952

-1,094

-148

946

80-90%

182,188

41,271

32,099

-9,172

-1,797

-249

1,548

90-95%

254,912

57,174

42,858

-14,316

-2,901

-352

2,548

95-99%

443,197

113,145

64,741

-48,404

-968

-723

245

99-100%

2,311,279

778,178

268,921

-509,257

97,570

-3,744

-101,314

ALL

99,575

24,312

24,312

0

189

189

0

Exhibit:

Top 20%

360,377

96,948

53,305

-43,643

3,131

-547

-3,678

Top 10%

538,985

152,756

74,561

-78,195

8,071

-845

-8,916

Top 5%

821,166

247,701

106,053

-141,648

18,970

-1,334

-20,304

Top 1%

2,311,279

778,178

268,921

-509,257

97,570

-3,744

-101,31

Table 3: Distributional Impact on Family Income Groups (Aggregate) of Proposed Policies in President Obama’s Budget, Fiscal Year 2012


Market Income
Percentile

Market Income (millions)


Share of Income

Income After Redistribution


Aggregate Change in Redistribution from Policies
(millions)

OMB Baseline

OMB Policy


Total Income
(millions)

Share of Income


Total Income
(millions)

Share of Income

0-10%

94,011

0.7%

400,608

2.8%

409,286

2.8%

8,678

10-20%

344,024

2.4%

524,864

3.6%

539,788

3.7%

14,924

20-30%

555,082

3.9%

701,340

4.9%

715,326

5.0%

13,986

30-40%

736,851

5.1%

832,348

5.8%

841,987

5.8%

9,638

40-50%

932,215

6.5%

1,010,459

7.0%

1,016,839

7.1%

6,381

50-60%

1,090,963

7.6%

1,132,357

7.9%

1,139,166

7.9%

6,809

60-70%

1,269,713

8.8%

1,267,317

8.8%

1,275,325

8.8%

8,008

70-80%

1,532,643

10.6%

1,488,924

10.3%

1,499,531

10.4%

10,608

80-90%

1,994,960

13.8%

1,877,571

13.0%

1,894,527

13.1%

16,956

90-95%

1,387,724

9.6%

1,295,917

9.0%

1,309,789

9.1%

13,871

95-99%

1,937,473

13.4%

1,724,802

12.0%

1,725,872

12.0%

1,070

99-100%

2,562,874

17.8%

2,110,524

14.6%

1,998,182

13.9%

-112,343

ALL

14,412,829

100.0%

14,412,829

100.0%

14,412,829

100.0%

0

Exhibit:

Top 20%

7,883,031

54.7%

7,008,814

48.6%

6,928,369

48.1%

-80,445

Top 10%

5,888,071

40.9%

5,131,244

35.6%

5,033,842

34.9%

-97,401

Top 5%

4,500,347

31.2%

3,835,326

26.6%

3,724,054

25.8%

-111,273

Top 1%

2,562,874

17.8%

2,110,524

14.6%

1,998,182

13.9%

-112,343


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