Stop Raising Taxes On The Poor, President Obama

That was a disingenuous speech on economic inequality that President Obama gave last week. “Making sure our economy works for every working American….It drives everything I do in this office,” the president thundered on Wednesday.

“Since 1979, when I graduated from high school,” he went on, “our productivity is up by more than 90 percent, but the income of the typical family has increased by less than eight percent.” Funny, in 2007, the year before Barack Obama won the presidency, the typical family took in not 8%, but 18% more than it had in 1979.

What happened—there’s been a 10-point drop in median income since George W. Bush’s last hurrah? If you listened to the speech, the cause was an old chestnut. “Trickle-down ideology became more prominent.”

In idiomatic American English, “trickle-down” refers not to the brutalization of the poor since 2007, but to the apparent iniquitous effect of the President Ronald Reagan tax cuts that were fully enacted way back in 1983. Here’s what happened to median family income from 1983 through Reagan’s last year in office, 1989: up 14%.

Last week’s speech was a clutter of misinformation and errors, on the order of Obama classics from over the years. But let one thing be clear. It is getting mighty difficult in this country to overcome reduced circumstances. The fault lies with the president and his allies in Congress and the states, specifically with legislation and policy that has been promulgated since 2007.

President Obama, simply put, is responsible for a set of policies that may qualify as the largest collective tax increase that the lower classes and the poor have ever endured in this country.

Never heard of this? Don’t blame Casey B. Mulligan, the world’s foremost labor economist. Last year, he published a rich book, The Redistribution Recession, which made the case that economic growth has been lacking in the recovery from the Great Recession mainly because the government has made it un-remunerative for those lacking a job to pursue and obtain work.

The basic metric is as follows. Before the Great Recession, an unemployed person averaged about $10,000 in government benefits. With the stimulus programs that hit in 2008 and 2009, that figure leapt to $16,000. It has recently moderated to $14,000, all in constant dollars.

Mulligan points out that there have been fewer unemployed not receiving benefits through the Great Recession than there had been prior to 2008. The probable cause is that unemployment brought in compensation circa 50% greater than before. Hence the “redistribution recession.”

You know all the programs that did this, the babies of the 2009 stimulus package and the like: the extension of unemployment insurance; homebuyer credits and mortgage forgiveness; food-stamp eligibility expansions. All well and good, you may say, for a nation enduring tough times.

But as we were supposed to have learned some time ago, the problem with government benefits for the poor is that they make going back to work an expensive proposition. If you quit the dole for work, not only are you subject to income and social security taxes (some 18%) on the extra money that working brings, you also must progressively forfeit all the government benefits.

In Mulligan’s analysis, the crucial income threshold seems to be around $30,000 per year. If you are making less than that, you remain eligible for the panoply of benefits. If you start making more, you start losing the benefits, and fast. When you go from non-work to work at $30,000 and up, you start paying the 18% and forfeiting the $14,000 in benefits. And then comes the phase-out of the earned income credit (EIC).

Mulligan concludes that new programs enacted since 2007 have added about 15 points to the marginal income taxes facing those returning to work at the lower end of the income scale. This does not take into account the considerable taxes that already faced such workers prior to 2007, which because of the EIC phase-out were already well above the statutory 18%.

So in our day, those returning to work face marginal income taxes in excess of 30%, probably considerably higher.

Then comes the Affordable Care Act. In a paper last month, Mulligan demonstrated how Obamacare is introducing still further negative returns to work for the lower classes. One illustrative section of the paper was called, “Part of the Population Will Have Their Work Incentives Erased.” The example proved that on account of Obamacare means-testing, take-home pay in many cases will be greater if wages are in the $20,000 rather than the 30,000-range.

In such an environment, it makes sense for those at the low thresholds to keep over-the-table earnings to a minimum. We’ve been growing poor people in this country over the last five years because the government has determined to make it so. President Obama fulminates about inequality as if it’s someone else’s fault, while the policies that bear his name make a growing underclass the most credible option.