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Tax hike on rich will do little to close huge income gap

Contrary to modern Republican assertions, there is nothing un-American about Barack Obama's desire to soak the rich. Presidents from Thomas Jefferson through to Franklin Roosevelt and Bill Clinton have made taxing the wealthy key planks of their economic platforms. And no one questioned their patriotism.

Mr. Obama is picking up where Mr. Clinton left off by seeking to undo George W. Bush's tax cuts for the rich. The President is playing a stronger hand since his re-election last month, and the Republicans that matter have all but conceded that taxes on the wealthy will be going up, regardless of the outcome of the "fiscal cliff" negotiations.

Time will tell whether Mr. Obama succeeds in becoming the Ronald Reagan-in-reverse he mused about during the 2008 election campaign. By successfully challenging a key tenet of the Reagan revolution – that marginal income-tax rates must only go down – he might be on his way.

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Still, despite the hopes of some Democrats, the $1-trillion (U.S.) or so in new taxes on upper-income earners that Mr. Obama can reasonably expect to extract over the next decade will not do much to reduce the staggering rise in U.S. income inequality since the Reagan era. Mr. Obama will need to engineer a bigger revolution for that.

At best, the new taxes will help the U.S. government fulfill its now nearly all-consuming role of providing health care and pension benefits for Americans over 65. Only a reinvigorated middle class could shrink the chasm between the rich and everyone else. And that would take more public investment at the lower end of the age spectrum.

A president has to start somewhere, however.

Jefferson, the third U.S. president, got the tax-the-rich ball rolling, favouring tariffs to do the job because "the rich alone use imported articles." It was not until a century later, in 1913, that the federal income tax was established. By 1918, the richest 1 per cent of American households paid 80 per cent of all income taxes, according to a recent New Yorker article by Harvard University historian Jill Lepore.

After hitting 91 per cent under Franklin Roosevelt, the top marginal income-tax rate settled at 70 per cent in the 1970s, when there were 25 different tax brackets. Mr. Reagan cut the number to just two, with a top rate of 28 per cent.

Mr. Clinton got Congress to raise the top income-tax rate to 39.6 per cent in 1993. George W. Bush cut it to 35 per cent. And now, Mr. Obama wants to restore the Clinton-era rate on households earning more than $250,000 annually. (Vice-President Joe Biden indicated on Friday that Mr. Obama might settle for a somewhat lower rate than 39.6, however.)

The Democratic push to raise rates has less to do with balancing the budget, which many in the party's base consider irrelevant, than a desire to reverse the jaw-dropping rise in inequality that began with the Reagan years. As economists Thomas Piketty and Emmanuel Saez have noted, the top 1 per cent of Americans earned 23.5 per cent of all income in 2007, compared with only 9 per cent in 1970.

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There is evidence the gap has grown since the recession. Using Internal Revenue Service data, Prof. Saez found that the top 1 per cent captured 93 per cent of all income growth in 2010. And the U.S. Census Bureau has reported that the top 1 per cent saw a 5.5-per-cent increase in incomes in 2011. The bottom 80 per cent saw a 1.7-per-cent decline.

It is not hard to figure out why. While Wall Street recovered quickly after the crash, middle-class America has been hollowing out. A study this year by the National Employment Law Project found that mid-wage occupations accounted for 60 per cent of U.S. job losses during the recession but only 22 per cent of job gains made as of the first quarter of 2012. Low-wage positions accounted for most of the gains.

The November employment report, released Friday, underscores the trend. While the overall jobless rate fell to 7.7 per cent, more than 20 million Americans are either without a job or forced to settle for part-time work because full-time employment is unavailable.

The passage this week of right-to-work legislation in Michigan suggests wages there will not be rising any time soon. Even with a union, new auto-plant jobs pay barely half of the pre-bailout rate.

It will take a lot more than a slightly more redistributive government to recreate a path to a middle-class lifestyle for most Americans. Mr. Obama's push to invest in infrastructure, research, education and health care for the working poor will help. But those investments risk being crowded out by the ballooning costs of Medicare and Social Security of the elderly. And there are not enough rich Americans to tax to pay for it all.

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About the Author

Columnist Konrad Yakabuski writes on politics, policy and business for The Globe and Mail’s Comment section and Report on Business. More


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