Campaigns offer ways to dig out of economic hole

The gap between rich and poor in America has grown bigger in recent years than any time since the 1920s, and there are no easy ways for the presidential candidates to close it.

Barack Obama and John McCain both say their economic plans can narrow the income gap, and although Obama's tax plan offers a classic way to do that by raising taxes on the rich, economists think neither is likely to bring dramatic changes.

“Taxes are not going to solve the income gap problem,” said Roberton Williams, principal research associate at the nonpartisan Tax Policy Center. “Nobody's going to stand for the kind of confiscatory taxes you would need.”

He and others said there are many other factors affecting income – including the tumultuous financial markets, technological change, global competition, the erosion of labor unions and corporate pensions, as well as federal tax and regulatory policies. Changing those policies to reduce income inequality could involve politically difficult measures, such as higher taxes, or higher minimum wages and other subsidies.

Obama and McCain offer the kind of income strategies their political parties have been championing for years. Obama, the Democrat, sees a role for government in helping people get opportunities for education, training and work, while the wealthy who benefit most from society have an obligation to contribute more to the collective good.

McCain, the Republican, espouses a version of what some call the “trickle down” theory that allows the rich to keep more of their income, on the theory that they'll invest and spend, thereby creating more jobs and wealth.

Republican loyalists argue that this concept worked well during the Reagan presidency, as the three-year tax cut that began in October 1981 helped pull the nation out of its worst recession since the Great Depression and triggered eight years of prosperity.

Democrats counter that many lower-income earners never enjoyed the benefits of that boom, which was sustained in part by collapsing oil prices and federal budget deficits.

Obama wants to return the two top income tax rates to pre-2001 levels in 2011 – the same rates during as the Clinton era, which saw the longest sustained economic expansion in U.S. history.

That would mean a top income-tax rate of 39.6 percent, far below the 70 percent top rate that existed until 1981, or even the 50 percent top rate of 1982-86 – not to mention the top rates of more than 90 percent that prevailed from the end of World War II until 1963.

The nation's top 1 percent of earners, those making more than $603,402 in 2008, had a 22.9 percent share of all pretax income in 2006, according to a March study by University of California-Berkeley economist Emmanuel Saez.

The top 1 percent's share of the national income pie had hovered around 9 to 10 percent from the 1950s through the 1970s, then began climbing in the 1980s. While Americans at all income levels saw their wealth increase during the 1990s, the top 1 percent's income exploded. Since George W. Bush became president, their share kept growing while everyone else's income barely rose.

Obama's tax plan aims to close the gap a bit. A Tax Policy Center analysis found that those in the lowest 20 percent of income earners, making below $18,981 a year, would see a 5.5 percent boost in after-tax income next year. Those in the top 5 percent, making above $226,918, would see after-tax income drop by 0.1 percent.

Under McCain's plan, the lowest 20 percent would see a 0.2 percent increase in after-tax income next year, while top earners would gain 3.3 percent.

After-inflation median household income last year was $50,233, according to the U.S. Census Bureau. The top 1 percent earned above $603,402, and the top 10 percent earned above $160,972, according to the Tax Policy Center.