President Obama says income inequality is the "defining challenge of our time" and insists that America must address the difference between the rich and the poor. He may be on to something, but not in the way he thinks — or wants to talk about.
A new report by the Congressional Budget Office takes a look at actual tax-return data to measure precisely how income is distributed in the United States. These nonpartisan accountants discovered that the bottom 40 percent of those eligible to pay taxes pay absolutely nothing to the IRS. In fact, they get a sizable part of their income from refundable tax credits and other federal freebies. Those in the middle of the scale — the people Mr. Obama says are always on his mind — pay an average income-tax rate of 1.6 percent. By comparison, the reviled "1 percent" gave the government 20.1 percent of their income. The White House thinks this is unfair — to those paying the 1.6 percent.
The poor will always be with us, and only a fool expects income disparity to go away. But a strong, thriving economy will shrink that disparity. What matters is that the real income levels of the poorest Americans continues to rise over time. The great Scottish economist Adam Smith, a major influence on the Founding Fathers, noted the "industrious and frugal peasant" in Europe lived a better life than a king in an uncivilized country. The principle holds today. Cable television, heating and air conditioning, cellphones and the Internet are part of the technology that makes life easier for everyone. A ride on an air-conditioned bus or streetcar is much more comfortable than a king ever was on a wintry ride down a cobblestone street in a carriage drawn by six snow-white horses.
Not even a government has a magic wand to wave and suddenly the owner of the restaurant makes no more than a waiter or busboy. The genius of the American economic system is that the busboy can work his way up and become the owner, or at least the manager. Many do. The economist Steven Horwitz calculates that 95 percent of households that were classified as "poor" in 1975 were no longer "poor" in 1991.
Income disparity is large and growing, however, in the nation's capital. Since 2009, when Mr. Obama unleashed an unprecedented wave of government spending, the Washington area has become the jobs mecca of the United States. Unemployment in the region is well below the national average, and the income disparity between those in the capital region and those outside the Beltway has grown accordingly. Income has shriveled in much of the country, but in the District of Columbia income has exploded. According to the Census Bureau, the median household income in America is $51,000, compared with $66,000 in the District. The capital area was once considered to be below average. Washington may be the only place in America where the "stimulus" actually worked.
Many have figured out that a government gig can be the ticket to the upper class. A couple who works for the Michigan state government, for example, would enjoy household compensation high enough to qualify as upper class. Thanks to the greed of public-sector unions, benefit packages in Michigan have grown so out of control that the average state compensation exceeds $100,000, according to the Mackinac Center for Public Policy. Those lavish salaries are paid by taxpayers who make significantly less in private business.
This is the disparity that deserves Mr. Obama's concern and attention. His government is getting rich, and the rest of us are paying for it.