A healthy dose of redistribution

THE growing gap between rich and poor is a defining feature of 21st-century America. Barack Obama devoted time to the conundrum of income inequality in his state of the union speech last night, and pushed for raising the minimum wage. Yet he failed to trumpet a main way he is reducing inequality: Obamacare. Mr Obama did praise his health-care law, but its effect on redistributing income went undiscussed.

By one measure, income inequality has widened during Mr Obama’s presidency. From 2009 to 2012 income for the top 1% rose by 31.4%, whereas the bottom 99% saw income rise by just 0.4%, according to a report from Emmanuel Saez and Thomas Piketty. However, this tally of income excludes taxes and transfers from the government, such as Social Security and health subsidies from Medicare, the health programme for the old, and Medicaid, the health programme for the poor. Americans received a whopping $1.5 trillion in net health-care subsidies in 2012, in the form of government programmes and employers’ contributions to health insurance. That $1.5 trillion was equal to 13% of Americans’ disposable income—that is, income minus taxes.

Obamacare includes new taxes and dramatic changes in the subsidies for health care. These measures are expected to have an impact on income, broadly defined. For example, the law requires employers to offer health insurance, which may spur them to lower cash wages. The law also expands Medicaid to a broader swath of the poor; those earning between 100% and 400% of the federal poverty line are eligible for tax credits to buy insurance on new health exchanges. On top of this, Obamacare taxes adults who can afford but don’t buy coverage; it reduces payments to private Medicare plans; and it raises Medicare taxes for rich families.

Just what these changes will mean for incomes is the subject of a new and timely study from the Brookings Institution, a think-tank. Gary Burtless and Henry Aaron predict that the law’s impact on cash wages will be relatively modest. Workers whose employers begin to offer insurance may see their cash wages dip, while workers who lose employer-sponsored insurance may see their wages rise. But when a broader definition of income is used, including the value of health subsidies and taxes, Obamacare has a bigger impact. Americans in the bottom 10% of income distribution will see an average jump of 7.2%; those in the second decile will see their income jump by 5.3%. For the top 80% of Americans, income will drop. The biggest percentage declines come from the middle class, rather than the very rich, though Mr Burtless points out that the wealthiest Americans would probably see a bigger drop if he and Mr Aaron had better data on their investment income.

The chart above, from Brookings, likely overestimates how much the poorest families value health insurance. Subsidies for health care are all well and good, but they cannot buy groceries or pay rent. When Mr Burtless and Mr Aaron tally the value of insurance against families’ other basic expenses, the bottom decile’s income dips, while income rises for those in the second and third deciles of the income distribution (see the blue bars in Chart 5b of their paper).

The report does not account for Obamacare’s other transfers of income, from young to old and from healthy to sick. But their findings suggest at least two points for further thought. First, Obamacare does indeed redistribute income to the poorest Americans. Republicans will probably see this is as a bad thing. Democrats presumably would hail this as a feat.

Second, generous insurance subsidies may not be the most efficient way to help the poor, particularly as such subsidies may not improve health. Katherine Baicker of Harvard has shown that the expansion of Medicaid in Oregon reduced financial strain, but did not lead to healthier patients. As Obamacare begins to shower health benefits on the poor, the new farm bill looks set to cut $8 billion from the food-stamp programme. So goes the perversity of Washington: give the poor more than they want of one thing, while cutting what they need most.