“We have enormous long-term budget gaps, and you just can’t close that kind of gap with messing around with income taxes on the top 2 percent of households,” said William Gale, director of the Economic Studies program at the Brookings Institution. “There’s just not enough money there.”

Wealth Gap

Economically and politically, though, using the tax code to try to close the income gap makes perfect sense for Democrats. During the past three decades, income inequality expanded dramatically while middle-class wages stayed relatively flat, stoking frustration among workers. The gap between the very rich and everyone else grew especially pronounced. In 1980, the top 1 percent of taxpayers collected 9.1 percent of the country’s pre-tax income. By 2006, the income share for those at the pinnacle had more than doubled, to 18.8 percent.

Political appeals to middle-class pocketbooks can be powerful, because voters realize direct benefits from taxing others and cutting taxes on themselves. The broad concept underlying a sharply progressive tax code also retains solid public support. In a Gallup Poll last October, 58 percent of respondents said they thought money and wealth were divided too unevenly, and 46 percent said they favored policies that would “redistribute wealth by heavy taxes on the rich.”

After entering the White House, Obama moved quickly to persuade Congress to incorporate a centerpiece of his campaign platform, the so-called Making Work Pay middle-class tax credit, in the economic stimulus package enacted in February. That tax cut is set to be on the books only until the end of 2010, when most of the Bush-era tax changes are on course to expire. That group of provisions includes lower income tax rates, elimination of the so-called marriage penalty and a larger child tax credit. When lawmakers get down to the business of deciding which pieces of the expiring code to retain or jettison, they will have multiple opportunities to make distributional shifts.

So, on the surface, the tax code would seem to be an efficient way to address income inequality. After all, if the distribution of income is a problem, then the agency that collects tax payments and sends out refunds seems like a logical place to look for solutions.

And to some extent, the progressive income tax system already serves that purpose by imposing higher effective tax rates as incomes rise. Those at the very top of the income ladder face the highest marginal rates, the most limits on deductions and generally the biggest bite from the alternative minimum tax, the parallel tax system designed to prevent anyone with a high income from legally avoiding taxes altogether.

Those at the bottom of the income scale, meanwhile, can benefit from a variety of tax credits that can be “refunded” even to those who owe no tax — which puts more cash into the pockets of some workers than they earn each year.

Those features mean the current system already redistributes income. Middle-income taxpayers get a larger share of after-tax income than pre-tax income, and upper-income taxpayers experience the reverse effect. “The tax code is a very effective mechanism to lean against the trend of greater inequality,” said Chuck Marr, director of federal tax policy at the liberal-leaning Center on Budget and Policy Priorities, a group that advocates greater use of refundable credits and tax policies to aid lower-income workers.

But the tax code merely addresses the symptoms of inequality, not its underlying causes, Gale said. Returning to the Clinton-era top tax rate of 39.6 percent won’t undo the broader trends that increase inequality. “The impact,” he said, “is just not as big as the stock market boom or the rise in demand for skilled workers due to communications and technology and globalization.”

Many of the president’s domestic aspirations — including giving Americans wider access to medical care and higher education — are intended to act as economic levelers by enhancing the strength and productivity of the labor force. But even if those goals are realized, they would take many years to significantly affect the distribution of income. And depending how it’s designed, another of Obama’s desires — a cap-and-trade system designed to limit greenhouse gas emissions — might work against the goal of wealth distribution by effectively imposing a regressive levy on all Americans. (To help counter that, Obama wants to tie an extension of his middle-class tax credit to any climate change legislation.)

The limitations of tax policy, however, don’t mean it should be discarded as an inequality-fighter, Gale argued. “There’s no way that a reasonable tax policy is going to offset all of the inequality created by the global economy,” he said. “It’s just a flea vs. a hammer. But tax policy can work to moderate that.”

Conservative-leaning academics and lawmakers argue, however, that redistributive tax changes are counterproductive, because they can discourage work and conceive of economics as a zero-sum game. “The problem is, they run the risk of killing the goose that laid the golden egg,” said Peter Roskam , a Ways and Means Republican from Illinois.

Democrats have a ready comeback to that, noting that in the late 1990s, when the top income tax rate was 39.6 percent, the economy was growing at an annual rate of 4 percent or better — stronger than in the 10 years before or since. They contend that Congress isn’t considering the sort of redistributionist policies that might stunt economic growth.

“You go back to when I was a kid, growing up in the Eisenhower administration. As I recall, the top rate was about 90 percent. That’s not a good thing, and right now it’s not that we’re arguing between 80 and 90 percent,” said Thomas R. Carper of Delaware, a Democrat on the Senate Finance Committee. “If I were making a million or two million dollars a year, I don’t think I’d complain a lot” if the tax rate were 39.6 percent, he said.

Shifting Scales

Besides its questionable power to change long-term economic trends, the tax code is not a precise tool for determining which families deserve assistance from government and which can or should pay more.

Each taxpayer’s final bill depends on factors that don’t correlate with income, purchasing power or need. That’s because the tax breaks scattered through the law create all sorts of incentives, from earning money through investments to buying energy-efficient appliances to purchasing a house in the District of Columbia. One family that could objectively be considered far wealthier than another might still have a far lower annual tax bill.

Differences in regional costs of living also affect Americans’ place on the income scale. The federal government’s own employee compensation system demonstrates this, by giving extra “locality pay” for workers in high-cost areas. A federal employee who’s paid $39,194 a year for working in the New York area would earn $34,875 in the rest of the country for doing the same job, but the New Yorker would pay more in taxes, even though his purchasing power is about the same.

Those disparities make it difficult for lawmakers to design proposals aimed squarely at the middle class. If he keeps it, Obama’s campaign promise to support tax increases only for people making more than $200,000 (and married couples making more than $250,000) will affect people differently from place to place. Although Obama’s proposal targets just the top few percent of all U.S. wage earners, it would mean higher taxes for a disproportionate share of the people living in such high-cost, high-wage areas as the New York and Los Angeles suburbs.

The tax code has some naturally built-in offsets: Those residents of New York, New Jersey and California, for example, may deduct their generally higher mortgage payments and their relatively higher state and local taxes — all of which are also a function of the same higher cost of living. Then again, the alternative minimum tax often takes a bigger bite out of their income by limiting their ability to benefit from some of those deductions.

David Albouy, an assistant professor of economics at the University of Michigan, has estimated that the tax code contributes to a wealth transfer of almost $300 billion annually from higher-wage to lower-wage areas.

Several House members from New York, including Democrat Steve Israel , introduced a bill this month that would adjust income tax brackets for the cost of living. While $150,000 might be considered “extravagantly wealthy” in some parts of the country, Israel said, his constituents on Long Island view that as a family income for just barely getting by.

“All federal policy that is intended to address middle-class economics starts off on the wrong assumption,” he said. “Nobody’s defined what the middle class is, because no one works into the calculation that actual cost of living that middle-class families confront.”

Democrats generally agree with Obama’s desire to draw the line for raising taxes at a relatively high income level because the party’s core political base is in the Northeast and along the West Coast, where both expenses and salaries tend to be higher than in the rest of the country.

Still, the administration’s position may have this unintended consequence: It will be difficult, without taxing people of lesser means as well, to generate sufficient revenue to reduce the deficit while expanding access to education, combating climate change and providing more Americans with health insurance.

“When we finally address the long-term fiscal imbalance, it’s just absolutely clear that a lot of the burden has to fall on the middle class,” said Alan Viard, resident scholar at the American Enterprise Institute.

Oregon Democrat Ron Wyden , a member of the Senate Finance Committee, acknowledged the difficulty of the task ahead. “It is definitely not impossible,” he said. “It’s going to be a big lift at $250,000.”

Conflicting Goals

Even if Democrats succeed in starting to equalize the distribution of after-tax income, they may also undermine efforts to sustain such policies.

That’s because every upward tilt of the tax code pushes more and more people off the tax rolls entirely. Obama’s premise in pushing the Making Work Pay credit was that the burden of Social Security and Medicare taxes was too much for some, particularly those who owe little or no income tax — and the credit was designed to free a larger number from having to pay anything. If the goal is to reduce income inequality, the new Making Work Pay credit and its ending of tax liability for millions of Americans are signs of success. But if the goal is to create the sense of shared national sacrifice that Obama talked about in his campaign, those same things might not be all that beneficial.

People who pay no taxes have fewer reasons to see government as a cooperative exercise, many political experts argue. That’s particularly important for payroll taxes, which finance the middle-class entitlements of Medicare and Social Security and are often viewed as separate from the rest of the government. Taxpayers need to have “skin in the game,” says Wisconsin Democrat Ron Kind , a member of Ways and Means. “I’m not a big subscriber to social engineering through the tax code,” says Kind, who says he wants to make sure the tax code and other federal policies encourage savings and investment while addressing the problems of middle-class Americans who are having to run faster to keep up.

Scott Hodge, president of the Tax Foundation, a nonpartisan group that favors a simple, economically neutral tax code, warns more bluntly about the consequences of shifting the tax burden too far up the income ladder. “Are we sowing the seeds of social conflict by having a majority of people who can demand ever more government at no cost to themselves?” Hodge asked. “How long are those people at the top willing to continue to pay more and more without growing increasingly resentful of the inequity of it all?”