Income Inequality—Day Three

A look at why such inequality of income distribution is occurring. Just why are the rich getting so much richer and the poor getting poorer? Capital gains and dividends. But don’t take my word for it.

Thomas Hungerford, leader of the Congressional Research Service study Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 has just concluded another study addressing Income Inequality. Changes in Income Inequality Among U.S. Tax Filers between 1991 an 2006: The Role of Wages, Capital Gains, and Taxes, Thomas Hungerford, 23 January 2013 takes a look at the income distribution and elements the of influence. One important note made by Hungerford during his discussion whether it is good or bad to have this growing wedge talks about another very important issue, the potential for upward mobility. Being low/middle class isn’t really a bad thing IF I can work really hard and smart and move up…the American Dream right? Unfortunately research indicates income mobility is not very great and the degree of income mobility has either remained unchanged or decreased since the1970s (Hungerford 2011, and Bradbury 2011). It looks that if we fail to do something different, the American Dream may be on life support at best.(I really recommend a read of the Bradbury paper, she advises the Federal Reserve and her work is extensively documented)


A graph of the Hungerford study findings

But here are a few key points from the January research The single greatest driver of income inequality over a recent 15 year period was runaway income from capital gains and dividends.”

And direct from the report abstract: “Changes in wages had an equalizing effect over this period as did changes in taxes. Most of the equalizing effect of taxes took place after the 1993 tax hike; most of the equalizing effect, however, was reversed after the 2001 and 2003 Bush-era tax cuts. Similar results are obtained with other inequality measures.”

Or, as Hungerford put it in an interview with Greg Sargent: “The reason income inequality has been increasing has been the rising income going to the top one percent. Most of that has come in capital gains and dividends.”

In other words, wealthy beneficiaries of low tax rates on capital gains and dividends are doing extremely well — and their runaway wealth is a major driver of income inequality. A lot of that money could and should be taxed as ordinary income — as some folks in Washington want as a way to help resolve the sequester, and many believe is a way to reduce the growth of income inequality.

As a next project I hope to do up a couple tax examples to demonstrate the differences in how our current tax rates and rules affect the tax bills and percent paid by some hypothetical couples in each of low, middle, and high incomes. What I’m most interested in is how differently incomes are taxed dependent on from where the income was received. Do you work for it? Or do you already have so much you don’t need to?

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