Graph of the Day: Capital Gains Drive Income Inequality
As the mainstream Republican establishment begins to coalesce around Mitt Romney following his caucus victory in Iowa, the former Massachusetts governor should also come under increased scrutiny for his hardline conservative positions on tax policy, which many Americans rightly perceive as out of touch with both fiscal reality and growing economic inequality. Romney’s stated opposition to any new income taxes, his promise to lower capital gains tax rates and eliminate the estate tax look particularly out of touch in light of a new report from the Congressional Research Service, which concludes that capital gains—the primary source of income for Mitt Romney and others in the top 1 percent—are now the single greatest driver of income inequality today.
According to the report, GDP grew a healthy 38 percent in the decade between 1996 and 2006 (the last year before the boom-bust cycle of 2007-2008), with average inflation-adjusted after-tax income increasing about 25 percent. But that average conceals an astounding divergence in outcomes between the nation’s richest and poorest citizens: while income of the wealtheist 1 percent nearly doubled, the bottom 20 percent actually saw their income decrease by 6 percent. And because the CRS analysis only used data from active tax filers, those numbers may even underestimate the true width of the income gap.
The CRS data confirms earlier reports from the likes of the Congressional Budget Office that suggest that the tax code has become less progressive over time, decreasing inequality by less than 4 percent in 2006. Still, the inequality encouraged by the Bush tax cuts—which provided enormous savings at the top of the income distribution—pales in comparison to the incredible shift from labor income to capital income among the wealthiest 5 percent, which, Jared Bernstein muses, “seems endemic of a society that devalues work while providing outsized rewards for speculation and asset accumulation.”
The graph below, culled from the CRS data, illustrates the growing rift between the top 1 percent—who now take the majority of their income from cheaply taxed capital gains and dividends—and the bottom 99 percent, who continue to derive nearly all of their income from wages. It is a troubling paradigm shift in the way our society values labor and rewards risk-taking, but perhaps a natural evolution for the “you’re on your own” culture of today’s Republican party.
For more, check out Greg Anrig’s 10 Reasons to Eliminate the Tax Break for Capital Gains.
Graph of the Day: CBO Report Confirms Growing Inequality
By Benjamin Landy
Just in time to ride the wave of populist anger now sweeping the nation, the Congressional Budget Office released a new report on income inequality today, confirming what most families already know: few but the wealthiest Americans have seen their income grow appreciably since 1979.
Although the report was commissioned several years ago, by Senators Max Baucus and Charles Grassley, the timing couldn’t be more appropriate for the current political climate. At a time when many Americans are struggling like never before, the CBO report illustrates in stark detail just how little middle class income has grown in the last thirty years. As the graph on the right shows, the real after-tax income of the middle class (broadly defined as those between the 20th and 80th percentiles) has improved little more than 1% per year on average, while incomes for the richest 1 percent have surged nearly 300 percent, or 7% per year. Income for the top quintile as a whole grew 65 percent during the period, substantially more than the bottom eighty but still nowhere near that of the top one percent.
The CBO suggests several theories as to why the wealth gap has widened so dramatically in recent years (although in keeping with their mandate “to provide objective, impartial analysis,” the study provides no recommendations). The first is that technological changes have increased returns for entertainers like athletes, actors and musicians, as new forms of mass media have allowed them to access wider markets. A related theory is that executives have seen their paychecks skyrocket as corporations have merged, growing in size and scope relative to 1979, igniting a bidding war between firms seeking to retain the best (and best compensated) talent. The CBO also notes a 2010 study that identifies surging income growth in the financial and legal sectors as a primary source of growing inequality; another pinpoints financial deregulation and risky new financial instruments like derivatives.
Whatever the cause, the CBO report concludes that government policy has done little to mitigate income inequality, and may even have exacerbated the problem over the course of the period studied. Typically, the government uses transfers and federal taxes to reduce income inequality, by boosting income for the poor and taking more taxes from the rich. But the effective tax rate for the rich has fallen since 1979, while programs that disproportionally help the poor—like Social Security, Medicaid, food stamps and unemployment insurance—have grown less effective. As the graph on the left shows, those programs are doing less today to reduce income inequality than they did in 1979. Tax rates for the rich, meanwhile, are at their lowest levels in fifty years.
Still another way to consider this growing gap is to compare Gini coefficients, where a more distorted line (in the charts below) indicates a greater degree of inequality. The CBO report helpfully breaks down these calculations in terms of labor income, business income (income derived by owners of private businesses), capital income (dividends and rental income) and capital gains for both 1979 and 2007. Interestingly, while labor income inequality has remained much the same, business and capital income inequality has increased substantially. The concentration of capital gains, unsurprisingly, has always been the most unequal of income sources, and it has only grown more unequal in recent years.
Malcolm Gladwell: What If We Told People “You Can’t Make More than Two Million Dollars”?
Author Malcolm Gladwell marvels at how much we’ve changed as a society that once had a top marginal income rate above 90 percent — in effect telling people “you can’t make more than two million dollars,” as Gladwell puts it — but that now regards even the suggestion of higher taxes as anti-American.
Gladwell’s point isn’t that we should impose a cap on income, nor am I recommending one. Nevertheless, it is deeply troubling the degree to which our values have changed over the last half century. What was once considered a civic duty (albeit grudgingly, by some) and responsibility to one’s community is now openly derided as an act of class warfare; an assault on the nation’s “job creators” (an admittedly brilliant euphemism).
“American” values have slowly become indistinguishable from the values of the aristocracy because Republicans have won the war of messaging in this country, and the Democratic party has let them. I wonder how far the middle class will have to fall before the American people realize they’ve been duped.
