2 Center for American Progress | How the Government Subsidizes Wealth Inequality
Low tax rates for capital gains and dividends
Capial gains and dividends are axed a lower raes han oher sources o income. Labor income, such as wages and salaries, is axed a raes o up o 39.6 percen and also subjec o payroll axes. Capial gains and dividends, which are invesmen income, are axed a a op rae o 23.8 percen, which includes he 3.8 percen surax on invesmen income imposed by he Aﬀordable Care Ac, or ACA. Tose lower raes are a subsidy or inves-men income. Subsidies in he ax code are known as ax expendiures, and he nonpar-isan Congressional Budge Oﬃce, or CBO, esimaes ha he ax expendiure or low raes on capial gains and dividends will cos he ederal governmen $1.34 rillion in revenue over he nex 10 years.
axpayers wih incomes in he op 1 percen will ge 68 percen o ha money, while he botom 80 percen will receive only 7 percen.
Low tax rates for investment income almost exclusively beneﬁt the wealthy
Share of total tax beneﬁts
Lowest quintileSecond quintileMiddle quintile5%2%0%0%Fourth quintileHighest quintile75%50%25%0%
Source: Congressional Budget Oﬃce, "The Distribution of Major Tax Expenditures in the Individual Income Tax System" (2013), available at http://www.cbo.gov/sites/default/ﬁles/cboﬁles/attachments/43768_DistributionTaxExpenditures.pdf.
81st-90th: 5%91st-95th: 5%96th-99th: 14%Top 1: 68%
educing ax raes or invesmen income has delivered enormous windalls o he wealhies Americans and exacerbaed economic inequaliy. A sudy by Tomas L. Hungerord o he Economic Policy Insiue ﬁnds ha, “By ar, he larges conribuor o increasing income inequaliy (regardless o income inequaliy measure) was changes in income rom capial gains and dividends.”
By axing capial gains and dividends a a lower rae han oher income, he ederal governmen is making i more likely ha he rae o reurn on capial will exceed he economic growh raehe key driver o Pikety’s heory o rising uure economic inequaliy. Te eﬀecs o preerenial ax raes or capial gains and dividends are mos apparen when looking a he riches o he rich using Inernal evenue Service, or IS, daa on he counry’s op 400 axpayers. Tese axpayers represen he op 0.0003 percen o all 140 million individual income ax reurns ﬁled in 2009, he las year or which daa are available.
Amazingly, his iny group claimed a ull 12 percen o all capial gains ha beneﬁ rom reduced ax raes.