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How the Government Subsidizes Wealth Inequality

How the Government Subsidizes Wealth Inequality

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Wealth inequality has increased dramatically in recent years, and government subsidies for capital gains and dividends are only making the situation worse by helping the rich get richer.
Wealth inequality has increased dramatically in recent years, and government subsidies for capital gains and dividends are only making the situation worse by helping the rich get richer.

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Published by: Center for American Progress on Jun 24, 2014
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1 Center for American Progress | How the Government Subsidizes Wealth Inequality
How the Government Subsidizes Wealth Inequality
By Harry Stein June 25, 2014
enowned French economis Tomas Pikety’s
Capital in the Twenty-First Century
 horoughly documens how hose a he very op o he income disribuion are pull-ing away rom he res o us.
1
 In he Unied Saes, wealh inequaliy has skyrockeed o levels no seen since he 1920s, wih he op 0.01 percen o Americans owning more han 10 percen o all naional wealh.
2
 As sobering as ha is, Pikety argues ha economic inequaliy will grow even worse over ime, based on his conenion ha he rae o reurn on capial will exceed he overall growh rae or he economy.
3
 I capial, or wealh, grows aser han he economy, hen he owners o ha capial and heir heirs  will amass an even larger share o oal naional wealh over ime. o reverse his rend, Pikety advocaes a global wealh ax.Tis issue brie pus aside he quesion o wheher new policies, such as a global wealh ax, should be enaced o reduce economic inequaliy. Insead, i explores wo exising policies ha acually subsidize wealh inequaliy. Firs, reduced ax raes on capial gains and dividends increase he afer-ax rae o reurn on wealh, which makes i more likely ha he rae o reurn on capial will exceed he overall economic growh rae. Second, capial gains are never subjec o he income ax a all i he invesor dies, which subsi-dizes wealh concenraion wihin a amily dynasy.Tese wo subsidies will cos he U.S. ederal governmen abou $2 rillion over he nex 10 years, almos all o which will go o he wealhies Americans.
4
 Pas Congresses have repealed boh o hese subsidies a differen poins in ime, hough hey were laer revived by subsequen legislaion. ecenly, ax reorm proposals rom  boh sides o he poliical specrum have once again advocaed scaling back or elimi-naing hese subsidies. Even i new policy inervenions such as a global wealh ax are no poliically or adminisraively easible a his ime, he ederal governmen could sill decisively respond o growing wealh inequaliy by simply scaling back he ax subsidies ha help he rich ge richer.
 
2 Center for American Progress | How the Government Subsidizes Wealth Inequality
Low tax rates for capital gains and dividends
Capial gains and dividends are axed a lower raes han oher sources o income. Labor income, such as wages and salaries, is axed a raes o up o 39.6 percen and also subjec o payroll axes. Capial gains and dividends, which are invesmen income, are axed a a op rae o 23.8 percen, which includes he 3.8 percen surax on invesmen income imposed by he Affordable Care Ac, or ACA. Tose lower raes are a subsidy or inves-men income. Subsidies in he ax code are known as ax expendiures, and he nonpar-isan Congressional Budge Office, or CBO, esimaes ha he ax expendiure or low raes on capial gains and dividends will cos he ederal governmen $1.34 rillion in revenue over he nex 10 years.
5
 axpayers wih incomes in he op 1 percen will ge 68 percen o ha money, while he botom 80 percen will receive only 7 percen.
6
FIGURE 1
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 raes or invesmen income has delivered enormous windalls o he  wealhies Americans and exacerbaed economic inequaliy. A sudy by Tomas L. Hungerord o he Economic Policy Insiue finds ha, “By ar, he larges conribuor o increasing income inequaliy (regardless o income inequaliy measure) was changes in income rom capial gains and dividends.
7
 By axing capial gains and dividends a a lower rae han oher income, he ederal governmen is making i more likely ha he rae o reurn on capial will exceed he economic growh rae󲀔he key driver o Pikety’s heory o rising uure economic inequaliy. Te effecs o preerenial ax raes or capial gains and dividends are mos apparen  when looking a he riches o he rich using Inernal evenue Service, or IS, daa on he counrys op 400 axpayers. Tese axpayers represen he op 0.0003 percen o all 140 million individual income ax reurns filed in 2009, he las year or which daa are available.
8
 Amazingly, his iny group claimed a ull 12 percen o all capial gains ha  benefi rom reduced ax raes.
9
 
3 Center for American Progress | How the Government Subsidizes Wealth Inequality
Te average ax rae or hese exremely wealhy axpayers has allen dramaically in recen decades. Te op 400 axpayers aced an average ax rae o 26.38 percen in 1992, which ell o 19.91 percen by 2009.
10
 Tis ax cu or he exremely wealhy can  be explained almos enirely by reducions in he capial gains rae. Te correlaion  beween hese wo drops is nearly perec, wih 95 percen o he change in he average ax rae or he op 400 axpayers explained by capial gains ax cus. Tis rend has likely reversed in recen years o some exen, since he op capial gains ax rae has increased rom 15 percen in 2009 o 23.8 percen oday.
30%20%10%1992
26.38%19.91%
199419961998200020022004200620080%
FIGURE 2
The extremely wealthy have received enormous tax cuts
Average tax rate for the top 400 taxpayers
 
Source: Internal Revenue Service,
The 400 Individual Income Tax Returns Reporting the Largest Adjusted Gross Incomes Each Year, 1992-2009
, available at http://www.irs.gov/pub/irs-soi/09intop400.pdf.
    M   a   x    i   m   u   m    c   a   p    i    t   a    l   g   a    i   n   s   r   a    t   e
Average tax rate for top 40015%20%25%R² = 0.9530%30%20%10%
FIGURE 3
Lower taxes for the extremely wealthy are almost entirely explained by capital gains tax cuts
Average tax rate for top 400 taxpayers and maximum capital gains rate, 1992-2009
Sources: Internal Revenue Service,
The 400 Individual Income Tax Returns Reporting the Largest Adjusted Gross Incomes Each Year, 1992-2009
, available at http://www.irs.gov/pub/irs-soi/09intop400.pdf; Tax Policy Center, "Historical Capital Gains and Taxes," available at http://ww-w.taxpolicycenter.org/taxfacts/displayafact.cfm?DocID=161&Topic2id=30&Topic3id=39 (last accessed June 2014).

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