Ending Income Inequality Requires Going After Capital Gains

Conservatives argue that by cutting taxes on the wealthy, money and wealth will "trickle down" to the middle and lower class in the form of jobs. A new study seems to confirm what we all have knows for years - tax cuts for the rich overwhelmingly benefit the rich.

Income inequality has risen for three decades and worsened since the recession ended. Last fall, the Congressional Budget Office found that incomes for the richest 1 percent soared 275 percent between 1979 and 2007. For the middle 60 percent of Americans, average incomes grew just under 40 percent.

According to a new study by Thomas Hungerford, an economist for the Congressional Research Service (CRS), the reduction of the federal capital gains tax is "by far the largest contributor" to that rising income inequality, which is now comparable to countries like Pakistan and the Ivory Coast.

According to the report:

By far, the largest contributor to increasing income inequality (regardless of income inequality measure) was changes in income from capital gains and dividends. Capital gains and dividends were less equally distributed in 1991 than in 2006, though highly unequally distributed in both years. The large increase in the contribution of capital gains and dividends to the Gini coefficient, however, is due to the large increase in the share of after-tax income from capital gains and dividends, and to the increase in the correlation of this income source with after-tax income.

The report also undermines Republican position on the sequester. Since wealthy individuals are benefiting the most from the GOP's resistance to any new revenue measures, Democrats can correctly argue Republicans taking a hard line on the sequester would rather damage our economy then close tax loopholes for the rich.

As the Washington Post's Greg Sargent writes:

Republicans are openly conceding the sequester will damage our national security, even as they refuse to avert it by agreeing to the closing of loopholes benefiting the wealthy — even though this would likely be part of a deal in which they got more in spending cuts than they’d be conceding in new revenues!

Hungerford's new findings echo a study he produced for the CRS in 2011, which found tax cuts on capital gains were the largest contributor to growing income inequality. From 1996 to 2006, income grew 25 percent for all Americans, but it grew 74 percent for the top 1 percent of income earners, and 96 percent for the top 0.1 percent.

Hungerford isn't the only economist that has studied income inequality. Two academics, Emmanuel Saez and Thomas Piketty, have used IRS data to construct longer-run assessments of income inequality. They found that in 2007 the richest 1 percent earned 23.5 percent of income. That was the biggest share since 1928, just before the Great Depression.

The Associated Press contributed to this story.

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