According to a new report from the Congressional Research Service, the lowering of the capital gains tax - a part of the 2003 G.W.Bush tax cut package - was the biggest driver of income inequality from 1996-2006.
Via Jared Bernstein:
The lowering of the capital gains tax, pushed through as part of the Bush tax cut package of 2003, was the biggest driver of income inequality from 1996 to 2006, according to a recent report from the Congressional Research Service. While the Bush tax cuts as a whole contributed to rising inequality, it was the change in policy toward capital gains — which were once taxed at normal income rates but are now taxed at 15 percent for the rich — that played the largest role in exploding the income gap. While after-tax income increased by an average of 25 percent for Americans as a whole, lower earners saw a much smaller increase and the top 0.1 percent’s income, driven by lower capital gains tax rates, nearly doubled
I think a lot of people sense that there’s something unsettling about this shift from labor income to capital incomes. It seems endemic of a society that devalues work while providing outsized rewards for speculation and asset accumulation. The CRS findings place that sensibility in the context of hard data.
Jared Bernstein’s areas of expertise include federal and state economic and fiscal policies, income inequality and mobility, trends in employment and earnings, international comparisons, and the analysis of financial and housing markets. You can follow him on his website here.