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Wednesday, October 26, 2011

CBO Trends in Household Income and Relevance to Current Tax Reform Debate

A lot of talk about tax reform today, including the proposals from presidential candidates, is either directly or indirectly about who should pay. The tax base and rate affect work, investment and spending decisions and affect how one's income and wealth may grow or not grow. For example, a few candidates are pushing for a consumption tax (Cain's 9-9-9 plan includes a 9% sales tax plus a 9% subtraction method VAT for businesses that will ultimately be paid by individuals; and Perry's flat tax). These are regressive taxes that without the Earned Income Tax Credit, will most likely result in a greater tax burden for low and middle-income taxpayers.

For over ten years, we have had lower capital gains rates than we had with the Tax Reform Act of 1986 which the maximum capital gains rate was 28%. In the late 1990s it was brought down to 20% (18% if the asset was held over 5 years) and the 2001/2003 tax cuts lowered the rate on many capital gains to 15%. The bulk of capital gain income is reported on the returns of high income individuals, such as Warren Buffett, bringing their average tax rate down often to a lower rate than middle-income taxpayers.

This week, the Congressional Budget Office (CBO) released a report - Trends in the Distribution of Household Income Between 1979 and 2007. Per the report:

"The share of income going to higher-income households rose, while the share going to lower-income households fell.
  • The top fifth of the population saw a 10-percentage-point increase in their share of after-tax income.
  • Most of that growth went to the top 1 percent of the population.
  • All other groups saw their shares decline by 2 to 3 percentage points."
The chart at the start of this post, from the report, highlights the significance in the changes between the quintiles and top 1%.

Should the lower qunitiles be taxed more? Can the top 1% pay more? These are good questions that I hope will be answered with the support of data by those touting any particular tax reform.

What do you think?

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