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Sunday, November 27, 2011

Growing income inequality and the federal tax system

Laura Tyson of the Haas School of Business at UC Berkeley has a post on the Economix blog of the NY Times for 11/18/11 - "Tackling Income Inequality." She summarizes and analyzes data on changes in income and its elements (such as wages and capital gains) and how the income of the top 1% has "soared." She notes that there is reason for the Occupy Wall Street folks to focus on this topic.

The data is from a recent Congressional Budget Office report - Trends in the Distribution of Household Income Between 1979 and 2007 (10/11).

Tyson focuses on taxation of capital gains. She notes that when she was President Clinton's economic adviser, she led a study on the effects of reducing the capital gains rate. Per Tyson: "We concluded that a cut would decrease future tax revenue, would contribute to rising inequality and would not increase saving and investment as its advocates asserted." She also reminds readers that to reach a compromise on the budget, President Clinton signed legislation that dropped the top capital gains rate from 28% to 20% in 1997. That rate was dropped to 15% and also for qualified dividends, a few years later by President Bush and today, many believe it should stay at that rate.

Tyson also notes what is an income inequality issue and what becomes a federal revenue issue: "Capital and business income are much more unevenly distributed than labor income and have become more so over time. Capital gains income is the most unevenly distributed — and volatile — source of household income."

I have blogged on this before to offer another perspective to consider with respect to the concern some raise that many individuals with income under $50,000 don't pay federal income tax (for example, 5/8/11 post). (For more on data from Tax Policy Center that for 2011 46% won't owe federal income tax - see their blog post of 7/27/11.) A 15% capital gains rate versus a 20% capital gains rate provides a $3,000 tax savings to someone with $60,000 of capital gains. So why a focus on someone with $50,000 of income perhaps not owing $3,000 of tax rather than the higher income person (with capital gain income) saving - and it is an even greater savings if the capital gains rate had stayed at 28%.

Back to the Tyson article - she suggests to address budget problems and reduce growing income inequality, to return ordinary and capital gains tax rates to what they were when Clinton left office, taxing some carried interests as ordinary income, adding a progressive consumption tax (no details of what it might be), and lowering the corporate tax rate (paying for it with the increased capital gains rate).

I encourage reading of both Dr. Tyson's article and the CBO report - interesting data and ideas.

What do you think?

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