Drastic income inequality growth in the United States is largely derived from changes in the way the U.S. government taxes income from capital gains and dividends, according to a new study by Thomas Hungerford of the non-partisan Congressional Research Service.Essentially, what Democrats have been saying about income inequality — that it’s in a large part due to favourable taxation and deduction policies for high income Americans — is largely right, and that has major implications for a possible sequestration fix.
The Hungerford study, in short, is a big get for the Left.
While this may sound like a bit of esoteric macro-econ, it’s very relevant to the ongoing debate over the $1.2 trillion in across the board cuts that sequestration will bring about on March 1.
During the debate over the sequester, Democrats and the Obama administration have repeatedly proposed closing loopholes in the tax code that disproportionally benefit the wealthy in lieu of drastic cuts to each and every sector of government.
Republicans have continued to back the cuts, and have indicated that the only possible replacement they’re comfortable with are cuts that are targeted rather than sweeping.
Here’s where this study comes in. The study looked at recent data from 1991-2006 in an attempt to tease out why wealth inequality became so much more pronounced in the United States over that period.
The Gini ratio measures the extent to which a country’s income distribution deviates from a perfectly equal distribution, and serves as an indicator of the gap between the rich and the poor.
Over time, the U.S. has seen the Gini ratio rise significantly:
It’s become difficult to ascertain what the root cause of this rise in income inequality is.
Republicans have argued that increased big government, taxation and regulations are keeping small business owners down, unable to ascend to a higher income bracket. They have proposed cutting the size of government to enable small business owners to flourish.
Democrats have argued that the income disparity comes from low wages and privileges granted to the wealthy when it comes to capital gains taxation rates and investment income. They have proposed increasing the minimum wage and raising the capital gains rate.
This study, then, is a relative win for the left.
It conclusively found that the wealthy benefitted from low tax rates on investment income, which in turn caused their wealth to grow faster.
Essentially, taxing capital gains as ordinary income would make the playing field more fair, and reduce over time income inequality.
Even more, such a move would serve as a deficit reduction measure that could replace portions of the sequester.
(h/t) Greg Sargent
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