Mitt Romney turned over his taxes yesterday, revealing that “Unlike most Americans who earn a paycheck, Romney gets the majority of his income from investment profits, dividends and interest…Romney and his wife Ann paid an effective tax rate of 13.9 percent in 2010 and expect to pay a 15.4 percent effective tax rate when they file their returns for 2011. Those rates are roughly in line with the effective tax rates paid by most Americans, but they are far below the top income tax rate levied against wages, which is 35 percent, because the U.S. tax code favors investment income over wage income.” Even with this, there are still many unanswered questions.
It might be useful to get some data on how concentrated dividend and capital income is among the top 1% and especially the top 0.1%, since the tax status of this income will be a political topic in 2012.
Let’s look at Congressional Research Services, Changes in the Distribution of Income Among Tax Filers Between 1996 and 2006: The Role of Labor Income, Capital Income, and Tax Policy. First thing to notice is that for the bottom 80% of Americans receive less than 1% of their income from dividends and capital gains, while it is half the income the top 0.1% receives:
As Jared Bernstein wrote when this CRS report first came out, “The largest single contributor to the growth of inequality, 1996-2006, was dividends and capital gains.” Here’s a chart he created from the CRS report, noting what has and hasn’t contributed to inequality as measured by the gini coefficient:
I’m not sure of the percentage of the audience here that thrives on Lorenz curves. For those that do let’s take some from the big CBO report, Trends in the Distribution of Household Income Between 1979 and 2007. Here are the Lorenz curves for each of the major types of income. Noticed how capital gains is packed into the very topmost part of the distribution curve.
Also notice how inequality of every type of market income has increased over this time period.
Why does the tax code disadvantage against those who make the large majority of their incomes from wages and salaries? Progressive taxation based around the equality of sacrifice has had a very long tradition; does Mitt Romney and others in the top 0.1% have less of an ability to sacrifice than someone making $70,000 a year?
Rortybomb 
Earned income gets an additional tax hit – Social Security Tax. Most of the 99% pay that tax on almost all of their income.
The analysis above misses a very big point: Most stock is not owned by individuals. Institutional investors and non-profits own most of the stock in the US and they don’t benefit from capital gains tax treatment. But almost all of us non-rich have a stake in these other owners of stocks: mutual funds, pension funds, insurance companies, charitable endowments, etc.
Just kill the capital gains subsidy because most holders of stocks are not eligible to utilize it. Capital gains subsides help the individual rich, not capital markets.
The changes in the IRS code did not happen overnight. There has been a long progression to give special consideration to what used to be called “unearned income” as the economy has become more-and-more financilaized. Romney is, at best, the “poster-boy” for the segment of American society that sees financial speculation as the single most important part of the American economy. Unfortunatley, We-the-People don’t have lobbyists to influence the legislators who continue to make changes to the IRS Code via attachments to almost every bill that goes through Congress granting more-and-more special consideration to inomes generated by speculation.
As Buffett has said, shoving money around is the preferred way to wealth in the US. I wonder if this is rather like the preference in the ancien regime for income made from landholdings. Prestige comes from getting money in a relatively easy way. “No sweat” as they say.
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thanks for educating us on the true essence of preferential treatment