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?