A recently-released report by the Congressional Research Service (CRS), on
the changes in the distribution of income among individual filers of tax returns
between 1996 and 2006, has concluded that the tax cuts that were first enacted
under the presidency of George W. Bush have contributed to a widening of the
United States wealth gap.
The CRS report examines changes in income inequality among US tax filers between
1996 and 2006. In particular, it points out that Congress will soon need to
address issues affecting the distribution of taxpayers’ income in the
US.
For example, the Administration has stated that one of its principles for tax
reform is to observe the “Buffett rule” that “no household
making over USD1m annually should pay a smaller share of its income in taxes
than middle-class families pay,” while Congress will need, later this
year, to debate the scheduled expiration (at the end of 2012) of the 2001 and
2003 Bush tax cuts.
The CRS found that inflation-adjusted average after-tax income grew by 25%
between 1996 and 2006 (the last year for which individual income tax data is
publicly available). However, the average increase obscures a great deal of
variation; in that “the poorest 20% of tax filers experienced a 6% reduction
in income, while the top 0.1% of tax filers saw their income almost double.”
In addition, the CRS also found that “tax filers in the middle of the
income distribution experienced about a 10% increase in income, and the proportion
of income from capital increased for the top 0.1% from 64% to 70%.”
It has been ascertained that capital gains and dividends were a larger share
of total income in 2006 than in 1996 (especially for high-income taxpayers)
and were more unequally distributed in 2006 than in 1996, and that changes in
capital gains and dividends were the largest contributor to the increase in
the overall income inequality.
However, total taxes (individual income tax, payroll tax and the corporate
income tax) also contributed to the increase in income inequality between 1996
and 2006. Taxes reduced income inequality by 5% in 1996, but by less than 4%
in 2006. Taxes were therefore more progressive and had a greater equalizing
effect in 1996 than in 2006.
The major tax change between 1996 and 2006 was enactment of the Bush tax cuts,
which reduced taxes especially for higher-income tax filers. Those tax cuts
involved reduced tax rates, the introduction of the 10% tax bracket (which reduced
taxes for all taxpayers), and reduced tax rates on long-term capital gains and
qualified dividends.
Furthermore, in 1996, long-term capital gains were taxed at 28% (15% for lower-income
taxpayers) and all dividends were taxed as ordinary income. By 2006, long-term
capital gains and qualified dividends were taxed at 15% (5% for lower-income
taxpayers).
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