According to a new study from a researcher at the U.S. Congressional Research Service, “the largest contributor to increasing income inequality…was changes in income from capital gains and dividends,” meaning the money from financial assets. Changes in wages over the past twenty years were found to slightly dampen inequality, though the sharp effect of capital gains was more than enough to cancel out wages’ equalizing effect.
“Overall, the top 1% took home 71% of all capital gains” in 2012, Ed Schultz noted on Thursday’s The Ed Show, citing data from the Tax Policy Center. “That’s where the money’s going: to the top. Because capital gains tax rates are lower than the average Americans.’”
According to former Federal Reserve Chairman Paul Volcker, much of the financial activity which leads to those massive capital gains does not provide any direct benefit to society in return. “The economic and social value of much of the trading and innovative financial engineering is questionable,” he told British parliament in October.
The Washington Post’s Greg Sargent notes that the report’s findings are “directly relevant to the current debate, because Obama and Democrats want to offset the sequester in part by closing loopholes enjoyed by the wealthy, such as the one that keeps tax rates on capital gains and dividends low.” If the report is accurate, then raising the capital gains tax might be one of the most effective ways to reduce income inequality.
While conservatives often make the argument that various tax increases would harm economic growth, MSNBC contributor Jared Bernstein has written, “I’ve simply never seen compelling evidence that tax increases significantly hurt growth, labor supply, jobs, wages, or that rate decreases provide much of a boost the other way.”
The report on drivers of inequality used a measure of inequality called the Gini index. According to recent economic studies using the Gini index, the United States now has higher income inequality than either Tsarist Russia [PDF] or the Roman Empire.