[Five ways income inequality happened, and will continue
On Friday October 28, 2011, 11:31 am EDT
By John Wasik
(Reuters) – As if on cue for an Occupy Wall Street commercial, the latest Congressional Budget Office report highlighted the large crevasse between the upper 1 percent of U.S. households and the rest of us.
When it comes to income inequality, this is what U.S. politicians should be digesting now. While it’s hardly a major revelation that for the top 1 percent of earners real after-tax income rose 275 percent between 1979 and 2007, the top 20 percent made more in after-tax income than the remaining 80 percent. That’s quite a difference since the lowest-income group’s median income only rose 18 percent.
Income inequality couldn’t be more of a mainstream issue as some 70 percent of Americans surveyed want wealth shared more equally.
The reasons for the growing disparity, which the CBO, without irony, measured by an increasing “Gini coefficient,” were buried deep in the report. It’s how income was taxed that allowed the ultra-wealthy to keep more of what they earned compared to middle- or lower-class Americans.
1) INVESTMENT INCOME EARNERS ARE TAXED LESS
Most lower- and middle-class earners make their money from wages, which are subject to Social Security, Medicare, federal and state taxes. But income from businesses, capital gains and dividends may be taxed at lower rates. In the CBO study period, the share from capital gains and business income increased, meaning upper-income families reaped greater after-tax benefits just from the kinds of non-wage income they reported.
When you’re on salary, you get taxed regularly through your paycheck. If you hold stocks, bonds, business equity and property, your capital gains — if any — can be delayed for years. Holding securities in tax-deferred retirement accounts can put off taxes for decades.