Bush Tax Cuts Increased Income Inequality

The Washington Post highlighted a recent Congressional Research Service report which shows....drum roll please, the Bush tax cuts made the rich richer and the poor poorer. Surprise!

The below CRS graph shows the percentage change in inflation-adjusted incomes and taxes by income bracket from 1996-2006.


From the CRS report, Changes in the Distribution of Income Among Tax Filers Between 1996 and 2006: The Role of Labor Income, Capital Income, and Tax Policy we have some pretty damning facts on the Bush tax cuts and their effects:

Between 1996 and 2006, the share of total after-tax income attributable to dividends and capital gains grew by 40 percent, faster than any other category. Earned mostly by the well-to-do, investment income was the largest contributor to the increase in income inequality between 1996 and 2006, according to CRS.

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. Tax filers in the middle of the income distribution experienced about a 10% increase in income. Also during this period, the proportion of income from capital increased for the top 0.1% from 64% to 70%.

Income inequality, as measured by the Gini coefficient, increased between 1996 and 2006; this is true for both before-tax and after-tax income. Before-tax income inequality increased from 0.532 to 0.582 between 1996 and 2006—a 9% increase. After-tax income inequality increased by 11% between 1996 and 2006.

Total taxes (the individual income tax, the payroll tax, and the corporate income tax) reduced income inequality in both 1996 and 2006. In 1996, taxes reduced income inequality by 5%. In 2006, however, taxes reduced income inequality by less than 4%. Taxes were more progressive and had a greater equalizing effect in 1996 than in 2006.

In other words, the Bush tax cuts increased income inequality.

While earnings inequality increased between 1996 and 2006, this was not the major source of increasing income inequality over this period. 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. Changes in capital gains and dividends were the largest contributor to the increase in the overall income inequality. Taxes were less progressive in 2006 than in 1996, and consequently, tax policy also contributed to the increase in income inequality
between 1996 and 2006.

It's not all Bush tax cuts causing income inequality though. Globalization and the never ending race to the bottom on wages had a lot to do with it.

Tax filers in the bottom four income quintiles received a smaller share of before-tax and after-tax income in 2006 than in 1996. For example, the middle quintile (middle 20%) received 13.7% of all before-tax income in 1996 (and 14.2% of all after-tax income) but received 12.1% in 2006 (and 12.7% of after-tax income). In contrast, the top 20% of tax filers received 54% of all before-tax income in 1996 and 59.3% in 2006.

The share of before-tax income received by the top 0.1% of tax filers increased from 6.6% in 1996 to almost 10% by 2006.

The Gini coefficient is a measurement of income inequality. In 2007, the U.S. ranked 40th of all of the globe's nations in worse income inequality.

Income inequality as measured by the Gini coefficient increased between 1996 and 2006; this is true for both before-tax and after-tax income. The before-tax income Gini coefficient increased from 0.532 to 0.582 between 1996 and 2006—a 9% increase. The Gini coefficient for after-tax income increased by 11% between 1996 and 2006.

The Gini coefficient for after tax income went from 0.503 in 1996 to 0.560 in 2006.

The CRS gave Lorenz curves for 1996 and 2006 after tax income reprinted below. Lorenz curves are graphical representations of income inequality. The straight diagonal means perfect income equality. Further bowed to the right means more income inequality.


So next time you heard that giving zero taxes on capital gains is a good thing, refer to the facts here. It's only good if you're one of the uber-rich.

To wit, President Obama is cutting the IRS by 5%. This is with record budget deficits and a request to raise the debt ceiling....again. David Cay Johnston calculates out the cost of auditors.

IRS data show that auditors assigned to the 14,000 or so largest corporations found $9,354 of additional tax owed for every hour spent testing tax returns in the 2009 fiscal year. The highest-paid IRS auditors make $71 an hour. Based on a 2,080-hour work year, that works out to around $19 million of lost revenue annually for every senior corporate auditor position cut from the payroll.

We're used to Republicans spinning a tale of economic fiction with the tax code, but who knew the Obama administration is making sure corporations get away with tax murder too?

From 2005 to 2009, hours spent auditing the biggest corporations declined by 33 percent, according to IRS records analyzed by the Transactional Records Access Clearinghouse at Syracuse University in New York.

Two decades ago, when the economy was a third smaller, the IRS staff numbered about 118,000. Now it numbers 95,000 and is on the way to about 90,000. The likelihood of a big company being audited has plummeted 50 percentage points from 72 percent in 1990 to 22 percent in 2010.

Big company audits are now limited to specific issues known to the companies in advance, not unlike when cops tip off owners of favored gambling dens before a raid. Each audit also begins with an “estimated time to completion.” Working auditors tell me this is really a hard deadline that allows companies to run out the clock with delays in producing documents.

Seems by hook or by crook the uber-rich and large corporations are making sure their effective tax rate goes to zero, whether by law of enforcement. 1897 here we come!



another study?

How many studies are there now which show the Bush tax cuts were B.S.? The GOP must have cotton in their ears for they are saying we need even more tax cuts for the rich.