A new study looking at changes in wages and salaries, capital income, and in taxes found that capital gains and dividends made the largest contribution to income inequality. As the study states:
By far, the largest contributor to this increase (in income inequality) was changes in income from capital gains and dividends. Changes in wages had an equalizing effect over this period as did changes in taxes. Most of the equalizing effect of taxes took place after the 1993 tax hike; most of the equalizing effect, however, was reversed after the 2001 and 2003 Bush-era tax cuts.
Capital gains were already the largest contributor to income inequality in 1991. But by 2006, the contribution of capital gains to income inequality almost doubled. Capital gains contributes so much to income inequality because of the large increase in their share of after-tax income. Continuously cutting the tax rate meant that more after-tax income came from capital gains and dividends.
The rise in income inequality is due more to changes at the top of the income distribution than at the bottom. While income for all Americans grew 25 percent from 1996 to 2006, it grew 74 percent for the top 1 percent and 96 percent for the top 0.1 percent. A large part of this was again driven by continuous cuts to income and capital gains taxes.
In short, the affluent have been keeping more and more of their income while ordinary Americans have faced stagnant wages and disappearing benefits.
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