Thursday, June 4, 2015

The US Tax System Becomes Less Progressive For The Ultra Wealthy

The US tax system is based on the ability to pay theory.  Tax rates generally increase as income rises.  This study shows that the tax system is progressive up to a point.  Most households in the top 1% have a higher tax rate than households below the top 1%.  As one moves up to the top .01% and beyond the tax rate actually falls.  That is because capital gains become a larger source of income as one's income increases.  Capital gains are taxed at a lower rate than earned income which is the primary source of income for households below the top .01%.  The ultra wealthy have a lower tax rate than upper middle income Americans. 

Capital gains used to be taxed at the same rate as earned income in the US.  Conservative administrations, beginning with Reagan, cut the tax rate on capital gains by arguing that it would encourage investment.  It has not produced a measurable gain in business investment.  In fact, business investment in recent years has declined.  Retained earnings are being used to jack up stock prices through stock buybacks and dividend payouts, which are also taxed at a lower rate, have increased dramatically.

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