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California State University, Dominguez Hills
University of Wisconsin, Parkside
Created: January 12, 2009
Latest Update: January 12, 2009
jeannecurran@habermas.org
takata@uwp.edu
patriciaacone@yahoo.com
- Introduction
Backup of capital gains tax explanation in Floyd Norris' NYT column from Saturday, January 10, 2009. He explains effects of difference in timing of taxation and rate of taxation at different rates in taxable and non-taxable accounts, and empasizes the enormous advantage which goes to the very rich. Charts included. Important for our understanding as stimulus package is enacted. jeanne
January 10, 2009
Off the Charts
Investment Tax Cuts Help Mostly the Rich
By FLOYD NORRISMORE Americans than ever before have learned firsthand the perils of investing in the stock market, as the value of retirement accounts like 401(k) plans plummeted over the last year.
Never before has the pain of a bear market in stocks been spread as broadly in the United States as this one has, a fact that has intensified the economic impact of the collapse in share prices that began in late 2007.
But while the pain of the bear market has been spread widely, the tax benefits of stock ownership have become more concentrated among the wealthy.
hat seeming paradox stems from the differing treatment of profits on capital gains, depending on whether the stock or other asset is held in a taxable account or a retirement account.
Most Americans hold stocks, and stock mutual funds, in their retirement accounts, principally in 401(k) accounts. Those accounts are not taxed until the money is taken out, usually after retirement. But then, the money is fully taxed at ordinary income tax rates, regardless of whether or not it came from capital gains.
As a result, the reduction of the tax rate on long-term capital gains to 15 percent in 2003, and the accompanying reduction of the tax on most dividends to the same amount, provided no additional benefits to most Americans. But it produced substantial benefits for those who owned stocks in taxable accounts.
A new study by the Congressional Budget Office traces the proportion of capital gains reported on tax returns of various income groups from 1979 through 2005, with the results shown in the accompanying graphics.
In 2005, the latest data available, the top one-tenth of 1 percent of taxpayers — a group that included those with after-tax incomes of more than $1.5 million — reported $335 billion in capital gains, or just over half the total amount of capital gains. By contrast, the bottom 95 percent of the income distribution — those with incomes under $126,300 — had just $69 billion in capital gains, about 10 percent of the total.
The well-off have always received most of the capital gains, of course. But the distribution has become more skewed in recent years. A generation earlier, in 1979, the first year for which data is available, the bottom 95 percent had 20 percent of the gains, and the top one-tenth of 1 percent had a little over a third of the gains.
The accompanying chart shows the total amounts of capital gains reported each year, adjusted for inflation, in 2005 dollars. As it happens, in 2003, the first year of the new low capital gains tax rate, it provided no net benefit for the 60 percent of Americans at the bottom of the scale. As a group, they had net capital losses of $600 million.
The budget office data also indicates that higher-income people received a similar large share of the benefits from the reduction in the tax rate on dividends. But that is not as clear because the data lumps dividend payments with interest payments.
It is worth noting that a taxpayer needed much higher income in recent years to be a member of the most elite groups. Expressed in 2005 dollars, the after-tax income needed to make the 21st percentile rose 9 percent from 1979 through 2005, to $17,800. The income necessary to reach the 81st percentile climbed 36 percent, to $67,400, and the number for the 96th percentile leaped 57 percent, to $126,300.
But to be among the top one-tenth of 1 percent, the amount needed soared 215 percent, from $486,500 to $1.5 million. And while in 1979, it took after-tax income of $1.8 million (in 2005 dollars) to qualify for the most elite group — the top one-hundredth of 1 percent — membership in that group in 2005 required income of $8.6 million, an increase of 365 percent.
Floyd Norris comments on finance and economics in his blog at Floyd Norris' e-mail.
- Discussion Questions
- How is this issue with "privilege to the very wealthy" related to the privatization of social security?"
Consider that those with great wealth can afford to take the tax breaks at whatever point they will benefit them the most and can afford to ride out the market bubble crashes. Those with far less wealth are, however, unable to wait out the markets' self-corrections and can be wiped out by crises like the present one. Not a very reliable way to plan the security and stability required for protection of those who lack the great wealth privilege, which is most of us. Notice the percentages Mr. Norris cites on this.jeanne
- If the capital gains tax gives investors a break on what they have earned through their investments, why doesn't it help the "not so wealthy?"
Because when full taxation is applied to their non-taxable accounts, like 401(k)s, no difference is recognized between investment funds that came from capital gains and investment funds that came from earned sources. The whole account is fully taxed. Cute, hmmm? jeanne
- References:
- Off the Charts: Investment Tax Cuts Help Mostly the Rich By Floyd Norris, the chief financial correspondent of The New York Times. Saturday, January 10, 2009. At p. B3. onsulted by jeanne on January 10 and 12, 2009. Copyright, New York Times.
- Ideas for Obama On the Stimulus. By Paul Krugman. The New York Times, Opinion Section, Monday, January 12, 2009. Consulted by jeanne on January 12, 2009.Copyright, New York Times.
Mr. Krugman insists that Obama must expand spending on infrastructure that will generate more jobs in the planning stages and will reach further into the job growth issue two years from now. "So how can Mr. Obama do more? By including a lot more public investment in his plan — which will be possible if he takes a longer view."
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