There were many factors involved -- like the stagnation of most workers' wages, the war on unionism, the huge growth in CEO compensation, the issuance of huge Wall Street bonuses, etc.
But according to a new report issued by Thomas Hungerford, an economist with the Congressional Research Service, there is one element of those Republican policies that has had more effect on the widening gap between the rich and the rest of America than any other facet -- the capital gains tax. The capital gains tax used to be taxed at the same rate as earned income. But the Republicans decided that the rich shouldn't have to pay as high an income tax rate as others, so they adjusted the capital gains tax rate by making it a different tax rate than that applied to other forms of income.
They couldn't lower the regular earned income tax rates below those paid by the middle class. That would have caused a real uproar. But they knew that the rich make a larger part of their income off of capital gains than other Americans. As the bottom chart above shows, the bottom 80% of Americans earn next to nothing from capital gains (about 0.7% of their income). But that's much different for richer Americans -- where it makes up 18.8% of the income for the top 20%, 28.1% of the income of the top 5%, 38.2% of the income of the top 1%, and a whopping 51.9% of the income of the top 0.1% (the richest Americans).
Lowering the capital gains tax, first to 20% and then to 15%, gave the richest Americans a huge tax break (since they would otherwise be paying about 36% on that income) while maintaining the tax rate paid by most Americans (who got most of their money from earned income, not capital gains). This allowed the really rich to earn enormous amounts of money while paying a smaller tax rate than the middle class (like Mitt Romney, who only paid a tax rate of about 13% on over $20 million in income).
President Obama put a band-aid on this unfairness last December, when he negotiated an elimination of the Bush tax cuts on the richest Americans. That raised the capital gains tax from 15% to 20% (but left it still way below the top rate for earned income of 36%). So the richest Americans are still getting a huge tax break -- simply because they earn a large part of their income in a different way than most Americans. And the gap in wealth between the rich and the rest of America continues to grow larger each passing day.
This is simply unfair to most Americans. There is no legitimate reason why the income of the rich should be taxed differently from the income of most Americans. All income should be taxed the same -- using the progressive rates of the tax on earned income. It is time to eliminate the special tax rate on capital gains (investment income). It is time to return fairness to the American tax system.