At a time when President Bush's proposal for lower tax rates on capital gains is a key issue in negotiations over a deficit-reduction package, some new ammunition for Democratic opponents of the proposed reduction has been supplied by the Center on Budget and Policy Priorities, a liberal-oriented nonprofit think tank.
Using Congressional Budget Office statistics, the center reported yesterday that the income gap between the nation's top earners and bottom earners widened enormously from 1980 to 1990. One of the main reasons, the report contends, was a huge increase in capital gains by the top 1 percent of Americans.
As a result, wrote authors Robert Greenstein and Scott Barancik, "the richest 2.5 million people now have nearly as much income as the 100 million Americans with the lowest incomes."
The figures show that the average after-tax income of the poorest fifth of American households, measured in 1990 dollars, dropped from $7,357 in 1980 to a projected $6,973 in 1990. Average household income of the next three-fifths of Americans is projected to rise slightly.
But the top 1 percent will enjoy a rise from $213,675 to $399,697 -- 87.1 percent, according to the projections.
The figures also show that the average capital gains for the bottom nine-tenths of households before taxes is expected to rise from $287 in 1980 to $299 in 1990 -- just $12. For the richest 1 percent, capital gains before taxes are projected to jump from $82,946 to $175,536 -- an increase of $92,590.
The center argued that these trends would be greatly accelerated by the passage of any capital gains tax rate decrease. Citing the Congressional Joint Committee on Taxation, the center said that more than nine-tenths of the benefits from the administration proposal would go to the top fifth of taxpayers.
Treasury officials said they had not had time to read the center's report and could not comment.
Under existing law, the tax on capital gains from the sale of property, stocks and the like is the same as the normal income tax rate. In his fiscal 1991 budget, Bush proposed to exclude from taxation a portion of capital gains on assets held over various specified periods. For example, the maximum tax rate on capital gains on investments held over three years would be 19.6 percent for taxpayers in the 28 percent tax bracket.
The president argued that the reduced rate would help U.S. businesses in the face of increasing global competition, because the tax rate for capital gains "is higher than in any other industrialized country except Australia and the United Kingdom."
Bush's proposals to reduce capital gains tax rates have been a source of conflict with Democrats during the last two congressional sessions.
Greenstein, in an interview, said the wealth of high-income families has been growing much more swiftly than that of low-income families because wages of low-income and middle-income earners have been stagnant, decreasing in real dollars in many cases.
He noted that there also have been large increases in the prices of stocks and real estate during the 1980s, leading to big capital gains for well-to-do holders of such investments. He said other factors cited by economists are an increase in two-earner professional families, both with large incomes, and an increase in low-income one-parent families.
In the tax area, the reduction of the maximum marginal income tax rate from 70 percent in 1980 to 50 percent in the 1981 Reagan tax bill, and subsequently lower, saved money for well-to-do taxpayers. The rate is 33 percent or 28 percent, depending on exact income, but the 1986 law setting these rates also wiped out a special low capital gains rate and various loopholes, Greenstein said.
He said that while top taxpayers were benefiting from the reduction of the top income tax rate, the average low-to-moderate-income worker saw his or her total tax rate rise because increases in the Social Security payroll tax offset lower income tax rates for these workers.
The bottom line, according to the report: "Disparities in after-tax income have widened so much in recent years that by 1990, the top 1 percent of the population will have nearly as much after-tax income as the bottom 40 percent."