A new report from the Congressional Research Service — the nonpartisan public policy branch of Congress — takes a closer look at the drivers of income inequality between 1996 and 2006, the last period of moderate economic growth before the latest boom-bust cycle.
Changes in income from capital gains and dividends were the single largest contributor to rising income inequality between 1996 and 2006. Changes in tax policy also made a significant contribution to the increase in income inequality, but even in the absence of tax policy changes income inequality would likely have increased. Although earning inequality increased between 1996 and 2006, changes in wages and salaries appear to have had little effect on the increase in overall income inequality.
Democrats like President Obama have proposed raising the capital gains tax — which was lowered under Bush — partly out of interest in bridging this divide. Many conservatives, by contrast, believe that capital gains are taxed too much, arguing that it’s income that can be double-taxed under corporate and individual income taxes. All the major Republican presidential candidates but Romney and Santorum want to eliminate the capital gains tax entirely.
(h/t Jared Bernstein)