The Bush-era tax cuts, initially set to expire at the end of 2010 but temporarily extended by President Obama in exchange for the passage of fiscal support policies by a divided Congress, are set to expire again at the end of 2012. The Obama administration has pushed to extend the tax cuts for all but the top 2 percent of filers.
One under-examined feature of the Bush-era tax cuts is their disproportionate cut in tax rates on income derived from wealth. Under rates set by President Bush and extended by Obama, most long-term capital gains and dividends face a top rate of 15 percent, much lower than the overall top marginal rate applied to wages and salaries.1
These preferential rates for capital incomes have increasingly benefited the wealthiest filers and lowered their overall effective tax rates. As the graph below depicts, between 1996 and 2006, top filers have earned a growing share of their before-tax income from capital gains and dividends, and a declining share from wages and salaries. The change is most pronounced at the top of the income spectrum, with filers in the top 0.1 percent of the distribution and the top 1 percent of the distribution experiencing a 6.1 and 7.4 percentage-point increase, respectively, in their share of income from capital gains and dividends. The bottom 80 percent of filers, on the other hand, experienced virtually no change in their share of income from wages and salaries, and actually saw a decrease in their share of income from capital gains and dividends.
1. Under current rates, capital gains and dividends that would be taxed at a 10 or 15 percent ordinary rate are taxed at a 0 percent rate.