Economic Snapshot | Budget, Taxes, and Public Investment

Why Taxing Capital Income Makes Sense

Rising income inequality has had an adverse impact on tax revenues. Income inequality is rising not only because wage inequality has been rising but also because capital income inequality has been rising. High-income individuals own the great majority of capital and receive most capital income.

National income is split between labor’s share and capital’s share of income. As the figure below shows, capital’s share of income has been rising over the past four decades and stands at about 40 percent of total income. Before 1975, capital’s share was approximately 33 percent of total income with some year to year variation around that average. Rising income inequality is due to the rising inequality of the various components of income and to the increasing importance of capital income.

Economic Snapshot

Why Taxing Capital Income Makes Sense: Capital’s share of national income, 1933–2013

Capital share 1933–1975 Capital share 1975–2013 Capital share trend 1933–1975 Capital share trend 1975–2013
1933 0.330337 0.328629
1934 0.334615 0.328673
1935 0.337434 0.328717
1936 0.33179 0.328761
1937 0.326843 0.328805
1938 0.326923 0.32885
1939 0.330579 0.328894
1940 0.343284 0.328938
1941 0.349066 0.328982
1942 0.335094 0.329026
1943 0.314702 0.32907
1944 0.306964 0.329114
1945 0.293855 0.329158
1946 0.301026 0.329202
1947 0.321557 0.329246
1948 0.335327 0.32929
1949 0.332872 0.329334
1950 0.339583 0.329378
1951 0.332016 0.329422
1952 0.321079 0.329467
1953 0.318254 0.329511
1954 0.327267 0.329555
1955 0.33972 0.329599
1956 0.332442 0.329643
1957 0.331129 0.329687
1958 0.330217 0.329731
1959 0.338799 0.329775
1960 0.332375 0.329819
1961 0.33483 0.329863
1962 0.339091 0.329907
1963 0.342937 0.329951
1964 0.343554 0.329995
1965 0.348252 0.330039
1966 0.342051 0.330084
1967 0.335306 0.330128
1968 0.330776 0.330172
1969 0.321209 0.330216
1970 0.31164 0.33026
1971 0.320705 0.330304
1972 0.322372 0.330348
1973 0.323539 0.330392
1974 0.323634 0.330436
1975 0.335803 0.335803 0.33048 0.341231
1976 0.339906 0.342114
1977 0.343959 0.342997
1978 0.345399 0.34388
1979 0.343383 0.344763
1980 0.343374 0.345646
1981 0.355692 0.346529
1982 0.359666 0.347412
1983 0.364941 0.348295
1984 0.368658 0.349178
1985 0.364459 0.35006
1986 0.354284 0.350943
1987 0.352929 0.351826
1988 0.354782 0.352709
1989 0.354265 0.353592
1990 0.348579 0.354475
1991 0.347781 0.355358
1992 0.340205 0.356241
1993 0.343759 0.357124
1994 0.35141 0.358006
1995 0.358352 0.358889
1996 0.36189 0.359772
1997 0.363283 0.360655
1998 0.353657 0.361538
1999 0.350403 0.362421
2000 0.343092 0.363304
2001 0.341598 0.364187
2002 0.348409 0.36507
2003 0.354264 0.365953
2004 0.358851 0.366835
2005 0.371476 0.367718
2006 0.37812 0.368601
2007 0.369553 0.369484
2008 0.361959 0.370367
2009 0.373476 0.37125
2010 0.385633 0.372133
2011 0.386805 0.373016
2012 0.392149 0.373899
2013 0.396049 0.374782
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Source: EPI calculations of Bureau of Economic Analysis (BEA) NIPA tables 1.7.5 and 1.12

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Now, how does this affect tax revenue? It starts with two important facts. The first I have already mentioned—capital’s share of income has been rising. Second, capital income is taxed more lightly than labor income. Remember Mitt Romney? When he ran for President, he released some information on his taxes; the major take away was his effective tax rate was less than the tax rate paid by many lower- and middle-income taxpayers. An increasing proportion of national income—that is, capital income—is being taxed at low tax rates and, consequently, tax revenue has suffered. Increasing taxes on capital income will increase tax revenues and help reduce income inequality.


See related work on Taxes | Economic inequality

See more work by Thomas L. Hungerford