The average effective tax rate fell for all income groups above $500,000, continuing a drop that has occurred for years. For incomes above $10 million, the average rate fell from 22.4 percent in 2009 to 20.7 percent in 2010. The reason for the continual drop is clear: the 2003 high-income Bush tax cuts lowered the rate on investment income, and wealthy Americans are deriving more income from investments than they ever have, the Wall Street Journal reports:
The reason for the drop in average tax rates is no secret: It’s the special 15% top rates for capital gains and dividends that President George W. Bush pushed through. In 2009, taxpayers with incomes exceeding $10 million reported 35.8% of their income as capital gains and dividends. That rose to 48.5% for 2010.
Low capital gains rates have helped the wealthy pay lower and lower tax rates even as their incomes have skyrocketed. And while capital gains income makes up almost half of the incomes of the wealthiest Americans, it accounts for 2.2 percent or less for earners under $200,000. Half of all capital gains income goes to just to the richest 0.1 percent of Americans.
The capital gains rate has been steadily eroded since President Ronald Reagan taxed such income equal to wages in the 1980s, and the result has been rising income inequality. A January 2012 study found that low capital gains rates were the biggest driver of American income inequality, which now rivals the levels seen in countries like Ivory Coast and Pakistan. In 2010, the capital gains preference helped the richest 1 percent capture 93 percent of all income gains.