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More Regressive Tax Code Contributed To Growing Income Inequality Before Crisis: Report

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A national shift toward a more regressive tax code played a significant role in further increasing the wealth gap in the years leading up to the financial crisis, according to a new government report.

Between 1996 and 2006, a period when the top 0.1 percent of filers experienced an almost two-fold increase in income, the Congressional Research Service's report finds the poorest 20 percent of tax filers saw their incomes fall by 6 percent, increasing income inequality both before and after taxes.

That rise in inequality can largely be accounted for by the growing capital gains -- or profits from the sale of property or investments -- among richer Americans. During that ten-year period, the share of income from capital for the top 0.1 percent rose to 70 percent from 64 percent. But that's not the only reason for the growing wealth gap. The report also points to regressive alterations in the tax code as an important factor in rising income inequality.

"Taxes were less progressive in 2006 than in 1996, and consequently, tax policy also contributed to the increase in income inequality between 1996 and 2006," according to the report. "But overall income inequality would likely have increased even in the absence of tax policy changes."

A less progressive tax code hasn't just resulted in an increase in income inequality. At a time when the federal debt tops $15 trillion, tax cuts for wealthy Americans are also costing the U.S. Treasury $11.6 million every hour, according to an October report.

The study's findings mirror others that indicate income inequality has been on the rise for quite some time. The top one percent of Americans saw their incomes grow by 275 percent between 1979 and 2007, according to an October report from the Congressional Budget Office. During the same period, the bottom fifth of earners only experienced a 20 percent boost in income.

In addition, the 400 richest Americans, according to Forbes, have a combined net worth that is more than that of the bottom 60 percent of Americans. Perhaps even more surprising, one family -- the Walmart heirs -- had the same net worth in 2007 as the bottom 30 percent of Americans.

The gap between the richest Americans and the poorest has gotten so wide in fact that income inequality in America is even higher than levels reached in Ancient Rome, a study released last month found.

And if the past is any indication, that could be bad news for the U.S., seeing as it's less income inequality positively correlates with economic growth, according to a September report from the International Monetary Fund.

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