This piece from the NYT business section does a great job of explaining why cuts to the capital gains tax have been so regressive. There’s a nice chart with the original article, too.
By FLOYD NORRIS
Published: January 10, 2009
MORE Americans than ever before have learned firsthand the perils of investing in the stock market, as the value of retirement accounts like 401(k) plans plummeted over the last year.
Never before has the pain of a bear market in stocks been spread as broadly in the United States as this one has, a fact that has intensified the economic impact of the collapse in share prices that began in late 2007.
But while the pain of the bear market has been spread widely, the tax benefits of stock ownership have become more concentrated among the wealthy.
That seeming paradox stems from the differing treatment of profits on capital gains, depending on whether the stock or other asset is held in a taxable account or a retirement account.
Most Americans hold stocks, and stock mutual funds, in their retirement accounts, principally in 401(k) accounts. Those accounts are not taxed until the money is taken out, usually after retirement. But then, the money is fully taxed at ordinary income tax rates, regardless of whether or not it came from capital gains.
As a result, the reduction of the tax rate on long-term capital gains to 15 percent in 2003, and the accompanying reduction of the tax on most dividends to the same amount, provided no additional benefits to most Americans. But it produced substantial benefits for those who owned stocks in taxable accounts.
Read the full article.