Distributional Effects of Taxes on Corporate Profits, Investment Income, and Estates Page: 4 of 22
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Distributional Effects of Taxes on Corporate Profits, Investment Income, and Estates
Recent tax reductions enacted in 2001 through 2004, as well as some under consideration, reduce
the effective tax rate on capital income in several different ways. Taxes on capital arise from
individual taxes on dividends, interest, capital gains, and income from non-corporate businesses
(proprietorships and partnerships). Reductions in marginal tax rates as well as some tax benefits
for business reduce these taxes. Taxes on capital income also arise from corporate profits taxes,
which are affected not only by rate reductions but also by changes to provisions affecting
depreciation, interest deductions, other deductions, and credits. Finally, taxes can be imposed on
capital income through the estate and gift tax.
The largest of the recent reductions, measured by estimated revenue cost, is the estate and gift tax
repeal ($54 billion in FY2011, the last full year it is effective under current law). The reduction in
tax rates on dividends and capital gains costs $27 billion in FY2008; the marginal individual rate
reductions cost $63 billion in FY2010, of which perhaps a quarter, or around $15 billion, are
taxes on capital income. Bonus depreciation began at a cost of more than $30 billion, but that
figure represented timing effects; the equivalent annual cost was probably less than $20 billion.
Overall, the tax cuts on capital income cost around $110 billion per year, a significant sum. All of
these provisions are temporary, although in the case of the estate and gift tax and the individual
rate reductions, the temporary nature was necessary to address a parliamentary rule in the Senate.
Bonus depreciation was deliberately set to be temporary, and expired in 2004. The dividend and
capital gains relief was originally to expire in 2008, but was extended through 2010. Thus some,
or all, of these provisions will likely be considered for extension.
Although many issues surround these tax changes, one of them is the extent to which they benefit
higher or lower income individuals. The eventual consequences of these tax provisions depend on
the behavioral responses to tax cuts, which also drive issues of incentive effects and economic
growth. This report addresses these distributional issues, in the context of behavioral responses.
The first section of this paper provides general data on the distribution of capital income of
various types, as a background to discussing the incidence issues. The next section discusses how
behavioral responses could alter the distributional effects, examining both shifts in the types of
assets held and changes in savings rates.
Data on the Distribution of Income by Type and
Capital income may be earned directly by individuals in operating their own businesses or as
passive income from lending or investing in corporate stocks. Income from unincorporated
businesses is not separated into labor and capital income, but we can compare the distribution of
income of different types by examining passive capital income sources. There are three major
types of passive capital income: interest on debt, dividends on corporate stock, and capital gains
(which arise from the sale of stock and from the sale of other assets). Table 1 provides data on the
distribution of this income.
Congressional Research Service
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Distributional Effects of Taxes on Corporate Profits, Investment Income, and Estates, report, May 7, 2007; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc809623/m1/4/: accessed December 18, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.