Capital gains drive record breaking inequality

Issue Brief
January 4, 2023By Tyler Mac Innis

Capital gains constitute one of the main drivers of income inequality, which stands at record levels in Oregon. The term capital gains refers to income generated from the profitable sale of assets such as stocks, bonds, real estate, a business, or even a work of art. Because such assets are highly concentrated in the hands of the rich, the income produced by the sale of those assets flow to the top.

Capital gains fuel income inequality

Income inequality in Oregon set a new record in 2020,[1] in large part due to the fact that the rich disproportionately make their money from capital gains. The top 5 percent of Oregonians took home 84.5 percent of all capital gains income in 2020.[2] Together, the bottom 95 percent of Oregonians took home just 15.5 percent.

Capital gains are even more concentrated when one looks within the top 5 percent of earners in Oregon. The richest 0.1 percent – fewer than 2,000 Oregonians – took home more than 35 percent of all capital gains income in Oregon in 2020. This tiny group of ultra-rich Oregonians together collected more than twice the capital gains income than went to the lowest 95 percent of Oregonians. The rest of the top 1 percent collected more than 22 percent of all capital gains in 2020. The rest of the top 5 percent took home more than 26 percent of all capital gains income that year.

In dollar terms, Oregon’s rich rake in fortunes in capital gains compared to most Oregonians. In 2020, a member of the top 0.1 percent on average got nearly $1.9 million just from their capital gains. The rest of the 1 percent took home more than $131,000 in capital gains on average. For the bottom 50 percent of Oregonians, the average earnings from capital gains was less than $200.[3] It should be noted, only about one in every five Oregon tax filers reported capital gains or losses in 2020.[4] Most Oregonians within the bottom 50 percent had no earnings from capital gains.

A flood of capital gains in 2021 warn of a grimmer picture of inequality

The above analysis relies on tax data from 2020 provided by the Oregon Department of Revenue. Thus, it does not include data from 2021. But other available information on capital gains income in Oregon suggest that income inequality worsened considerably in 2021.

The most recent Oregon Economic and Revenue forecast shows that in 2021, capital gains growth from the previous year was nearly nine times that of the growth of wages.[5] Capital gains grew by nearly 78 percent that year, while wages grew by less than 9 percent. The growth of capital gains earned by those subject to Oregon’s top income tax rate outpaced the overall capital gains growth rate, meaning the rich captured a disproportionate share of capital gains income in 2021.

The role of capital gains income fueling income inequality is not a new phenomenon. A 2013 study, for example, compared the impact on inequality levels from changes in wages, capital income, and taxes from 1991 to 2006. “By far, the largest contributor to this increase,” the report concluded “was changes in income from capital gains and dividends.”[6]

Lawmakers need to recognize the role of capital gains in fueling income inequality

Income inequality undermines the well-being of Oregonians. Inequality limits social mobility, hindering the possibility for a child born into poverty to move out of it. It leads to worse physical and mental health outcomes, particularly for those lower on the economic ladder. Moreover, income inequality slows economic growth, innovation, and investment.[7]

Lawmakers need to recognize the damage caused by growing income inequality. At the very least, it means rejecting policies that would make inequality worse. Better still, lawmakers should enact policies that reduce inequality. In broad strokes, that means: