A new IRS report reveals that when stock markets rallied following the financial crisis of 2007-09, the wealthiest Americans saw their taxable income rise while their effective tax rates fell.

The wealthy took a hit from the stock market crash – there’s no doubt about it.  In 2008 and 2009, the wealthy’s share of national income fell; and because they were receiving less money from more lightly taxed capital gains, their tax rates rose.  In 2010, that began to change.  As the stock market picked up steam, the top 1% (families with taxable income $369,691) garnered 18.87% of all national income, almost a 10% increase from 2009.  At the same time, their average tax bills fell to 23.39%, down from 24.05%.

The top 0.1% recovered even more favorably.  In 2010, they captured 9.24% of the national income, up from 7.94% in 2009.  Their average tax bills fell from 24.28% to 22.84% – lower than the other one-percenters.

Despite lower tax rates, the top 1% still paid 37.4% of total taxable income in 2010, up from 36.3% in the prior year.  The increase in taxes paid though was less than the increase in their share of national income.

Put simply, the rich got richer because their investment income increased when the markets recovered.  Their taxes got smaller because more of the income came from these less-taxed sources.

The American Taxpayer Relief Act sought to shrink this gap by increasing the top capital gains tax rate to 20% for individuals/couples making over $400,000/$450,000, effective Jan. 1 2013.  In addition, there is a new 3.8% medicare surtax on passive investment income like capital gains for incomes over $200,000/250,000, bringing the top rate to 23.8%.

It’s doubtful that will be enough to make effective tax rates more equitable.

Tell us how you think capital gains and investment income should be taxed in the comments field below!

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