Changes in tax law that reduced the federal tax rate on capital gains income is “by far the largest contributor” to rising income inequality in the United States, according to a new paper from Thomas Hungerford, an economist at the Congressional Research Service.

Capital gains and other investment income was taxed as regular wage income from 1986 until 1996, when the capital gains rate was reduced. It was further reduced as part of the Bush tax cuts, and over the last decade, it has reversed the equalizing effects of taxes and allowed for massive income gains for the wealthy that translated directly into increased income inequality:

By far, the largest contributor to this increase was changes in income from capital gains and dividends. Changes in wages had an equalizing effect over this period as did changes in taxes. Most of the equalizing effect of taxes took place after the 1993 tax hike; most of the equalizing effect, however, was reversed after the 2001 and 2003 Bush-era tax cuts. [...]

The large increase in the contribution of capital gains and dividends to the Gini coefficient, however, is due to the large increase in the share of after-tax income from capital gains and dividends, and to the increase in the correlation of this income source with after-tax income.

Hungerford’s findings are similar to a study he produced for the Congressional Research Service in 2011, which found that while income grew 25 percent from 1996 to 2006 for all Americans, it grew 74 percent for the top 1 percent and 96 percent for the top 0.1 percent. That study also found that tax cuts on capital gains were the biggest driver of the disparity.

The capital gains rate increased to 20 percent at the beginning of 2013, and top earners will pay an even higher rate because of a surcharge to help pay for Obamacare. Still, the rate remains far lower than the top income tax rate, even as inequality in America is now comparable to countries like Pakistan and the Ivory Coast. (HT: Greg Sargent)

Already, the biggest banks in the U.S. are huge. The largest 0.2 percent of institutions — just 12 mega-banks — control 69 percent of total bank assets. The 20 biggest banks hold assets equal to 84.5 percent of the nation’s entire economic output.

And if the U.S. accounted for bank assets (and risk) in the same way that European countries do, the problem would look even worse:

U.S. accounting rules allow banks to record a smaller portion of their derivatives than European peers and keep most mortgage-linked bonds off their books. That can underestimate the risks firms face and affect how much capital they need.

Using international standards for derivatives and consolidating mortgage securitizations, JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. would double in assets, while Citigroup Inc. would jump 60 percent, third- quarter data show. JPMorgan would swell to $4.5 trillion from $2.3 trillion, leapfrogging London-based HSBC Holdings Plc and Deutsche Bank AG, each with about $2.7 trillion.

JPMorgan, Bank of America and Citigroup would become the world’s three largest banks and Wells Fargo the sixth-biggest. Their combined assets of $14.7 trillion would equal 93 percent of U.S. gross domestic product last year, the data show. Total assets of the country’s banking system would be 170 percent of economic output, still lower than 326 percent for Germany.

Several members of Congress, from both sides of the aisle, have wondered recently why the biggest banks aren’t being broken up, since they’re “too big to fail,” “too big to jail,” and even “too big for trial.” “Glass-Steagall [which separated commercial and investment banking] was put in place in 1933 to prevent exactly what happened to us. It was in place, I think for approximately 66 years, until it was repealed,” noted Sen. Joe Manchin (D-WV) last week. “If it worked so well for so many years why do you all not believe that it’s something we should return to or look at?”

As Demos noted in a recent report, the financial sector sucks $635 billion out of the economy every year that could otherwise go to more productive uses, while creating behemoths that put the entire economy at risk. “These banks are not just too big to fail, they’re too big to manage,” said Sen. Sherrod Brown (D-OH). “I think these banks will be stronger and healthier and probably more profitable if they’re smaller.”

Sequestration, the automatic spending cuts that loom at the end of the month, will have widespread and devastating effects on the American economy, reducing growth by 0.6 percent and costing it 700,000 jobs, according to independent analysts. But it will also have major effects on programs that Americans depend on, particularly as the modest economic recovery continues.

Among the programs that will face cuts is the federal unemployment insurance program. While the part of the program that benefits the unemployed by providing grants to states is exempt from the cuts, the extended benefits signed into law at the start of the Great Recession are not. Extended benefits provide aid to workers who have been unemployed longer than 26 weeks, when most states end their programs. The budget cuts will reduce those benefits, which average roughly $300 a week for the program’s 3.8 million recipients. CNN reports:

The forced spending cuts scheduled to take effect next month trim the program’s funding. Recipients of those payments could lose an average of more than $400 in benefits each through the end of the federal fiscal year, according to the Department of Labor.

America’s unemployment insurance program is already stingy compared to those used by other Western industrialized nations, and it is rapidly becoming even stingier. Seven states have passed laws reducing access to unemployment benefits, and those laws carry the side-effect of ending access to federal unemployment compensation as well. In North Carolina, where the most radical change was made, benefits were cut by more than $200 a week, and the state’s jobless will lose access to $780 million in federal funds.

Democrats have offered plans to replace the sequester with a combination of spending cuts and revenue increases that protect the most vulnerable Americans, including those who have been unemployed for months. Republicans, however, have refused to negotiate on any package that is not made up solely of spending cuts, even though spending cuts have made up the majority of deficit reduction efforts so far.

The United States is rapidly approaching March 1, the date on which the automatic spending cuts put in place by the summer 2011 debt ceiling deal will begin taking effect. There is little indication that Congress will avert the cuts as it did in January, as Republican leaders have thus far been unwilling to negotiate with President Obama and Senate Democrats.

Congress is currently on recess until next Monday, leaving just five legislative days until the automatic cuts — known as sequestration — will take effect. Here’s a breakdown of why the sequester was created and what it will mean for programs facing cuts and the nation’s overall economic recovery:

Why the sequester was created. The sequester was a result of the GOP’s wrangling over the debt ceiling in the summer of 2011, when Republican leaders — who had previously passed clean debt increases 19 times under President Bush — demanded spending cuts as the price for averting a costly default. On the brink of default, Congress passed the Budget Control Act, which enacted immediate spending cuts and created a supercommittee tasked with striking a “grand bargain” to reduce the deficit. Republicans walked away from the committee after refusing to consider tax increases on the wealthy, setting sequestration into motion. The sequester, which cuts from both domestic and defense spending, was designed to be painful enough that both sides would negotiate to avert it.

How to avoid it. The sequester was originally supposed to take effect on January 1, but it was avoided as part of the overall “fiscal cliff” deal that maintained most of the Bush-era tax cuts and enacted spending reductions to offset the first round of automatic cuts. In the past, Republicans offered plans to offset the sequester by cutting more spending, even though deficit reduction efforts have been heavily skewed toward spending cuts to domestic programs already. Democrats have offered multiple proposals that would bring more balance to efforts to reduce the deficit. A plan from the Congressional Progressive Caucus would replace the sequester largely with new revenue, evening the balance of spending cuts and revenue increases in overall deficit reduction efforts. Senate Democrats proposed a plan that reduced the deficit by $110 billion, enough to offset the sequester until next January. Half of the reduction comes from cuts, the other half from tax increases on the wealthy. Republicans, however, have again refused to negotiate over new revenues, even from tax reform that would close corporate loopholes.

What it will mean. Because its cuts are across-the-board, the sequester will affect most domestic programs. Jobless workers will lose access to unemployment benefits, while safety net programs for women and children and early childhood education programs will face deep cuts. The sequester will cut funding for law enforcement and border security, food safety, airline travel security, Head Start, disaster relief, and health research. Defense programs will also see reductions. These cuts will have broad ramifications for the country’s recovering economy, pushing it down the austere path Europe has followed into second recessions. Independent reports predict that sequestration would reduce economic growth by 0.6 percent over the year while also leading to the loss of 700,000 jobs. The debt limit fight that created the sequester already pummeled the recovery, and allowing these spending cuts to take effect would cause even bigger problems.

The Obama administration is reviving its push to provide labor protections to home health workers who are often excluded from traditional labor law. According to The Hill, the administration will offer a final rule governing the home health industry soon:

Enactment of the regulations, which are under final review at the White House, would represent a major victory for unions that have fought for decades to win higher pay for direct-care aides. [...]

In recent days, the White House has held multiple meetings with groups that have a stake in the proposal, according to participants and logs maintained by the Office of Management and Budget.

Involved parties on both sides said they expect the White House to issue the rule soon.

Home health workers are not subject to minimum wage or overtime pay laws because the Fair Labor Standards Act exempts those “who provide ‘companionship services’ to people with disabilities and the elderly,” a definition that has been applied to home health workers. But as Sarah Jane Glynn noted, “Home care workers today provide everything from help with eating and dressing to monitoring blood pressure and vital signs,” making them far from simple companions.

The Big Business community is, predictably, opposing the new rule, and Congressional Republicans tried to block it the last time it surfaced. But with the home health industry set to explode in the coming decades, ensuring that those workers get the bare minimum when it comes to labor protections is a no-brainer.

When Wisconsin Gov. Scott Walker (R) initiated a high-profile effort to bust his state’s public sector unions in 2011, he said that he had no interest in pursuing similar efforts against private sector unions. “Private sector unions are my partner in economic development,” Walker has said. The Milwaukee Journal Sentinel noted that he “has consistently downplayed seeking any restrictions on private unions in public statements.”

Walker also said in December that “he wouldn’t pursue any new bills on public or private unions in the coming legislative session.” However, word evidently did not get down to his Republican colleagues, who introduced and are fast-tracking a bill to allow employers to cut hours of union workers without the unions’ consent:

Republicans are hurrying bills through the Wisconsin Legislature that they say could prevent layoffs by allowing companies to cut back workers’ hours, but Democrats on Tuesday called them a renewed GOP attack on unions.

The bills wouldn’t require companies to negotiate with unions about cutting back hours, in contrast to almost all similar laws in other states. But a spokeswoman for the author of the Assembly version of the Wisconsin proposal said there was no intent to harm organized labor.

The Wisconsin GOP is moving this bill under the guise of creating a “work-sharing” program, which is an idea aimed at using government support to allow businesses to cut back worker hours while not laying off employees (with the government picking up the tab for the hours workers miss). However, “in all but one of the 24 states with work-sharing laws, union representatives must agree to the reduction in hours for their members.” Wisconsin’s bill does not include a similar requirement.

“Republicans began their war on bargaining rights with Act 10, and with this bill they have now turned their attention to private sector unions,” said state senate Minority Leader Chris Larson (D). “This bill is a clear opening shot at undermining private sector unions.” “The Farrow-Brooks bill says that private sector unions shouldn’t be able to negotiate for their members. It’s one more step toward their goal of ending the right of Wisconsin citizens to have their voice heard in the workplace,” added State Senator Julie Lassa (D).