Global Policy Forum

By David Cay Johnston

Despite all the talk about prosperity in this digital age, tax return data indicates that the rising tide of bits and bytes is lifting the yachts much more than the rowboats.

From 1986 through 1997, the latest year for which detailed figures are available from the Internal Revenue Service, the average income of the richest 1 percent of Americans soared 89 percent, to $517,713 from $273,562.

Those figures are after federal income taxes have been paid, and are expressed in constant 1997 dollars to eliminate the effects of inflation. To be counted among the top 1 percent in 1997 required an after-tax income of at least $268,889, suggesting a pretax income of at least $440,000.

But the incomes of those at the top did not rise steadily over those 12 years. The average declined from 1989 to 1991 because of a mild recession. And it dropped again in 1993, but that is probably a fluke, attributable to significant numbers of wealthy people who cashed in deferred income in 1992, in anticipation of an increase in the top income tax rate to 39.6 percent, a rate paid only by the top 1 percent of taxpayers.

During those same 12 years, the bottom 90 percent of Americans, meaning everyone who took home less than $80,000 after paying federal income taxes, did not fare nearly as well.

In 1997, the average income for the bottom 90 percent was $23,815, up a scant $364, or 1.6 percent, from 1986. This average also fluctuated during the 12 years, but the changes, up or down, were less than 2 percent in 11 of those years. The fluctuations were so tiny that in the chart accompanying this article they disappear, and the line appears flat.

The figures were computed from an I.R.S. statistics-of-income report by the Center on Budget and Policy Priorities, a nonprofit Washington group that advocates policies that it says will benefit the poor.

The center's report did not include one fact that illustrates the sharp divergence between the fortunes of the economic elite and the rest of America: From 1996 to 1997, the increase in average income for the top 1 percent of Americans - a gain of $69,009 - was nearly triple the total average income of the bottom 90 percent.

Over nine years of economic expansion, the question of whether the fruits of the boom are being distributed fairly has become central in American politics. Competing policy proposals from Democrats and Republicans on issues ranging from taxation to health care to retirement savings are often based on fundamentally different interpretations of the available data. And the quality and reliability of the data itself is often hotly disputed by advocates in each camp.

There are many ways to measure income, none of them perfect. Tax- return data like that examined by the center has the advantage of coming from documents that all taxpayers sign under penalty of perjury, and of being subject to comparison with W-2 and Form 1099 reports from third parties listing payments of wages, dividends, interest and royalties. Rent and capital-gain income, which goes mostly to the affluent, depends on the reporting of those who receive the income.

Edward N. Wolff, an economist at New York University who studies the wealthy, said tax-return data gave a reliable picture of those with the highest incomes. But for the bottom 90 percent, he said, "the figures are biased downward," because a substantial amount of Social Security and other income is not picked up on tax returns. Income from tax-free bonds and the like is also omitted from tax returns, but it goes almost entirely to the wealthy.

Another widely used measure of income, the Census Bureau survey data on median household income, also showed little change in overall income from 1986 to 1997.

Adjusted for inflation, the median income rose just 1.5 percent during those years, to $37,005 in 1997 dollars. Unlike the tax data, the Census Bureau's survey figures tend to understate incomes at the high end, because of the methodology used to record large incomes. The bureau puts a cap on all income components - salaries, for example, are capped at $999,999 - so that a few extremely high incomes do not distort the survey averages.

Those who report the greatest share of the nation's income also pay the greatest share of income taxes. In 1997, the I.R.S. data shows, people with incomes of $100,000 or more, about 5.9 percent of all taxpayers, made 34.5 percent of all the money and paid 53.7 percent of the income taxes collected that year.

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