How the Super-Rich Lucked Out Twice

New data show the top earners are already enjoying lower rates

Countless investors, small and large, made big gains from the remarkable stock market runup of the late 1990s. Some of those gains, of course, proved fleeting when the bubble burst. But the big winners were those who made truly monumental gains and managed to cash out in time, according to just released data from the Internal Revenue Service.

While wage and salary data on average Americans has long been readily available, figuring out how those at the top are faring has always been far trickier: They are few in number, and they guard their financial privacy closely. Now, however, the IRS has published data on the top 400 individual taxpayers--the super-elite, as ranked by their reported adjusted gross income. There are no names, of course. Still, the new data show just how much income these big earners made in the aggregate for each year from 1992 to 1998, how much they received in capital gains, and how much they paid in taxes.

WIDER GAP. The numbers tell a story of growing concentration of income at the very top. Including salary, dividends, interest, and capital gains, the share of income going to the top 400 individual taxpayers rose by two-thirds between 1995 and 1998, according to Joel B. Slemrod, a University of Michigan economist who analyzed the new data.

To put it another way, the average income for a member of this group rose from $50 million in 1995 to a staggering $110 million in 1998, an increase of 117%. Meanwhile, the average income for all tax payers rose from $35,000 to $43,000, an increase of 23%.

Even more striking, the widening income gap between the top earners and the average American was accompanied by a falling average tax rate for the highest paid. In 1998, the top 400 taxpayers paid only 22% of their adjusted gross income in income taxes, way down from 30% in 1995. By comparison, the average tax rate paid by all taxpayers actually rose slightly over the same stretch, to almost 15%. This number, which measures the total income taxes paid as a share of adjusted gross income, averages out the effects of all tax deductions and exemptions and the lower rates paid on long-term capital gains, and also takes into account the lower tax rates paid by many low-income households.

So why are tax rates for those at the top shrinking? Chalk it up to the lower rates paid on hefty capital gains. Most, but not all of the income increase at the very top came from capital gains. In 1995, they accounted for 44% of the income of the top 400; by 1998, capital gains brought in 73% of their income. For the average American, capital gains made up only 8% of income.

To be sure, the outsize capital gains that helped boost the incomes and lower the average tax rates at the very top could well be transient. While likely to persist in 1999 and perhaps 2000, they could start to diminish as income tax returns reflect the bursting of the Nasdaq bubble.

PERMANENT LEAD? However long the effects of the boom last, the new numbers show that the amounts of money involved were enormous. In 1998, the last year for which data are available, the top 400 taxpayers received a total of $44 billion, or nearly 1% of all income. By comparison, in each of fifteen states, including New Mexico and Hawaii, all state residents combined earn less than $44 billion.

The experience of the top 400 is mirrored by less wealthy but still high-earning individuals. Take, for example, taxpayers reporting more than $500,000 in income. In 1998, this category included about 480,000 tax returns, a mere drop in the bucket compared to 125 million returns overall. Nevertheless, this group accounted for approximately 14% of all income that year, up from 8% in 1995. Their average tax rate fell over that stretch from 31% to 28%.

Will the income share of the top earners drop as the economy slows? Will their income fall faster than that of the average American? It's impossible to know. But it's clear that a relatively small number of individuals garnered a disproportionate share of the gains of the 1990s boom.

By Michael J. Mandel in New York

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