Alan Reynolds

The first in a recent series of New York Times articles about "class in America" claimed "the after-tax income of the Top 1 percent of American households jumped 139 percent, to more than $700,000, from 1979 to 2001, according to the Congressional Budget Office" (stopping at 2001 because the figure for 2002 fell to $631,700).

 A recent article in the same paper used a black box "computer model" to slice the pie even thinner, down to the top 145,000 taxpayers. Author David Cay Johnston concluded, "The average income for the top 0.1 percent was $3 million in 2002. . . . That number is two and a half times the $1.2 million, adjusted for inflation, that group reported in 1980."

 I criticized the first New York Times article in a May 18 Wall Street Journal piece, partly because the ephemeral incomes of a few entertainers, athletes and investors had nothing to do with the series' theme of upward mobility among the general population. More to the point, I cryptically suggested it is inappropriate to use income tax statistics to measure long-term changes in income inequality. That needs more explaining.

 Unlike Census statistics, the tax statistics include capital gains -- but only those gains that are realized and taxable. This is particularly deceptive when comparing recent years with 1979-80, because Individual Retirement Accounts began in 1981, and 401k and Keogh plans came later. Unlike 1979, most capital gains now accumulate invisibly in tax-deferred plans for retirement and college. Since 1997, couples may repeatedly realize capital gains of up to $500,000 from selling their homes, yet those gains are likewise missing from "income" as measured by The New York Times.

 Because most people now accumulate most capital gains and dividends in ways undetectable on tax returns, tax data wrongly suggest that only the very rich (whose investments exceed the caps on 401k and Keogh contributions) still appear to be realizing many gains. This creates a statistical illusion that only those at the top appeared to benefit much from the 1982-2000 boom in stocks and bonds.


Alan Reynolds

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