The IRS data indicate that the average after-tax income of the top 1% of tax filers jumped $121,000, or 31%, just between 1995 and 1997, after adjusting for inflation. That compares to an increase of 3.4% in the average after-tax income of the bottom 90% of tax filers. Indeed, the $121,000 average income gain enjoyed by the top 1% of tax filers during this period was several times the total income of the typical middle-class household.

Since 1997, the incomes of virtually all groups have been improving. The preliminary IRS data available for the period since 1997 suggest, however, that income gains for those at the top of the income spectrum have continued to outstrip income gains for other Americans. These data indicate that capital gains income rose approximately 20% just between 1997 and 1998 and that 72% of all capital gains income in 1998 went to tax filers with incomes exceeding $200,000. This virtually assures that income disparities widened further in 1998. (The data on after-tax income subtracts income taxes, but not other taxes.)

These recent developments are part of a longer-term pattern. Comprehensive information on after-tax income that the Congressional Budget Office has compiled for the period from 1977 to 1995 shows dramatic increases in income gaps. During this period, average after-tax income dropped for the bottom two-fifths of the population, was stagnant for the middle fifth and rose for the upper 40%, including an increase of 27% for the top fifth. Meanwhile, the average after-tax income of the top 1% of the population soared by 87%.

The new IRS data, which take up where the CBO data leave off (since the CBO data currently extend only through 1995), deserve especially close scrutiny. Some recent assessments of income trends that are based on Census Bureau data have suggested income disparities might have stopped growing in recent years. But as researchers have long noted, census data are inadequate for measuring gains at the top of the income spectrum and consequently provide an inadequate assessment of income disparities. For example, the standard census data do not include capital gains income, thereby missing $426 billion in income in 1998.

Recognizing the limitations of its data, the Census Bureau does not publish income information for the top 1% of the population. The IRS data are the sole reliable source of data on the incomes of these individuals.

Should we care that income inequality is at an exceptionally wide level? Should we care that just the gains in the average incomes of the top 1% between 1995 and 1997 far exceeded the total incomes of the typical family? Since most families are now better off than they were a couple of years ago, are such observations merely incendiary?

These observations do matter. Among other reasons, they provide a context for some key governmental decisions, chief among which are decisions about how to use the federal budget surplus.

Although the surplus realistically available for program initiatives and tax cuts is significantly smaller than many realize, substantial resources are available. We have a historic opportunity to address some of the nation's highest priority needs. Before deciding how to take advantage of this opportunity, policymakers and the public need to debate what our most pressing priorities are and which groups of Americans should benefit.

So far, such a debate has not occurred. Instead, Congress has charged ahead with efforts to advance tax cuts that would largely benefit very high-income taxpayers whose incomes are climbing much faster than everyone else's. While it now appears that major tax cuts will not be signed into law this year, tax cut proposals are sure to surface again next year, regardless of the election's outcome.

The new data on burgeoning income disparities suggest that a wiser course would be measures such as extending health insurance to a sizable number of the 44 million uninsured, providing an adequate Medicare prescription drug benefit, strengthening efforts to combat child poverty (which is higher in the United States than in most other Western nations) and providing more modest tax reductions targeted primarily to low- and middle-income working families. Such families, whose income gains in recent years have been much smaller than those of the wealthiest families, deserve to be our highest priority.

Isaac Shapiro is a senior fellow at the Center on Budget and Policy Priorities, a Washington think tank. John Springer is a writer there.

Copyright 2000 Los Angeles Times

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