Americans’ income shrank for 2 yrs: IRS data

Adjusted for inflation, the income of all Americans fell 9.2 per cent from 2000 to 2002, according to the new IRS data. While the recession that hit the economy in 2001 in the wake of the market plunge was considered relatively mild, the new information shows that its effect on Americans’ incomes, particularly those at the upper end of the spectrum, was much more severe.

The unprecedented back-to-back declines in reported incomes was caused primarily by the combination of the big fall in the stock market and the erosion of jobs and wages in well-paying industries in the early years of the decade.

With many more ordinary employees joining high-level executives in having part of their compensation dependent on stock options and bonus plans, a volatile and relatively unpredictable new element has been introduced to the incomes of millions of workers.

The data also helps explain why personal income taxes, the government’s most important source of revenue, are subject to much greater fluctuations than in the past. The last time reported incomes fell for even one year was in 1953.

From 2000 to 2002, individual income taxes fell 18.8 per cent, more than three times the decline in adjusted gross incomes, the IRS’s latest reports show. To some extent, taxes fell more than incomes because of tax cuts championed by President Bush and approved by Congress in 2001. But in that year and in 2002 the cuts applied primarily to those making less than $100,000, especially families with children, and to capital gains from the sales of appreciated assets like stock.

The major tax rate reductions for highly paid Americans did not take effect until 2003, when more affluent taxpayers regained some losses they experienced in the earlier years of the decade. Falling incomes, rather than tax cuts, appear to count for the greatest share of the decline in income taxes paid. That is because the higher one stood on the income ladder the greater the impact was likely to be from the stock market crunch.

At the same time many of those whose incomes fell the most — those reporting $200,000 to $10 million in income — paid at the highest rates, which meant that the drain on revenues was even greater when their incomes shrank. More than 352,000 taxpayers, one of every eight who had worked their way above $200,000 of income in 2000, fell below that figure in 2002.

The combined income of the rich and thin slice of Americans plummeted 63 per cent, to $110 billion, in 2002 from $300 billion in 2000. Among those who stayed in this category average annual income fell 22 per cent, to $20.9 million from almost $26.8 million in 2000.

Capital gains income, which results from selling stock market shares and other assets at a profit, fell over the two years by more than 29 per cent, to $246.8 billion from $349.5 billion. Two factors appear to be at work in the decline in capital gains income, which is highly concentrated among the wealthy.

The primary factor was the Wall Street debacle, especially the collapse of many dot-coms and telecommunications companies, which eliminated trillions of dollars of paper wealth. The second was the creation of a large reservoir of losing stocks, which can be sold to offset gains on winning stocks, reducing the amount of capital gains subject to tax for perhaps years to come. Net capital losses more than doubled, to $29.9 billion from $13.6 billion, and the number of taxpayers with net losses grew 96 per cent, to 13.3 million. During the same two years the number of Americans reporting no income or that they actually lost money for tax purposes exploded, growing 48.5 per cent, to 1.7 million in 2002. — NYT