[Mb-civic] NYTimes.com Article: I.R.S. Says Americans' Income Shrank for 2 Consecutive Years

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I.R.S. Says Americans' Income Shrank for 2 Consecutive Years

July 29, 2004
 By DAVID CAY JOHNSTON 



 

The overall income Americans reported to the government
shrank for two consecutive years after the Internet stock
market bubble burst in 2000, the first time that has
effectively happened since the modern tax system was
introduced during World War II, newly disclosed information
from the Internal Revenue Service shows. 

The total adjusted gross income on tax returns fell 5.1
percent, to just over $6 trillion in 2002, the most recent
year for which data is available, from $6.35 trillion in
2000. Because of population growth, average incomes
declined even more, by 5.7 percent. 

Adjusted for inflation, the income of all Americans fell
9.2 percent from 2000 to 2002, according to the new I.R.S.
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. Earlier government economic
statistics provided general evidence that incomes suffered
in the first years of the decade, but the full impact of
the blow and what groups it fell hardest on were not known
until the I.R.S. made available on its Web site the
detailed information from tax returns. 

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. 

In the past, overall personal income rose from one year to
the next with relentless monotony, the growth rate changing
in response to fluctuations in economic activity but almost
never falling. 

But now, 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. 

"Risks used to be confined largely to executives and
business owners with large incomes,'' said Edward N. Wolff,
an economist at New York University who studies wealth and
income. 

"But now for many people with more modest incomes their
earnings are more volatile,'' Mr. Wolff added, leaving them
more vulnerable to losing pay they count on to meet regular
expenses like mortgage payments, car loans and day-to-day
living costs. 

The new 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. It
may help analysts do a better job in predicting changes in
government receipts and provide businesses with clues to
help anticipate bigger ups-and-downs in spending for their
goods and services. 

Before the recent drop, the last time reported incomes fell
for even one year was in 1953. The only other time since
World War II that the I.R.S. reported an interruption in
income gains was from 1947 to 1949, but that was because of
changes in the tax law at the time that affected how income
was reported rather than an actual fall. 

>From 2000 to 2002, individual income taxes fell 18.8
percent, more than three times the decline in adjusted
gross incomes, the I.R.S.'s latest statistical reports
show. (Adjusted gross income is the broadest category of
income taxpayers report to the government, excluding only a
small portion of income in other forms, notably interest on
tax-free bonds.) 

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 - it is clear from
spending patterns, general income data and the performance
of the stock market - more affluent taxpayers regained some
of the 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. 

At the very top the ranks thinned by more than half. The
number of taxpayers reporting adjusted gross income of $10
million or more fell to 5,280 from 11,215. 

The combined income of this rich and thin slice of
Americans plummeted 63 percent, to $110 billion, in 2002
from $300 billion in 2000. Among those who stayed in this
category average annual income fell 22 percent, 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 percent, to $246.8 billion from
$349.5 billion. So many companies reduced or halted
dividends after 2000 that by 2002 dividend income had
fallen 17.4 percent, to $98.8 billion. 

The stock market decline also affected the incomes of those
between $1 and $5,000, which includes large numbers of
children in affluent families with investments for college
costs. Incomes for that group fell 7.8 percent over the two
years, to $33.3 billion, as dividends fell and those who
had to sell equities in the depressed market to pay tuition
reaped smaller gains in 2002. 

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. 

While detailed analysis of how much losing stocks were used
to offset income from winning stocks is not yet available
from the I.R.S., the agency did report the number of
taxpayers who said they had an overall loss in the value of
assets they sold. Net capital losses more than doubled, to
$29.9 billion from $13.6 billion, and the number of
taxpayers with net losses grew 96 percent, 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 percent, to 1.7 million in 2002. 

These "negative incomes'' come primarily from two groups:
people closing out a failed business and full-time real
estate investors, who are allowed to use paper losses like
depreciation to offset their wage income. 

The huge increase in the number of people with reported
losses is an indication of how many people were wiped out
as the widening waves of losses from the dot-com era
swamped many vendors, from small businesses to landlords. 

Those who reported negative incomes in 2002 reported being
$65.6 billion in the hole for that year, 12 percent worse
than in 2000. 

Pearl Meyer, a leading executive pay consultant in New
York, said the stock market even took a toll on the pay to
the chief executives of the 200 largest publicly traded
companies. 

"You can see the effect of the stock market's decline in
pay actually taken home each year,'' she said. 

For the 200 executives, stock option profits, which are
taxed at the same rate as salaries, fell to an average of
$3 million in 2002 from $5.3 million in 2001 and $7.4
million in 2000, Ms. Meyer said. 

Total pay for the top 200 chief executives, she calculated
from reports to shareholders, plummeted to an average of
$7.9 million in 2002 from $12.5 million in 2000. 

The collapse of the stock market boom, however, also
affected many people well below that level. John A.
Caldwell, chief investment strategist for the McDonald
Financial Group in Cleveland, said that when "you have a
flat stock market over a two- or three-year time period
people are less likely to exercise their options.'' 

That is because most people, even if they have a meager
gain on their options, delay exercising them in the hope
that stock prices will rise before their options expire. 

http://www.nytimes.com/2004/07/29/business/29tax.html?ex=1092117000&ei=1&en=d1f1a90f6fe1a672


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