The New York Times | December 15, 2007
By David Cay Johnston

The increase in incomes of the top 1 percent of Americans from 2003 to 2005 exceeded the total income of the poorest 20 percent of Americans, data in a new report by the Congressional Budget Office shows.

The poorest fifth of households had total income of $383.4 billion in 2005, while just the increase in income for the top 1 percent came to $524.8 billion, a figure 37 percent higher. 

The total income of the top 1.1 million households was $1.8 trillion, or 18.1 percent of the total income of all Americans, up from 14.3 percent of all income in 2003. The total 2005 income of the three million individual Americans at the top was roughly equal to that of the bottom 166 million Americans, analysis of the report showed.

The report is the latest to document the growing concentration of income at the top, a trend that President Bush said last January had been under way for more than 25 years.

Earlier reports, based on tax returns, showed that in 2005 the top 10 percent, top 1 percent and fractions of the top 1 percent enjoyed their greatest share of income since 1928 and 1929. 

The budget office report takes into account a broader definition of income than tax returns that is known as comprehensive income. It includes untaxed Social Security benefits, welfare, food stamps and part of the value of Medicare benefits, giving a fuller picture of incomes at the bottom than tax data.

Much of the increase at the top reflected the rebound of the stock market after its sharp drop in 2000, economists from across the political spectrum said. About half of the income going to the top 1 percent comes from investments and business.

In addition, Congress in 2003 cut taxes on long-term capital gains and most dividends, which advocates said would encourage people to turn untaxed wealth into taxable income. Some economists have said that the increase in incomes at the top is illusory and is in good part simply converting untaxed assets into taxed income to take advantage of reduced tax rates.

The Congressional Budget Office report made no attempt to explain the increases in income in its annual report on effective federal tax rates paid by people at different income levels. 

Asked how much of the increase at the top was from the tax cuts rather than market gains, Peter R. Orszag, the budget office director, said, “I can’t give you an answer to that because we just don’t know.”

Chris Frenze, Republican staff director for the Congressional Joint Economic Committee, said the increase in top incomes is much more modest if viewed over longer time periods. Since 2000, he said, the average income of the top 1 percent has risen $97,900, or 6.7 percent, the same percentage increase this group had from 1992 to 1997.

Jared Bernstein, an economist at the Economic Policy Institute in Washington who characterizes the Bush administration’s policies as YOYO economics, based on You (Are) On Your Own, said the differences in income growth explained why so many Americans have told pollsters that they are feeling squeezed.

“A lot of people justifiably feel they are working harder and smarter, they are baking a bigger and better pie, and yet their slice is not growing much at all,” Mr. Bernstein said. “It is meaningless to middle- and low-income families to say we have a great economy because their economy looks so much different than folks at the top of the scale because this is an economy that is working, but not working for everyone.” 

At every income level Americans had more income, after adjusting for inflation in 2005 than in 2003, but the increases ranged from almost imperceptible for the poor to modest for the middle class and largest for those at the top. 

On average, incomes for the top 1 percent of households rose by $465,700 each, or 42.6 percent after adjusting for inflation. The incomes of the poorest fifth rose by $200, or 1.3 percent, and the middle fifth increased by $2,400 or 4.3 percent.

The share of all federal taxes paid by the top 1 percent grew, but only slightly more than half the rate of their growth in incomes because of the tax rate cuts. The top 1 percent paid 27.6 percent of all federal taxes in 2005, up from 22.9 percent in 2003, while the share paid by the middle fifth of taxpayers declined to 9.3 percent from 10 percent in 2003.

The share of their income that the top 1 percent paid in all federal taxes and in income taxes fell. The total tax rate dropped 1.8 percentage points, to 31.2 percent, from 2003 to 2005 while their average income tax rate declined one percentage point, to 19.4 percent, largely because of the cuts in taxes on capital gains and dividends.