Income Inequality and the Incomes of Very High-Income Taxpayers: Evidence from Tax Returns

This paper uses tax return data for the period 1951-1990 to investigate the rising share of adjusted gross income (AGI) that is reported on very high income tax returns. We find that most of this increase is due to a rise in reported income for the one quarter of one percent of taxpayers with the highest AGIs. The share of total AGI reported by these taxpay-ers rose slowly in the early 1980s, and increased sharply in 1987 and 1988. This pattern suggests that at least part of the increase in the income share of high-AGI taxpayers was due to the changing tax incentives that were enacted in the 1986 Tax Reform Act. By lowering marginal tax rates on top-income households from 50 % to 28%, TRA86 reduced the incen-tive for these households to engage in tax avoidance activities. We also find substantial differences in the growth of the income share of th