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 the increase in the share of AGI reported by high-income taxpayers
is due to an increase in reported income for the one quarter of one percent of taxpayers
with the highest AGIs. The share of total AGI reported by these taxpayers 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 incentive for these households to engage in tax avoidance activities. We also
find substantial differences in the growth of the income share of the highest one
quarter of one percent of taxpayers, and the share of other very high income taxpayers.
This suggests that the increasing inequality of reported incomes at very high levels
may not be driven by the same factors that have generated widening wage inequality
throughout the income distribution and over a longer time period.