(FORTUNE Magazine) – THE STATISTICAL gamesmanship over American income trends started early in this election year and has been heating up ever since. Enshrined in Bill Clinton's economic plan is the ''fact'' that the top 1% got 70% of all income gains during the 1980s, based on a calculation by MIT economist Paul Krugman that won wide prominence last March. ''Foul!'' cry Republicans, marshaling statistics showing that the rising tide of the record-long peacetime expansion lifted all boats -- yachts, tugs, and dinghies alike. Who's right? This article sorts out the facts without ideological blinders. Some conclusions: For all the talk of the poor getting poorer, middle and lower incomes didn't ''plummet'' over the Eighties, as has often been reported. Measured properly, they gradually rose. But the income gap is widening. A recent Census Bureau study found that the percentage of Americans earning ''high'' incomes (defined as at least two times the national median, which for a family of four is $40,763) increased from just under 12% in 1979 to 14.7% in 1989. The number of low earners (those whose incomes are half the median or less) rose from 20% to 22%. And the worrisome slowdown in productivity growth crimped wage gains for most workers. These trends are not exclusive to the Eighties, though -- a Census Bureau study, for instance, shows that income inequality has been growing since the late 1960s. When liberals and conservatives argue over these statistics, how can both sides find data that seem so eloquently to support their conflicting cases? One reason: Even the dispassionate authorities that collect and massage the statistics differ over methodologies, and differing methods yield differing results. For example, income data are generally broken into quintiles, ranging from the lowest 20% to the highest 20%. Tracking these from 1977 to 1989, the Congressional Budget Office (CBO) concluded that median incomes in the lowest, second-lowest, and middle quintiles declined by 10.4%, 9.8%, and 5.3%, respectively. That's one reason for the oft-heard assertion that the bottom 60% of the population lost ground while the rich made out like bandits. Census Bureau data for the same period, however, show a 6.9% gain for the lowest quintile, 8% for the second, and 8.6% for the middle. (For why these conclusions differ -- and which you should believe -- see box.) Everybody's numbers make clear that the ''rich,'' if you consider them the top quintile, include lots of folks who would judge themselves decidedly middle class. A household income of $53,710 before taxes made it into the top fifth of the income distribution in 1989 (the most recent year available). Those whose yearly take totaled $91,750 pretax -- about what's required to support a reasonably comfortable upper-middle-income life in New York City or Los Angeles, where many such earners live -- made it into the top 5%.

What about that rapacious 1% who, using Krugman's analysis, took the bulk of total income growth in the 1980s? Krugman's findings were based on CBO data. When the flap over his study hit this Spring, the CBO reran its numbers. Adjusting the data for family size, it found that the top earners' share of income growth fell to 44%. Removing dubious and inflated capital gains, the lucky one-percenters' take tumbled to 33%. That's not bad, but it's not 70% either. The CBO analysis was never intended to be used as a description of the ''unfairness'' of income distribution trends. Congress asked the agency to evaluate how changes in tax policy affected the burden borne by families with different incomes. This explains why its study begins in 1977 -- the year before capital gains taxes were nearly halved, and a year of no merit for gauging what happened to incomes in the 1980s. The CBO's findings on relative tax burdens could just as easily be used to support supply-sider claims that lower tax rates help everyone. Payments by families in the lowest quintile, which accounted for 2% of all federal income tax receipts in 1977, are forecast to fall to 1.3% this year, mainly because of an increase in earned-income tax credits of about 6% aimed at the indigent. Over the same period, the share of federal taxes paid by filers in the top quintile rose from 55.7% to 60.5%. The richest 5% of households alone will ante up 33.3% of the Treasury's total personal tax take for 1992 -- a nearly six percentage point increase since 1977. Similarly, supply siders would argue that chopping top marginal tax rates from 70% in 1981 to 28% in 1986 likely accounted for much of the large increase in the reported incomes of the people in the top quintile. Reason: It reduced their incentive to disguise income as retained earnings of privately held corporations, professional partnerships, or other tax shelters and to declare it as personal income. A study by economist Lawrence Lindsey, now a governor of the Federal Reserve Board, suggests that for each percentage point of the 1981 reduction in tax rates, taxpayers reported 1.1 to 1.7 percentage points of additional income. HOW RELIABLE, then, is the quintile measurement of the income distribution? ''It's the best we have,'' says economist Richard B. McKenzie of the University of California at Irvine. But he quickly goes on to quote the old saw, ''It's worse than knowledge; it's the pretense of knowledge.'' Quintiles oversimplify: They portray gross income trends that do not reflect who's in each quintile and what causes their earnings to swell or shrink over time. How do individual households fare as their members graduate from school, marry, have children, divorce, change jobs, age, or retire? The Census and CBO data offer little clue. Recent studies of economic mobility demonstrate that the changes are profound -- and relatively few people remain poor for long. Sampling individual tax returns filed over ten years, Treasury Department economists found that only about 14% of filers in the bottom quintile in 1979 were still there by 1988. Roughly 15% gained enough to leapfrog all the way to the top quintile. Within the middle fifth of the income distribution, about one-third remained a decade later; nearly half had moved up. Even among the richest 1%, less than half remained at that income pinnacle over the entire decade. The Treasury study measured income changes only for those who filed tax returns in each of the ten years. As a result, critics say, it gives too much weight to younger people who were more likely to be upwardly mobile as they matured and became more experienced. But the analysis finds strong support in a new study by economists Isabel Sawhill and Mark Condon of the Urban Institute, a nonpartisan research outfit. Analyzing a survey of 4,829 households headed by mid-career workers ages 25 to 54 in 1977, the study found that by 1986, the incomes of those who started in the bottom quintile had risen 77% to an average of $27,998. That far outstripped the 18% rise of all households in the sample. Earnings of those in the top quintile rose a modest 5%. , Both the Treasury and Urban Institute studies suggest that the folks in the bottom quintile are a mixed bunch. Nearly half don't work at all. And in any given year, many are transient -- workers temporarily out of a job, students preparing to get one that will lift them to higher incomes, and recent divorcees struggling to regain financial footing. Even many long-term denizens of the bottom fifth are reasonably secure. Some 28% are elderly living on inflation-indexed Social Security benefits. Economist Richard McKenzie found that about a quarter of the lowest earners own homes free of mortgages. THE BAD NEWS is that many in the bottom quintile are struggling. Since 1970, the number of families headed by an unmarried mother increased from about 11% of all households to 16.5% in 1990. Today, they make up 42% of the families in the lowest fifth. But many single mothers work their way out of poverty. Nearly 31% of those with children under 6 years old held full-time jobs in 1989, up from 25% in 1979. About 18% fell below the poverty line, vs. 20% a decade earlier. At the top, by contrast, you find many large families with more workers per household. While 29% of those in the lowest quintile in 1990 were individuals living alone, 89% of households in the highest were families. Their annual incomes averaged $92,663. One reason: They had almost four times more full- time workers -- who were generally older and more experienced -- than those in the bottom fifth. Broad social and economic changes -- like the breakup of the family -- influence incomes in ways that don't show up in raw survey data. For example, married-couple families dropped from 70% of all households in 1969 to 56% in 1989. A recent study by Census Bureau economists Gordon Green and Paul Ryscavage and statistician Edward Welniak estimates that had this proportion remained unchanged, median household incomes today would be $3,226 higher -- more than five times the actual gain -- and the poverty rate 2.1 percentage points lower than the 12.2% in 1989. Similarly, secular changes in the economy explain at least some of the increased inequality in wages and salaries. Since 1979, average cash wages -- the most conventional measure of compensation -- inched up a barely perceptible 0.2% and are today slightly lower than in 1973. Adding the increased value of fringe benefits would lift average total compensation another 3.75 percentage points. STILL, the flat average masks a widening disparity in earnings, increasingly < influenced by how well people are educated. Less educated workers faired relatively better in the 1970s when the pay gap between college graduates and high-school grads or dropouts narrowed. Back then, a record number of college- educated baby-boomers flooded the labor market. But in the Eighties the gap widened again as the number of college-trained entrants grew more slowly. In 1988, average earnings for male college grads with ten years of experience were 85% higher than those of their high school educated counterparts -- more than twice the differential of 1980. Women with college degrees and similar experience earned 60% more than their high school trained sisters, up from 37% in 1980. Says Finis Welch, a labor economist at Texas A&M University: ''We're in the midst of a big-league revolution, which is devaluing physical skills in favor of mental skills.'' The least-educated workers were hit hardest as many of the jobs that once supported their families in a middle-class lifestyle disappeared. Over the past decade, real wages of men who failed to earn a high school diploma tumbled nearly 10%. A recent Census Bureau study found that the number of full-time workers earning cash incomes of less than the $12,195 needed to maintain a family of four above the poverty line rose sharply in the Eighties. Though few families today rely on the wages of a single earner, the Census findings expose a worrisome trend. The percentage of all low-wage full-timers ages 18 to 64 increased from 11.6% in 1979 to 16% in 1989. The low-wage proportion of workers 18 to 24 soared from 23% to over 39%.

The shift to services doesn't seem to be the problem. True, hourly compensation in service industries for 1989 averaged $3.70 an hour less than the $17.16 in manufacturing. But service sector wages have risen 2.5% since 1980, while pay in manufacturing declined 1.9%. Lawrence Katz, a Harvard economist, thinks the record number of immigrants in the 1980s -- as well as a surge in low value added imports -- helped depress demand for low-skill American workers. He estimates that immigrants accounted for 31% of U.S. unskilled laborers by the mid-Eighties, up from 17% a decade earlier. HOW IS IT, then, that household incomes are rising? Obvious answer: More women have joined the paid labor force. They are also working longer hours and getting better pay. Between 1978 and 1988, the percentage of working married women increased from 61% to 72%. University of Michigan economists Sheldon Danziger and Maria Cancian, and Peter Gottschalk of Boston College, have found that women whose husbands earned more than $48,000 a year had the largest increase in employment -- 66.3% of them worked in 1988, vs. just 45% a decade earlier. And the ''gender gap'' between male and female pay has shrunk by ten percentage points; women now earn on average 74% of what men are paid. Says Danziger: ''Working wives are lifting a greater percentage of lower-income families out of poverty into the middle class and out of the middle class into the ranks of the rich.'' The multifaceted reality beneath the statistics people argue about is more complex than it seems. Next time you see a scary headline that makes it sound as if poverty is overtaking America, ask yourself: What's really behind those numbers?