Now that the Internal Revenue Service's Statistics of Income Bulletin has reported that a few high-income earners paid no federal taxes in 1992, expect a deluge of media reports that "the rich aren't paying their fair share" of taxes.

But a look at the statistics and how a very few lawfully and legally avoided federal tax payments should clear up any mystery.

• In 1992, of 954,747 earners with adjusted gross income of $200,000 or more, only 823 avoided paying any federal income taxes.

• They did it through write-offs for gifts to charity, large business losses, high medical expenses and state taxes.

And as a group, the rich were hardly shirking: the top one percent paid 28 percent of income taxes in 1988.

Another way for upper-income families to cut their federal taxes deserves particular attention: tax-free municipal bonds. A 1991 study found that:

• In 1989, 36.1 percent of all tax-exempt municipal bond interest went to those with adjusted gross income over $200,000.

• Those with incomes above $100,000 received 51.8 percent of interest, and those with incomes over $50,000 received 73.4 percent.

Obviously, tax-exempt municipal bonds ("munis") appeal more to those who must cut the IRS in for 30 percent of added taxable income than to those who face a 15 percent rate. While cities and states that issue the munis benefit by borrowing at lower interest rates, bond purchasers forgo higher rates of return in order to reduce federal taxes. Thus, the federal government in effect subsidizes borrowing by muni issuers through reduced federal revenues, allowing long-term expansions of municipal budgets.

So an investor's gain from not paying taxes is very close to his loss from accepting a lower rate of return, but the process encourages municipal governments to borrow and increase their long-term budgets. "Fair share" critics and official reports understate the effective tax burden on the wealthy, because no one measures the interest they forego as a payment to government. And society suffers a loss, since other investments are not made because the tax code has pushed capital into shelters instead.

Source: Gary M. Galles (Pepperdine University), "The Flaw in 'Fair Tax' Rhetoric," Investor's Business Daily, April 23, 1996.