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Rich-poor income gap widens, federal data show

| Sunday, April 5, 2015, 12:01 a.m.

WASHINGTON — The rich are still getting richer, and the poor are still getting poorer, federal data released Thursday suggest. Accounting for taxes, though, everyone's getting poorer, especially the rich.

The average American household's income declined for a second year in a row, data from the Bureau of Labor Statistics show, down 0.9 percent to $64,432. The wealthiest fifth of Americans were an exception, as their incomes increased by 0.9 percent. Among the poorest fifth, by contrast, incomes declined by 3.5 percent.

Taking taxes into account, the rich were much worse off. Income after taxes declined 8.1 percent in that wealthiest group, compared with just 1.8 percent among the poorest.

These figures are contained in the bureau's midyear report on consumer spending, including survey results from the second half of 2013 and the first half of last year. Combined with Friday's data showing that more discouraged workers left the labor force and wages increased only slightly in March, the numbers are a reminder that the economic recovery has yet to help most working Americans in a meaningful way.

The wealthiest paid nearly twice as much in taxes, possibly a result of payroll, dividends and capital gains tax increases at the beginning of 2013.

The contrast between incomes before and after taxes shows how policies such as income taxes and Medicare divvy up money among rich and poor at a time when the economy has become steadily more unequal. As Forbes' Scott Winship and others have argued, income is much more equally distributed than it would be without these interventions by government.

Even taking them into account, inequality has increased, and the Congressional Budget Office gives a couple of a reasons. For one thing, as the workforce ages, more and more government spending goes toward maintaining the incomes of middle-class retirees rather than helping the poor. For another, taxes on the wealthy have been reduced, too.

If tax refunds and Social Security put more money in Americans' pockets, the cost of health insurance and housing limit how much of it they can spend.

While the bureau reported that Americans are spending more, the main reason was an increase in spending on health insurance. There are far more people with insurance now because of President Obama's health reforms, so it wouldn't be surprising if people are spending more in this category. At the same time, the bureau revised its survey to get more accurate responses to its question about health care, so it's difficult to know exactly how to interpret the change.

Over the past few decades, increased spending on health insurance has largely eaten up government benefits for the middle class. It's a matter of debate as to whether that increase has actually left Americans any better off.

In any case, last year's slight increase in spending of about 1 percent does not appear to have kept pace with inflation. The bureau's Consumer Price Index for major cities increased 1.2 percent between the second half of 2013 and the first half of 2014, the period covered in the latest report. It includes data through last June, before the prices of gasoline and oil fell precipitously. Americans are feeling the squeeze, which is particularly apparent in the cost of housing. The average household spent $336 more on housing. Costs in this category rose 3.3 percent on average for the poorest group.

As Ryan Avent of the Economist recently argued, local zoning regulations largely determine the cost of housing. The rules making it more difficult for developers to build houses and apartments, forcing people to bid against one another for residences that have been built and allowing landlords to charge higher rents.

Just as federal taxes and welfare programs force the rich to pay so the poor can spend more, zoning rules shift the money from renters and young families buying homes back to wealthy landlords and developers. Some economists have estimated that these rules are the equivalent of a 50 percent tax on the cost of housing in cities such as San Francisco, Avent writes.

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