Income gap grows, even before tax bill's effect

The rich are getting richer and the poor are getting poorer, and that's before this year's tax bill.

While the Washington debate has focused on the size of tax breaks and who will get them, the tax overhaul takes place against a background of major growth in the gap in family assets between those at the top and everybody else. It will make it the difference even greater.

Do people care about the wealth and income spread? It may become a problem for society when those at the low end simply cannot meet their basic expenses as government faces the need to cut spending.

In 1963, the wealthiest had six times the assets of middle-income families, according to Urban Institute statistics. By 2016, they had 12 times as much as middle-income families. Meanwhile, the poorest went from having assets of about $1,000 to bearing debt of $1,000.

The biggest cause for the gap is the meteoric increase in the wealth of the top 10 percent. In the past 20 years, their wealth has taken off, leaving others behind.

With higher incomes, people can save more and make investments that increase their wealth. There’s obvious momentum that shows that having some money is the best basis for making more money.

What’s the reason for the widening gap? Wealthier people have higher incomes. And they enjoy the effect of government programs to stimulate growth in family wealth far more than the rest of the population.

In an economy with high employment, concerns now focus on the lack of progress in improving family income. The average expected tax cut of about two percent will do little to solve that problem. In fact, the gap is likely to grow thanks to bigger breaks for the wealthy.

Technology and imports have undermined pay raises for people with less skilled jobs. The value of their labor in the market cannot grow when they must compete with production by robots or low-income foreign workers.

To see their incomes increase, workers will need training for more advanced jobs. The looming problem is that the number of jobs based on technology may be less than the number of jobs performed by lower skilled workers. That may help explain why so many people have dropped out of the work force.

Not all people are economically equal. The lifetime income of white men is $2.7 million compared with $1.5 million for African American men. Men of either group do better than women of any group.

Another reason why most families have relatively little wealth is the emphasis on consumer spending as the chief driver of the American economy. High retail spending means little income is left for savings. Automatic savings plans have been consistently opposed by retail business.

The main sources of family wealth are home ownership and retirement funds. Tax laws are designed to support the growth of both of these assets, but the benefits flow mostly to higher income families.

Before the new tax bill, the federal government spent about $400 billion a year to help people boost their wealth, according to the Urban Institute. Almost half of these tax breaks goes to supporting employer-sponsored retirement plans, which mostly benefit the wealthiest 20 percent.

Next is the tax write-off for mortgage interest and an even larger share goes to the wealthy few. The tax break is designed to encourage home ownership, but Canada, without such a benefit, has a higher share of families that own homes. The U.S. system serves mainly to encourage buying bigger homes.

The ability of many people to survive through their retirement results from federal government programs like Social Security, Medicare and Medicaid. These programs essentially replace what would ideally be income from personal savings.

Because these so-called “entitlements” form a major part of the federal budget, and House Speaker Ryan will propose next year to reduce them. Employers are unlikely to step in to fill the gap. What will happen to those dependent on them for their economic survival?

In the end, the only solution to avoid an economic crisis may be targeted tax increases. The ceiling on the mortgage interest write-off could be lowered further and the proceeds used to assist first-home buyers.

Social Security and Medicare benefits might be taxed more at top income levels. The wealthy are not heavily dependent on these programs, but a higher tax on their payments could be used to protect people who need them to survive.

The federal government now leans toward promoting the growth of wealth for the already wealthy. At least, it should do the same for everybody else.