×

The Problem with Inequality

August 17, 2016
Editor(s): Naren Rajan
Writer(s): Jessica Xu, Matthew Khoo, Arief Nugroho

The Oxford Dictionary defines income inequality as a difference in size, degree and circumstances. It spans across a broad range of issues from gender and race to income and power. In today’s world that is seemingly fully of disparity, inequality is often touted to be one of the most pressing issues of the generation of our time. For the purpose of discussion, the article is going to focus primarily on an inequality that affects all of us: the income inequality.

We are currently living in the most unequal period since the 19th century. A recent report by Oxfam sheds some lights to the extent of inequality by highlighting the fact that the world’s richest 62 people now own the same amount of wealth as 3.6 billion people occupying the bottom half of humanity. The pace at which inequality is rising too does not seem to be decreasing. The same report commissioned by Oxfam as recently as 2010 put the above figures at 388 people and 3.6 billion people respectively. As such, it is only logical for one to infer that the wealth of the richest 62 has been increasing at a rate exponential than the wealth of the bottom 3.6 billion people.

While we often associate the bottom half of humanity with regions such as Africa and India, one will be surprised on how much inequality affects rich countries such as the US. The pictures are not rosy in developed countries either. A 2012 data from the OECD put the US as one of the most unequal rich countries with a Gini coefficient of 0.40 on the scale of 1 with the richest 10% owning 20% more than the bottom 10%. The estimate worsens when we compare the richest 1% of Americans to the rest with them enjoying 47% of pre-tax growth between 1975 and 2012. Australia, fortunately, paints a rosier picture with only 20% of pre-tax growth in the same period is enjoyed by the richest 1%. The Australian picture, however, becomes less rosy when Oxfam estimates that the richest 1% of Australians is as rich as the bottom 60% of Australians. To put that in the perspective, imagine 45 students in the University’s Faculty of Business and Economics owning as much as 2,727 other students. The widening inequality is the force driving the Occupy Movement that took the US, the UK and Australia by storm. With the issue becoming increasingly important among the idealistic voters, it is of no wonder that inequality makes a good election issue with it getting the spotlight in both the US Presidential and Australia General Election.

With the American Presidential Election getting a much wider worldwide coverage, there is perhaps no better spokesperson for the Occupy Movement than Senator Bernard ‘Bernie’ Sanders of Vermont. A self-proclaimed socialist democrat, he is seen as a proponent of income redistribution and a champion for the long-dead ‘American Dream’. With 63% (Gallup, 2015) of Americans unhappy with the way wealth is distributed, it is hardly surprising that Bernie’s ideas of breaking up banks, free college education and universal healthcare are getting tractions among the wider American public. According to Sanders, America “will not survive morally or economically when few have so much while so many have so little”. Given that 145,000 richest American families owning as much as the poorest 145 million families (Saez and Zucman, 2014), the American context of inequality is high unique considering public opinion that is divided over how to best overcome the problem. A 2015 Pew Poll showed that over 60% of Americans feel that corporations and the rich are not paying their fair amounts of taxes while 56% of them also feel that the poor are not paying their share of taxes. With such a divided public, it is of no wonder that the American congress has been unable to pass meaningful legislation reforms to best close the widening inequality gap despite inequality being a drag in the economic recovery (Stiglitz, 2015) and it being the root cause for “racial and religious discrimination, antipathy towards immigrants and lack of generosity towards the poor” (Friedman, 2009). With the current government seen as incapable of solving the issue, the rise of mavericks such as Bernie Sanders and Donald Trump are hardly surprising.

Turning our attention to the land down under, according to the Organisation for Economic Cooperation and Development (OECD), Australia faces an ever widening income equality gap that is rising at a faster rate than comparable countries such as the United States and Canada. Recent income statistics released by ABS indicates that the top 20% of income earners receive 40% of total national income while the bottom 20% receive only 7.7% of total national income (Greenville, 2013). This divergence in income is expressed through a relatively positive trend in the nation’s Gini Coefficient. However, it is important to note that although income inequality is on the rise, Australia has also experienced strong growth throughout the years in income across all social classes. As such, the paradox between a widening income gap and an overall increase in earnings of all income classes make it difficult to measure whether societal well-being is increasing or decreasing in Australia. For example, surveys measuring the attitudes of Australians concerning income inequality found that Australians on average believe that income distribution in Australia is more equal than it actually is. However, much of the debate concerning inequality in Australia revolves around the distribution of income and wealth to the top 1% of the country. For instance, it is believed that executive remuneration of the Top 20 CEOs of the country is almost $10 million, which is 150 times greater than the weekly earnings of the average Australian (Richardson, 2014). Discontent by the public for this discrepancy in earnings is manifested through recurring protests centered on the ever expanding of the people labelled as the “1%”. This point is further accentuated by the former prime minister Kevin Rudd who advocates that outrageous remuneration packages are paid to the very people (financial company executives) who have contributed so much to what has gone wrong in the global economy. “And who pays the price? Working people and their jobs” (Richardson, 2014). The discrepancy in income between the rich and other income classes in Australia establishes the “cause and effect “relationship between income and wealth distribution. That is, high incomes result in high accumulations of wealth, while a high accumulation of wealth generate high incomes. As such, this provides for an environment where the rich in Australia are able to perpetually entrench their foothold at the top end of the income hierarchy.

Impact of Federal Budget 2016 on income equality

Research and modelling conducted by the Australian National University on the changes of the recent Federal Budget reveals how the changes in taxation, family payments and childcare will hit impact low income earners the hardest. It is estimated that poorer households will be on average $1407 per year worse off with the implementation of the budget. Conversely, changes in the budget would benefit higher income households, namely through the cut in income taxes. Therefore, the recent changes can potentially further exacerbate the effects of Australia’s increasing income gap.

How can we reduce inequality?

Broadly and internationally speaking, education is frequently suggested as the most critical means of improving welfare and promoting economic and social mobility. Unsurprisingly, research shows that education is correlated with income and wealth (Standard & Poor, 2014). In particular, differences in the level of education attained can have significant effects on an individual’s future livelihood. A Harvard study finds that the disparity between the earnings of U.S. college graduates and high-school graduates explains between 60% and 70% of the rise in U.S. wage inequality between 1980 and 2005 (Goldin and Katz, 2007). Significant investments should therefore be made in education, with all students encouraged to attend higher education institutions in order to build relevant skills and adequately prepare for an increasingly-demanding workforce. This is a relatively simple choice for domestic citizens in a country such as Australia – where the HECS-HELP loan scheme is available for domestic citizens – and in countries such as Germany, Sweden and Norway, where tertiary education is offered for free. It may be a more difficult decision for the typical U.S. student, who generally must obtain a massive student loan at market interest rates to pay for their college education. More policies and funding focused on equity in education are urgently required in order to promote a ‘fair go’ for students of all socioeconomic backgrounds. However generally, it is clear that the costs of a good education are generally exceeded by the long-term benefits of a higher future income and a stable career. Educated parents are more likely to encourage their children to pursue higher education, thus promoting a perpetuating culture of learning and development and contributing to the long-term growth of the economy.

Reforming the current tax system would be a major milestone in the fight to reduce inequality. The effect of indirect taxes (for example, the GST in Australia) is particularly pronounced, because as a percentage of income, the proportion of tax paid declines at higher income levels. Consequently, indirect taxes significantly widen the income gap, as the burden of the tax is predominantly on the poor. Focus should also be on closing tax loopholes that benefit the wealthy; the revenue obtained from the extra tax received can be used to redistribute wealth and implement beneficial programs to upskill struggling citizens and provide support. However, high tax rates can act as a disincentive for economic development. A balance between economic growth and equity must be maintained.

Working families should be encouraged and assisted in building financial assets. In order to incentivise saving, policies that promote higher savings rates should be implemented in order to provide better economic security for struggling individuals. The high costs of financial services and home ownership are also often prohibitive to these citizens; lowering the significant costs associated with these wealth-building vehicles will allow for a fair ‘playing field’ for the less-well-off.

Other solutions potentially include reformation of gambling law, early-years programs for Aboriginal and Torres Strait Islander children, profit sharing between long-term employees and high quality employment for people with disability.

It is often insisted that modern-day society will never be able to fully eliminate inequality under a free-market system; that the very essence of capitalism disqualifies the potential for equal opportunity. Income inequality is a prevalent issue that certainly requires careful and balanced thought, planning and action to overcome. With the calculated machinations of politics and slow grind of the legislative process, throughout history, it has been quite difficult to reduce the gap between the struggling and the affluent. In particular, it is those who hold the power who stands to lose the most. Any change that is to occur must therefore be driven by the masses.

 

References:

Goldin, C. & Katz, L. (2007). Long-Run Changes in the Wage Structure: Narrowing, Widening, Polarizing. Scholars at Harvard. Retrieved 10 May 2016, from http://scholar.harvard.edu/files/goldin/files/long-run_changes_in_the_u.s._wage_stucture_narrowing_widening_polarizing.pdf
Standard & Poor,. (2014). How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide. Standard & Poor’s Global Credit Portal. Retrieved 10 May 2016, from https://www.globalcreditportal.com/ratingsdirect/renderArticle.do?articleId=1351366&SctArtId=255732&from=CM&nsl_code=LIME&sourceObjectId=8741033&sourceRevId=1&fee_ind=N&exp_date=20240804-19:41:13
Richardson, D & Denniss, R. (2014). Income & Wealth Inequality in Australia. Retrieved 10 May 2016 from http://www.tai.org.au/system/files_force/PB+64+Income+and+wealth+inequality+FINAL.pdf

Fletcher, M & Guttmann, B. Income Inequality in Australia. Retrieved 10 May 2016 from http://www.treasury.gov.au/~/media/Treasury/Publications%20and%20Media/Publications/2013/Economic%20Roundup%20Issue%202/Downloads/PDF/3-Income-Inequality-Paper.ashx

Killalea, D. (2016). Federal Budget 2016: Poor set to be worse off ANU modelling shows. Retrieved 10 May 2016 from http://www.news.com.au/finance/economy/federal-budget/federal-budget-2016-poor-set-to-be-worse-off-anu-modelling-shows/news-story/d839d32f7e2b61deca3538f68fbfb13b

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Naren Rajan
Editor
Jessica Xu
Writer
Matthew Khoo
Writer
Arief Nugroho
Writer