By: Bikal Dhungel
Inequality is a matter of concern. It rose in the previous
decades. The top 1% of richest people possess the amount of wealth
like never before. This is not only the phenomenon in rich countries,
but also in transition states where the process of development is
taking its pace. Inequality per se is not a problem but it can create
problems. Thomas Piketty, an Economist of University of Paris I,
Pantheon-Sorbonne wrote a book called ' Capital in the twenty first
Century ' that presents some good statistics about inequality in the
western world. He intelligently uses the statistics from the previous
century to present some fine data that, with an optimistic view,
will shape the discussion of inequality from now on.
Piketty mentions, the Gini-Coefficient, that says the difference
between the rich and poor, actually decreased from the time after
World War II until 1965. But then it increased again and stands today
at the highest level ever recorded since the data is available.
Within this group, the share of the income of top 1% people rose from about 8% in the 80s to over 20% in 2010. Anglo-Saxon countries
reflect quite similar picture. In US, UK, Australia and Canada, the
level of inequality is continuously rising since the 1980s. The US is
moving with the highest rate, followed by UK, Canada and Australia.
The situation however, is different in continental Europe and Japan.
In France, Germany, Sweden and Japan, the inequality level decreased
from 1910 and during mid 80s it reached the lowest level. Since that
time, it has remained constant, with some yearly variations.
The total global income consist of labour income and capital
income. Labour income consist of about 75% of total income whereas
capital income consist of about 25%. Since the 1970s, the share of
capital income is rising. Looking at the figure of France, even
though inequality in general decreased, the labour inequality has
remained the same. This simply means, those people whose income is
based on wages, they are not better off. This group consist of people
who are for example the poorest 60%. So, economic growth might have
occurred, but the ones with higher income, means the rich, are
profiting over proportionally from this.
In Anglo-Saxon countries, the share of people earning from capital
has increased with higher rates than the share of people who earn
wages. These explanations based on few figures of Piketty's book
means, expressing simply, in early 20th century in
continental Europe, the capital income inequality has been reduced
but there was no change concerning labour income inequality. But in
late 20th century, there was no significant changes in
both capital or labour income inequality. For Anglo-Saxon countries (
US, UK, Australia, Canada ), in early 20th century until
World War II, there was a large reduction in capital income
inequality when, also labour income inequality decreased, but in late
20th century, labour income inequality increased
drastically whereas capital income inequality increased only
slightly.
When we go more deeper, in Europe from 1870, the private capital
as a percentage of national income decreased from about 700% to 250%
in 1950s but then had an increasing tendency up to today which lies
around 500%. The share of public capital has remained the same today,
as the year 1870. This implies, there has been theoretically no
public capital gains. The data is similar for the US. Again, the
private capital fell in Europe and the US but the extent of this was
higher in Europe. It may be attributed to War in 1939 when most of
the private capital was destroyed. It might also be because of high
taxation. But, the private capital is again increasing since several
decades.
One can conclude from Piketty's findings that, ( as Piketty also
says ), if the rates of return in capital income is higher than the
return on wage income, inequality grows. So, one policy
recommendation from these statistics might be, that capital income
should be taxed higher, ( or at least taxed because in many
countries, they are not taxed ). Warning: this can also have negative
consequences in the economy depending on the situation how the
economy is running. However, we can think of why capital share is
increasing. First reason is, rich are in the position to save more.
Money left after consumption could be saved and as this amount
accumulates over time and mostly over generations, it will increase
so fast that it will be way more than any intelligent mind can guess
of, thanks to compound interests. Lets see this with an example.
Imagine your great great great great great grandfather put 100 unit
of a currency, lets say $ in a saving account with 3% interest for
you in the year 1600. Only 3% per year. Which means, this year it is
100$, next year it will be 103$. What do you think how much you will
get in 400 years ? You can guess the number first, but leave it, our
intelligence cannot even make a guess in compound interests. I will
tell you the answer. 100$ deposited with 3% interest per year in
1600, in the year 2000 you will get an amount of 13,642,371.82. Yes,
from 100$ deposit in the year 1600 with an interest rate of 3% per
year, you will get thirteen million six hundred and forty two
thousand, two hundred and seventy one point eighty two $.
Well, coming back to our discussion of inequality, if you tax
capital income efficiently, it might help to decrease the inequality
but this is rarely possible in today's world. We have a globalized
world where the movement of capital can rarely be restricted. There
are tax heavens, also called safe heavens where you can take your
money and keep it un-taxed. Singapore, Switzerland, Bahamas, Cayman
Islands, Monaco to name the few where billions of amount are in the
banks which we don't know who has put how much. In this case, it is
not possible to tax. A national government can only tax the companies
that are operating in their countries and few countries like the US
have enacted laws that forces its citizen to pay the tax no matter
where they earn their income. The issues with safe heavens will
equally involve the high level discussion like inequality because the
vast wealth concentration in the hand of extremely rich will do less
good to the ones with little as everywhere, financial constraints are
emerging as massive problem. The US government recently made the
Swiss to give details about their citizen's deposits in Swiss banks
and warned economical consequences in the form of trade bans for
Swiss goods coming to the US if they do not. The Swiss eventually did
it. Similarly, the European Union is talking with Switzerland. With
Luxembourg, the EU has achieved a huge success in this matter. Other
safe heavens might follow this. Still, this alone will not solve the
problem of inequality. We should not forget the fact that, the ones
with huge wealth are also in a position to manage the wealth better.
They can hire an Asset Management/ Wealth Management specialist who
can intelligently spend their money in order to maximize the return.
In some cases, we can also say that, the wealthy have lots of
internal information for example the policy of finance ministry or
central bank which will help them to forecast and react accordingly
in their own favor. It is equally true that, the rich have more
political influence. They might get successful in getting the
politicians enact policies in their favor by for example financing
their campaigns. One can see this in the US President Election.
Corporations donate millions, openly or secretly and once the person
gets elected, he is morally obliged to bring policies in the favor
of big corporations. This can be in the form of tax break, or
subsidies or any other trade preferences. In some of the European
countries, like Germany, elections are financed by tax revenues but
still, companies are allowed to make donations for political parties.
This has caused huge outcry from left wing spectrum about the
increasing role of corporations in policy level as, when these
corporations continually grow and take control over the large
majority, it might not be in the favor of the majority because the
top 1% for example might have higher voice than the bottom 99%.
Today, when we see the richest 100 economic entities, only 49 of them
are countries, 51 of them are big multi-national corporations.
Corporations like Walmart and General Motors are richer than states
like Saudi Arabia or Denmark. In which direction it goes will be
another topic but what is also true is that the concentration of
wealth is increasing. Without intelligent tax policies based on
fairness, we will have to face protests like ' Occupy Movement ' in
the future.
Thomas Piketty has triggered the important discussion about
inequality which cause the investment of handsome amount of time by
the intellectual community in the coming years and decades.
( The source of the data in this article is Thomas Piketty's book ' Capital in the twenty-first century '
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