Income Inequality
Abstract
The purpose of this research paper is to establish income inequality as a serious socio-economic issue. The views of various social and economic writers have been explored to prove that the unfairly effects the low income class. A critical examination is made regarding inequality of opportunities available to low income class, as compared to the higher ones. Several studies conducted by prestigious institutions are cited to back the claim that income inequality hinders economic growth by increasing poverty and unemployment. Other aspects, such as the effects on the affordability of education and healthcare, are uncovered. An evaluation of current economic system is conducted to reveal the ease at which wealthy can get wealthier, while leaving the rest of the population burdened by the squeezing tax rates. The paper also explores possible solutions to the issue especially that of subjecting high income class to higher tax rates on a reasonable levels so to help reduce the burden on the low income ones.
Income Inequality
Introduction
Income inequality is an oppressive issue to the least fortunate that needs to be seriously addressed and fixed. The large income inequality across the world increases poverty, it makes it easier for the wealthy to become wealthier, hinders overall economic growth as well as individual opportunity while also increasing unemployment.
As stated by Kuznets in his popular hypothesis, income inequality should follow an inverse-U shape along the development process, where the starting point was the beginning of industrialization. Income inequality must eventually decline as more and more workers participate in the high productivity sectors of the economy. In modern United States, the Kuznets curve with the period of falling inequality observed during the first half of the 20th century doubled back after 1970s when it was succeeded by a very sharp reversal of the trend. The result is that of new post-modern industrial revolution where income inequality is on the rise again (Piketty & Saez, 2001, p. 1). It was said by Rousseau more than two centuries ago that the precondition for income inequality was set when individuals departed from their primitiveness in order to create societies where private properties and individual roles predominated (Charles-Coll, 2011, p. 18).
Income Inequality Is an Oppressive Issue That Needs To Be Fixed
In a current analysis of each of the states of U.S., further complexity is added by the evidence of an inverted U-shaped curve between income inequality and economic freedom. This suggests that beginning from a low level of economic freedom, more inequality will be generated as the upper part of the income distribution benefits relatively more than the lower part (Bennett & Vedder, 2013, pp. 52-53).
Governments and other international organizations must be attentive now more than ever to the issues of equity, democracy and social exclusion as various individuals across the world from different backgrounds demand for better job opportunities and cheaper and more accessible education facilities. The World Development Report of 2006 entitled Equity and Development has made a remarkable contribution in renewing the demand for the World Bank’s leadership in organizing the global economic forces in the right step towards equality. Income inequality do not necessarily signal any lack of progress. Estimates of 2010 show that the downward trend of poverty has continued. Growth rates are at an all-time high in almost all developing countries, including in Sub– Saharan Africa. Such trends have enabled the deceleration of international income inequality in the first decade of the twenty-first century. But 2.5 billion people living in poverty and 1.3 in abject poverty are still extremely high figures (Olinto & Saavedra, 2012, p. 1).
Increased Poverty and Hindered Growth
The issue of income distribution has been largely ignored in numerous discussions related to poverty reduction and economic development in low and middle income countries. The common tendency is to view income distribution only in terms of its impact on economic growth. Various issues of poverty and inequality are closely bound together. It is impossible to deal with an issue like poverty or economic growth without further examination of income inequality issue from both analysis and policy making standpoint. It is indeed questionable that poverty can be defined independently of income distribution. (McEwan, 2009, p. 1).
The term income inequality recurred frequently in the lexicon of the World Bank during the late 1990s and early 2000s which further reflected the perception in the field of contemporary economics that the quality of institutions, the nature of governance, and thus the pace of economic growth were themselves affected by egregious inequality.
A public opinion survey of the European Union called the Eurobarometer recorded a 52 percent votes from people who agree upon high income inequality in their countries. Almost 90 percent have shown tendency to agree with that statement. Olinto and Saavedra (2012) say that the policy makers should be concerned with growing inequality if a pervasive perception of unfairness leads to political instability, thereby undermining growth and overall welfare. The inclination of the global economic process to faster growth has left behind some groups in its mission of poverty reduction. It is the responsibility of the policy makers to create compensational policies to compensate for those who missed welfare during such processes. The nations would one day wake up to growing issues in economic growth, should the issues of income inequality remain unaddressed. Research suggests that income inequality may affect a country’s development prospects in a number of adverse ways. For instance, it may lead to inefficient allocation of resources that reduces the rate of economic growth. Inequality may also have a major impact on access to credit, assets, access to health and education services, basic infrastructure, employment opportunities, and political representation (Olinto & Saavedra, 2012, p. 4).
East Asia is now concerned with the effects of income inequality that might polarize societies, increase social tensions, and undermine growth itself. Latin Americans are now concerned about the negative repercussions of the lack of opportunities for many citizens and the outcome of a grievous social conflict in the wake of high differences in living standards. A consensus has to be reached in the backdrop of political and ideological differences over the importance or desirability of pursuing policies to reduce income inequality directly. Only a few can disagree that leveling the playing field for all, by supporting equal access to opportunities, is a desirable societal goal. When linking income inequality of one generation to unequal opportunity in the next on the basis of broadening opportunity and fostering social mobility, interest in policies to mitigate income inequality can be justified. Specific policy details to promote equality of opportunity depends on individual countries, however the common facilities must include improvement of access to education and health services, infrastructure, land, and justice with a particular attention to underserved regions and communities (Olinto & Saavedra, 2012, p. 4).
Inequality of Opportunities
Even though wisdom of choices and hard work in efforts are well-deserving of their rewards, outcome equality can be ethically acceptable only if everyone had a common or basic starting point. What constituted this common starting point in a just society can be referred to as “primary goods,” “resources,” and, finally, “opportunities” (Ferreira, 2012, p. 9).
The difference between Inequality of opportunity and the inequality of efforts is the one reason why the results of econometric analysis is unstable in its attempt to estimate the causal effect of levels of inequality on growth. Inequality of opportunity and inequality of efforts are two fundamentally distinct aspects of social differences. Ferreira (2012) explains that just as there is good and bad cholesterol, there may be two kinds of inequality, one of which is much worse for a country’s health than the other. It has been found, for example, that U.S. states with higher levels of inequality of opportunity, as opposed to equality of income, have lower subsequent economic growth (p. 10).
Corak (2013) says that those who are concerned about equality of opportunity should also care about inequality of outcomes. According to Deininger and Squire (1997), although redistributive policies have the potential to benefit the poor both directly and indirectly, they will do so only if redistribution does not jeopardize investment. Policymakers should certainly pay attention to the distribution consequences of different policy options. The fear that economic growth on its own will have a systematic negative effect on the distribution of income is unfounded in these studies. Unequal distribution of assets, more than of income, can be an impediment to rapid growth, implying that redistributive policies that enhance people’s access to credit markets and, thus, their ability to invest could contribute to growth (p. 41).
Challenges in Measurement of Inequality
The measurement of inequality has consistently failed to capture the dynamics of inequality within each nation. In China, the income inequality has evidently increased during the past twenty-five years, and it has decreased in the past fifteen years of Brazil. These are the two nations which account for almost 25 percent of the world’s population. A failure to understand intra-country inequality may give an incomplete story of income disparity among world citizens. Although global income inequality increased slightly between the late 1980s and the middle of the last decade, the difference between the Gini co-efficients of 2005 and 1988 Gini coefficients (70.7 and 68.4 respectively) are not statistically significant (Milanovic 2012). Preliminary estimates have shown that this indicator did not change much thereafter. Therefore, the global inequality today is about the same as it was in the late 1980s, having not fallen as an international inequality. While the average per capita GDPs of developing nations are converging to the level of rich ones, income growth remain uneven within countries. As the patterns of convergence among countries coincide, the divergence among citizens within them are prying far apart (Olinto & Saavedra, 2012, p. 2).
The equal distribution of income cannot be related with an equal distribution of land as they both are not the same. Tests of the negative relationship between initial inequality and subsequent growth have yielded different results depending on whether initial inequality is measured in terms of income or land. Aggregate measures of distribution hides movement in the income of different groups. It can be observed that overall inequality remains relatively stable or unchanged over time, consistent with considerable change in the shares of total income received by individual groups (Deininger & Squire, 1997, p. 39).
Changing income dispersions within rich countries also affect the computation of global inequality. There are far more OECD countries with increase in income inequality than other members for which it has decreased. Finland, Germany, New Zealand, Sweden, the United Kingdom, and the United States are most notably hit by the rising income inequality. Even though the extreme situations of poverty across different parts of the world have been significantly reduced in the past three decades, income disparities among global citizens seem to have remained unchanged. That despite of a reduction in international inequality. The increased income disparities within countries such an emerging economies like China and India have further widened the gap between international and global inequality appears. At this stage, it can be hard to trust an optimistic economist who claims this to be a better world. Economists base their forecasts according to the Pareto principle, which says that if the world has become less poor and more unequal because some, even if a few, were made better off, and no one is worse off. Only then does an economist unequivocally say that we live in a better world (Olinto & Saavedra, 2012, p. 3).
Joumard et al (2012) also believe that many OECD countries have drifted up in income inequality over the past decades. A majority share of gains from overall incomes are entrapped individuals with top incomes. Again, poverty remains a pressing policy issue, under the tread of the increase in unemployment over the last few years. The recent financial and fiscal crises have also pushed governments to contain public spending, including cash transfers. Consolidation efforts in both fiscal and equity considerations have caused some governments to hike taxes. Taxes and transfers have a significant redistributive impact. Inequality in income after taxes and transfers, as measured by the Gini index, was about 25% lower than for income before taxes and transfers on average in the OECD area in the late 2000s ( p. 2). Labor market outcomes have become more unequal in the United States and many other high-income countries since the late 1970s and early 1980s. Institutional differences have also implied that changes in inequality and the returns to skills have varied across countries (Corak, 2013, p. 87).
Effects on Healthcare and Mortality
Healthcare is another primary concern in the debate about income inequality. The poor can be helped to have better health care facilities if income can be equally redistributed. The effect of income on health may not be an immediate one, yet redistribution can improve average health of the poor. People who are income-poor are also health-poor, so that seeing well-being as dependent on both income and health reveals wider disparities between rich and poor than are recognized by standard, income-based approaches (Deaton, 2003, p. 115).
In United States, both the State and Metropolitan Statistical Area (MSA) levels have discovered the impact of income inequality on Mortality. Examination of the ecological effects of residential segregation within the MSAs have made the examination of the extent of income segregation possible between small areas of each metropolitan districts. The concept of residential segregation is normally applied only to urban areas and its meaning is less clear in rural areas. Lobmayer and Wilkinson (2002) cites a paper by Shi et al which suggests that the relation between State income inequality and mortality was partly attributable to fewer primary care physicians per head of population in the less egalitarian states. If mortality at each end of life is influenced by access to primary care, and access is—as the inverse care law suggests—worse in the poorer areas, then segregation may increase mortality by reducing access to primary care (pp. 183 - 186).
Beginning the Process of Solution
After the World Development Report 2006 led the efforts to make the provision of equal opportunities more operational and policy-relevant. Ferreira mentions that Human Opportunity Index (HOI) is one key result of these endeavors. It can measure an inequality-adjusted rate of access to various basic opportunities. Ferreira also cites that HOI traces its intellectual origins to both Amartya Sen and John Roemer. By focusing on what its proponents call “basic opportunities,” which generally correspond to certain public services, it also brings the notion of equal opportunities directly to a policy level. In so doing, the HOI has been remarkably successful. Promoting equality of opportunity will go beyond its consistent role in and instrumental in poverty reduction. In engagement with clients, Banks now consider the efforts to measure and assess it empirically, including the widespread use of the Human Opportunity Index. Their use can be determined in time through well designed evaluation (pp. 10 - 11).
A major step in starting the process of solution is to impose strict tax regulations on high income bracket. In an Investopedia article titled Are Taxes Solution for Income Inequality? Nobel Prize winner Joseph Stiglitz is quoted saying that the current median income in United States has lowered in last 25 years. His research shows that individuals and Forture 500 companies that comprise top 1% have exploited offshore investment options to save from paying taxes in US, while the rest of the population are heavily levied.
Dan Moskowitz of Investopedia also quotes that ignoring the long term solution must deal with taxing corporations on capital returns to shareholders and less on labor investments. He concludes that would lead to increased job creation, organic growth and a reduction in income inequality. The solution Moskowitz offers may appear simple at glance, but solution needs a deeper exploration in terms of policy making. At this stage, it is simply agreeable that such a solution is possible with practical implementation. It is time the policy makers realize the fault with corporate tax eviction and initiate the process of designing policies against it.
Equality will be the ultimate success of democracy. A well-charted knowledge of the cause and growth of income inequality in order to substantiate the efforts in successful re-distribution of wealth. When fine print as an equally acceptable policy, issues of inequality can be gradually resolved with the use of the available tools, data and information. The narrowing of the currently-at-large gap between the two class groups can make a nation more than just prosperous, they make a nation united and strong in the face of any adversities.
References
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Corak, M. (2013). Income Inequality, Equality of Opportunity, and Intergenerational Mobility. Journal of Economic Perspectives, 27(3), 79-102. doi:10.1257/jep.27.3.79
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Moskowitz, D. (n.d.). Are Taxes the Solution for Income Inequality? | Investopedia. Retrieved April 22, 2016, from http://www.investopedia.com/articles/personal-finance/042315/are-taxes-solution-income-inequality.asp
