Dealing with inequality
Fri 20 Mar 2009 by David Grimmond in Inequality

Globally, the greatest source of disparity in income and wellbeing is between countries.   Which country you happen to be born in has the biggest influence on your lifetime prospects for income and wellbeing.   But even within the richer countries of the world there remains a wide disparity in outcomes and prospects.   Children from poorer households are more likely to fail at school; poorer adults are more likely to commit crimes and are more likely to have poor health outcomes.

A recent book by Richard Wilkinson and Kate Pickett[1] presents a wide range of evidence supporting the view that it is inequality rather than poverty that underpins poor social outcomes in rich nations.   For example they find that people living in countries where incomes are more evenly distributed are more likely to have longer lives and lower rates of obesity, delinquency, depression, and teenage pregnancy than those living in richer countries but where there is more income disparity.

Their thesis is not only that the poor fare worse in uneven societies but that the whole population bears a cost from living in the presence of inequality.   For example, they contend that the incidence of mental illness across the whole population can be as much as five times higher in highly unequal societies compared with the countries with the lowest levels of inequality.

A gut reaction to such information is to have society impose corrective actions such as higher taxes on the rich or impose limits on pay differentials.   Indeed, the two countries with both the lowest levels of inequality and best social indicators, Sweden (high taxes) and Japan (low pay differentials), are examples of these two approaches.

However, what works in one society will not necessarily work in the next.   Unlike Sweden and Japan, New Zealand is a land of migrants who demonstrate a very high willingness to pack up and move to where things appear better.   It would be counter-productive to obtain equality by encouraging an outflow of capital and talent.   A move towards more equal outcomes that begins with consensus has a greater chance of success than one that is imposed.   In this regard, it is perhaps not surprising that homogenous societies like that of Sweden and Japan have developed an economic environment that promotes more equal outcomes than more ethnically diverse nations.   If this train of thought is correct, initiatives that promote New Zealanders’ sense of unity and nation are perhaps required to ensure acceptance of policies that encourage greater equality.

Another important issue in terms of equality is being clear about what it is one wants to equalise.   Often the debate centres on income equality.   However, income is often a poor proxy for wellbeing.   More important is our buying power and the long-term security of that buying power.   This relates more to wealth and wealth prospects than current income.   For many, wealth and income will be one and the same thing, but for others low income is not seen as a factor inhibiting wellbeing.   Students on low incomes have strong career prospects, and many elderly can potentially sell down assets in order to live beyond their current incomes.

In this respect entrenched privilege and wealth is the critical barrier to greater levels of equality.   For example, studies of equality between races in the US demonstrate that in terms of income equality there has been a catch-up by the non-white population in recent decades, but the gap in terms of wealth has remained persistently wide.   Essentially there is a dynastic dimension to wealth inequality.   The prospects of children may have more to do with the wealth position of their parents than their innate abilities.

A means of correcting for dynastic privilege is to introduce a uniform tax on capital.   The absence of bequest taxes, in combination with alack of uniform tax on capital, is a stark aberration in the New Zealand tax system.   A legitimate argument against bequest taxes is that it can force the breakup of businesses into uneconomically sized operations.   But without either bequest taxes or a consistent form of tax on capital, we have a tax system that both entrenches privilege and distorts investment decisions.   An improvement on the current system would be to tax income from asset sales that is not reinvested.   This would allow the inheritance of going concerns or the transfer of capital into new activities, but would tax income from capital that is essentially for the purpose of funding consumption.   In this respect the income is no different to wage income, and so should be taxed in an equivalent way.

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