Dealing with inequality

Globally, the greatest source of disparity in income andwellbeing is between countries.   Which country you happen to be born in has thebiggest influence on your lifetime prospects for income and wellbeing.   Buteven within the richer countries of the world there remains a wide disparity inoutcomes and prospects.   Children from poorer households are more likely to failat school; poorer adults are more likely to commit crimes and are more likelyto 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 inequalityrather than poverty that underpins poor social outcomes in rich nations.   Forexample they find that people living in countries where incomes are more evenlydistributed are more likely to have longer lives and lower rates of obesity,delinquency, depression, and teenage pregnancy than those living in richercountries but where there is more income disparity.

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

A gut reaction to such information is to have society imposecorrective actions such as higher taxes on the rich or impose limits on paydifferentials.   Indeed, the two countries with both the lowest levels ofinequality 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 workin the next.   Unlike Sweden and Japan, New Zealand is a land of migrants whodemonstrate a very high willingness to pack up and move to where things appearbetter.   It would be counter-productive to obtain equality by encouraging anoutflow of capital and talent.   A move towards more equal outcomes that beginswith consensus has a greater chance of success than one that is imposed.   Inthis regard, it is perhaps not surprising that homogenous societies like thatof Sweden and Japan have developed an economic environment that promotes moreequal outcomes than more ethnically diverse nations.   If this train of thoughtis correct, initiatives that promote New Zealanders’ sense of unity and nationare perhaps required to ensure acceptance of policies that encourage greaterequality.  

Another important issue in terms of equality is being clearabout what it is one wants to equalise.   Often the debate centres on incomeequality.   However, income is often a poor proxy for wellbeing.   More importantis our buying power and the long-term security of that buying power.   Thisrelates 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 isnot seen as a factor inhibiting wellbeing.   Students on low incomes have strongcareer prospects, and many elderly can potentially sell down assets in order tolive beyond their current incomes.

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

A means of correcting for dynastic privilege is to introducea 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 forcethe breakup of businesses into uneconomically sized operations.   But withouteither bequest taxes or a consistent form of tax on capital, we have a taxsystem that both entrenches privilege and distorts investment decisions.   Animprovement on the current system would be to tax income from asset sales thatis not reinvested.   This would allow the inheritance of going concerns or thetransfer of capital into new activities, but would tax income from capital thatis essentially for the purpose of funding consumption.   In this respect theincome is no different to wage income, and so should be taxed in an equivalentway.


[1] Wilkinson R and Pickett K (2009) The Spirit Level: WhyMore Equal Societies Almost Always Do Better, Allen Lane

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