This post applies to the U.S., but I guess the same conclusion are valid for a number of other countries as well. In the case of the U.S., very high levels of income inequality could, in theory, be reduced in several ways:
- offering people better education (better education means better jobs, and more applicants for top jobs means lower wages at the top)
- cracking down on government backed corporate expropriation
- making the tax system more progressive
- increasing government transfers to those at the bottom etc.
Unfortunately, very little of this is happening. Let’s focus on the last two options. The tax system in the U.S. is not progressive at all. As you can see from this graph, taxation in the U.S. hardly influences income shares.
The poor only get a little bit more thanks to taxes, and the rich only lose a little bit. This is all the more regrettable given the fact that the rich have done very well over the last decades.
Higher tax rates for the wealthy and other more progressive taxes such as a higher inheritance tax, a higher capital gains tax, a Tobin tax etc. are politically impossible it seems.
Increased benefits for the poor are equally unrealistic given the fiscal situation and the predominant ideology. Although the poor in the U.S. do profit from the existing benefit system in absolute terms (unemployment insurance for example saves millions from absolute poverty), income inequality barely moves because of it. Income shares after benefits are hardly less unequal than before. This graph shows the influence on income shares of the sum of taxes and transfers, but you get the picture.
Taxes and transfers result in the poor having a bit more and the rich having a bit less, but fundamentally they don’t change the distribution of income.
More posts in this series are here.