Economic Inequality: What Can We Do About It?

According to the Gini Index, in every major region of the world outside of Europe, extreme wealth is becoming concentrated in just a handful of people.

“In 2021, the richest 1% of Americans owned 34.9% of the country’s wealth, while average Americans in the bottom half had only US$12,065, less money than their counterparts in other industrial nations,” writes Fatema Z. Sumar from the Harvard Kennedy School.  By comparison, the richest 1% in the United Kingdom and Germany owned only 22.6% and 18.6% of their country’s wealth, respectively.

Globally, the richest 10% of people now possess nearly 76% of the world’s wealth. Meanwhile, the bottom 50% own just 2%, according to the 2022 World Inequality Report, which analyzes data and the work of more than 100 researchers and inequality experts.

Drivers of extreme income and wealth

Large increases in executive pay are contributing to higher levels of income inequality.

Take a typical corporate CEO. In 1965 the average CEO earned about 20 times the amount of an average worker at the company. In 2018, the typical CEO earned 278 times as much as their typical employees.

But the world’s roughly 2,700 billionaires make most of their money not through wages but through the speculative economy–investments in stocks and real estate.

Their assets also grow due to corporate and individual tax breaks, rather than salaried wages granted by shareholders. Often the rich pay little to no tax by exploiting various loop holes in the tax code.

This calculation does not even count the effects of tax breaks, which often slash the real-world capital gain tax to much lower levels.

Tesla, SpaceX and Twitter CEO Elon Musk is currently the world’s richest man, with a fortune of $240 billion, according to a Bloomberg estimate.

The founders of several tech companies, including Google, Facebook and Amazon, have all earned billions of dollars in just a few years. The former Greek finance minister, Yanus Varoufakis calls them the new feudal capitalists, and we, the people in the streets, are the new serfs.

Reforming the Inequality Gap

Through economist Thomas Piketty’s books and other research, we have learned that 70 percent of all global wealth is owned by only 10 percent of the population (the top 1 percent holds 25-35 percent while the bottom 50 percent holds only around 2 percent).

Beyond the abstract numbers of inequality, there are millions of people struggling to meet basic needs such as clean water, food, education, and steady employment. In the US, one of the world’s richest countries, millions of people are living paycheck to paycheck, earning as little as $12,000 per year, the same as the average income in some of the poorest countries.

Piketty and other progressive economists suggest that to resolve the debt and inequality crisis, the wealthiest must foot the bill and thus ensure that the lower-income groups receive a bigger part of the pie.

In his latest book, A Brief History of Equality, Piketty is rather optimistic that this can be done and claims that over the great sweep of history we have moved towards more equality. And how can this be achieved: not through a smarter form of capitalism, but rather through better forms of democratic socialism.

Reform measures proposed by Piketty and other systems change economists:

• A progressive tax on wealth.
• Reintroduction of a progressive tax on income
• Increase marginal income rates
• Increase taxation on return on capital and reduce tax on work and productive economic activities
• Differentiate between productive use of wealth, such as profits from manufacturing, and unproductive profits, such as capital gains and financial income from interest.
• Tax unproductive profits higher than salaried work
• Take steps to protect and preserve the real economy

Progressive Tax on Income

Taxes on the rich, especially in the US, have steadily decreased since the time of Ronald Reagan and Margret Thatcher, with the expectations that this would free up more capital for productive investments. This near-religious promise has not materialized as expected, however.

While investments shrunk, what grew was the level of speculation and the vast amounts of debt accumulated by governments and individuals.

By reversing the trend and returning to higher taxes on the rich, we can reduce the number of resources wasted on speculation, reduce debt levels, and put more resources into the productive sectors of the economy.

Therefore, in addition to the introduction of a wealth tax, governments should also reintroduce a progressive income tax. In the past, the top tax rate on income was nearly 80 percent, while in most industrialized countries today it has been reduced to around 35 percent. This trend must be reversed through progressive taxation.

Reducing Inequality Long Term

The tendency to concentrate wealth is inherent in a market economy, and as long as we have a market economy, this fact cannot be changed. Because extreme concentration of wealth destroys the necessary conditions of a market economy, the whole system eventually self-destructs.

In order to prevent this and maintain a level of equality that will create sufficient demand to allow the markets to function, outside intervention in the economy by the state and trade unions has always been required.

An interesting situation thus arises: the forces that oppose free-market policies become the forces that maintain the conditions that make free markets possible. A prime example of redistributive policies within the framework of a market economy is the Scandinavian model.

Scandinavia has in the past had comparatively low inequality, a robust economy, and the highest living standard in the world. In recent years, Scandinavia has followed the trend to deregulate the economy. Not surprisingly, economic inequality is now on the rise.

Below are some long-term solutions for avoiding extreme inequality:

• Bailout people rather than banks
• Ensure wages increase on a par with productivity gains
• Reintroduce progressive taxation and welfare payments to reduce the gap between rich and poor
• Tax unearned income at a higher rate than income from work
• People’s incentives should be realigned with their contribution to society and the environment
• Make bonuses for loss-making companies illegal
• Place a much lower cap on salaries for top executives
• Use the money saved to increase the minimum wage
• Give incentives to cooperatives, since they ensure higher wages and worker involvement in the local economy
• Ensure low unemployment through government infrastructure projects

What we need in the long term is a form of democratic economy that is high on distribution and low on concentration of wealth. A new economy that is also rooted in ecology, since without nature, there would be no economy at all.

Real sustainable wealth is produced by nature, not the stock market, not by the super-wealthy billionaires. At stake is the quality of life for millions of people. At stake is the quality of life for the entire planet.