Life in the Rear-view Mirror

Income and Wealth Inequalities

Most people hold to the fundamental principle that the wealth of a nation should be shared equally amongst its inhabitants. In fact, it’s a deep-seated tenet of Democracy, particularly those that are founded on the principle that all men are created equal. Therefore, nothing shows the lack of a functioning democracy better than a high level of income and wealth inequality.

In 1912, Italian sociologist and statistician Corrado Gini developed a measure of income or wealth distribution, which is now known as the Gini Index. It’s a number between 0 and 1, where 0 represents perfect equality and 1 perfect inequality (all the nation’s wealth is held by one person). It’s impossible to achieve neither zero nor one. However, a value close to 0.5 represents very high inequality. Estimates for the world as a whole are in the range of 0.6 to 0.7, suggesting that global inequality is severe, and extreme in specific countries.

The global Gini Index has increased steadily since the 1980s, without any slowdown in sight. During this period, global income inequality has grown by at least 10%. The data for 2010 show that the highest income inequality of all developed countries is in the U.S. and the U.K., the leaders of the so-called free-world for the past two centuries. Their Gini Indexes were 0.38 and 0.35, respectively, just under the threshold of severe inequality, believed to be 0.4.

In contrast, Norway and Denmark are the countries with the lowest inequality, with a value of 0.25. Income inequality doesn’t just happen. It is part of deliberate government policy. If governments want to reduce inequality, there are many ways of doing it. Tax policy is one of the most effective.

Taxes are the major government tool for balancing income and wealth inequalities. They allow the government to take from the rich and give to the poor. As taxes are paid largely by people with money, the higher the tax rate, the lower will be the Gini Index. Given that the U.S. has a high Gini Index, its tax rate would be expected to be low, and that is exactly the case.

As might also be expected, Norway has the highest tax revenue at 43% of GDP, an honour it shares with Sweden. The values are for 2012, the latest year for which they were available. Germany’s tax rate was 38%, Switzerland’s 30%, and America’s was 25%, just below U.K.’s 28%.

Germany is Europe’s largest economy, and the one most comparable to the U.S. It’s tax revenue was 36%, eleven points higher than the U.S.! The comparison shows how tilted the U.S. playing field is in favour of the ruling class. They are simply not paying their fair share of taxes. Canada is only slightly better, with tax revenues of 31%. As would be expected, Canada’s Gini Index is lower than America’s (0.32 vs. 0.38), but it has grown steadily in the past two decades, from a low of 0.28. We are on a slippery slope!

Government education spending is another good indicator of wealth sharing. The more money spent on education, the more opportunity is given to the poorer segments of society to better themselves. Moreover, education is very important for the future well being of the country. Therefore, the larger the percentage of GDP allocated to it, the better equipped and more productive will be the country’s future workforce.

The average spending on education for all OECD countries was 5.4% of GDP. The U.S., U.K., and Switzerland are near the average. In Norway and Sweden it was 7%. It’s no surprise that the countries exceeding the average are also the ones with the highest tax revenues, and the ones with the lowest income inequality.

As the wealthiest country in the world, the U.S. should be the leader in education spending. Being in the middle of the pack, almost gives it a failing grade, as it indicates a less than equitable sharing of the country’s immense wealth. However, it’s simply a question of policy. The choice is simple: more spending on education for the poor, or lower taxes on the rich. The U.S. has chosen the latter.