Unraveling Economic Inequality

In South Africa, renowned for its staggering inequality, the richest one-tenth of 1% possesses nearly 30% of the nation's wealth, surpassing the combined ownership of the bottom 90%. Income and wealth disparities are not novel phenomena, as economists and historians have traced their existence throughout history, finding no society devoid of such inequality. This disheartening reality begs the question: is inequality an unavoidable facet of our world? To gauge inequality, one commonly used measure is the Gini index, which compares the distribution of income or wealth in a society with that of a perfectly equal society.

The Gini index, represented by the area of a shape multiplied by 2, ranges from 0 to 1. A Gini index of 1 signifies perfect inequality, where a single individual possesses everything while the rest have nothing. However, such extreme inequality is inconceivable in reality, as it would result in the starvation of everyone except the sole beneficiary. Conversely, a Gini index of 0 represents perfect equality, where all individuals possess identical income or wealth. Yet, even in communist nations, this level of equality is unattainable, primarily due to the impracticality of paying everyone the same wage, regardless of age, occupation, or workplace. Typically, developed countries today exhibit post-tax Ginis around 0.3, indicating a range of inequality levels.

It is crucial to recognize that the Gini index, or any other measure of economic inequality, does not provide insights into how income and wealth are distributed across genders, races, educational backgrounds, or other demographics. Additionally, it does not reveal the ease or difficulty of escaping poverty nor shed light on a society's historical path towards its present level of inequality. Economic inequality intertwines with various other forms of inequality, rooted in generations of discrimination, imperialism, and colonialism, which have perpetuated enduring power and class disparities. Nevertheless, despite these complexities, a rough measure of resource distribution within a country remains essential, and that is precisely what the Gini index offers.

Significant disparities in economic inequality exist between countries, largely influenced by the choices made by their respective governments. The selection of economic systems plays a crucial role in shaping inequality. During the 20th century, certain countries transitioned to socialism or communism, partly driven by the objective of reducing economic inequality. This shift did lead to a substantial decrease in economic inequality in China and the Soviet Union, particularly in the latter. However, neither country experienced the level of prosperity witnessed in the leading capitalist economies. Although individuals earned roughly similar incomes to their neighbors, the overall economic well-being was limited. The consequences of these choices, among other factors, eventually led to the collapse of the Soviet Union in 1991.

Conversely, capitalist countries offer counterexamples, demonstrating that they can choose to reduce economic inequality. It is tempting to assume that capitalism inherently perpetuates wealth accumulation at the expense of equality. China's transition to a more capitalist system resulted in a significant rise in its Gini index, indicating increased inequality. However, numerous capitalist countries have managed to maintain or decrease inequality levels. France has sustained a Gini index below 0.32 since 1979, while Ireland's Gini has generally trended downward since 1995. The Netherlands and Denmark have consistently kept their Gini indices below 0.28 since the 1980s.

These countries employ various strategies to address inequality. Progressive taxation, wherein higher income brackets face higher tax rates, serves as one method to mitigate inequality. The progressiveness of a tax system significantly influences its impact on reducing inequality. For instance, France exhibits a similar pre-tax income inequality level to the United States but achieves roughly 20% lower post-tax inequality. Inheritance taxes can also curb wealth accumulation across generations. European countries like Germany have implemented inheritance or estate taxes that apply to inheritances ranging from a few thousand to several hundred thousand Euros, depending on the recipient. In contrast, the US allows individuals to inherit up to $12 million without paying federal taxes.

Government transfers, redistributing tax revenues from one group to another, represent another approach to address inequality. Social Security programs, for example, collect taxes from working individuals to support retirees. In Italy, government transfers account for approximately a quarter of Italians' disposable household income, a significant contrast to the slightly above 5% figure in the US. Ensuring equal access to education, healthcare, and bridging the digital divide are additional strategies employed to reduce inequality. By enabling a highly educated and healthy workforce, societies can increase market value, leading to reduced inequality. Finally, addressing extreme wealth concentration is crucial, as it can undermine democratic institutions when individuals or families wield excessive power and influence.

While the discussion here has merely scratched the surface of inequality, it is evident that wealth and power tend to reinforce themselves, perpetuating inequality. Left unattended, societies naturally gravitate towards increased inequality. Breaking the feedback loops of wealth and power concentration is vital to fostering a more equal society.

Henrik Leandro