The government strives for extreme inequality reduction in the society to make the population more equal and inclusive for all. Reducing inequalities and ensuring that nobody is left behind belongs to the country’s sustainable development goals.
Inequality reduction is usually achieved in the economy through wealth redistribution – personal wealth transfers, so called ‘taking money from the rich and giving it to the poor’.
To provide more details, let’s take a look at how income distribution in a country can be achieved through direct and indirect ways:
- Changes in TAXation.
- Employment-related benefits.
- Changes in ownership.
- Altering domestic policies.
Changes in TAXation
Higher income TAX for the rich. Wealth redistribution can be achieved by increasing income TAX for the rich part of the population and decreasing TAX for the poor part of the population. This will decrease the disposable income of the richest and increase the disposable income of the poorest.
Steeper inheritance TAX. Another way of wealth redistribution is through steeper inheritance TAX. The richest group in the society stores wealth mainly in assets such as land, houses, apartments, businesses, stocks, etc. These assets are usually passed down on future generations at some point in the future. Because the rich own more assets than the poor, when those assets are being inherited upon the death of a person, the rich will ultimately have to pay more TAXes.
Global TAXes. On a global level, there is a lot of discussion whether large corporations should be paying additional TAXes. There are also other various proposals to generate revenue such as ‘the Tobin TAX’ on financial transactions when converting one currency into another, or a global TAX on nonrenewable energy resource. Again, the rich countries that use more resources to produce more products will be required to pay higher TAXes than poorer countries.
Employment-related benefits
Wage increases. Policies can mainly focus on creating employment opportunities and increasing wages for the lowest earners. The range of wage-related policies can also include full-employment schemes, living-wage policies, stronger minimum-wage laws and wage subsidies.
Welfare payments. Direct income-transfer policies include cash welfare payments, for example by offering families with many children monthly subsidies for each child. It can also include strengthening collective-bargaining rights to give workers more opportunities to negotiate financial benefits.
Negative income TAX. Negative income TAX is a system which reverses the direction in which TAX is paid for incomes below a certain level. In other words, earners above that level pay more money to the government while earners below that level receive money from the government.
Universal basic income. Another way for unconditional transfers could be universal basic income. This is a financial transfer concept in which all citizens of the country regularly receive an equal financial stipend paid by the government without the need of meeting any conditions. That amount of payment should be sufficient to meet a person’s basic needs. A basic income can be implemented nationally, regionally or locally, as necessary.
Changes in ownership
Promotion of workers’ ownership in businesses or redistribution of public land equally to all citizens can be considered as ways to reduce income inequality indirectly. These will equalize the unearned income that derives from ownership of wealth.
The three major forms of unearned income include:
- Rent, from property ownership.
- Interest, from owning financial assets.
- Profit, from the ownership of capital equipment in the form of businesses.
Altering domestic policies
Public goods free of charge. Overall economic inequality can also be affected by domestic policies set by national and local governments. Access to public goods such as public healthcare, public education or public transportation can be provided to poorer part of the population for free. It will benefit the group in the society with the lowest income, leaving a larger proportion of individuals’ incomes to be spent on other necessary goods such as food and clothing.
Easier access to public services. Nondiscrimination policies by employers, governments and educational institutions such as government-subsidized child care, or internships that enable young people to enter the labour market should also affect income inequality.
Debt forgiveness. Debt forgiveness happens when a lender wipes away all or some of the debt owed. It can also benefit the least advantaged groups in the society. However, while this concept might be undeniably appealing, it almost always comes with strings attached.
Well, as it is well-know, most of the world’s wealth nowadays is held by a very small group of people. This often leads to financial and social discrimination of the poor by the rich.
The Gini Coefficient measures inequality of income distribution across the population of the country. You can check more about this index at Corporate Finance Institute.
However, in order for countries to be prosperous in the short-term and flourish in the long-term, equity should be available to everyone, hence inequality reduction remains one of the most important government economic objectives.
