Tackling inequality must be at the heart of Budget, not tax cuts for the voting classes
Published 02/09/2014 | 02:30
My son asked me a very simple question a few days ago. His question was insightful, direct, and immediately followed by a request for sweets. (Which he got). He asked me: "Dad, why are some people richer than us, and why are some people poorer than us?"
Since the work of Thomas Piketty, and before him Joseph Stiglitz's 'The Price of Inequality' and Branko Milanovic's 'History of Global Inequality', inequality has become the topic du jour in economics and in policy, and this has stimulated a huge amount of research in the area. Inequality should be at the heart of the next Budget, when the tax rates are flagged to fall for the voting middle classes.
Here's how I answered my son, who is eight and enjoys pretty much anything with chocolate on it.
Right now, Ireland is a pretty equal place when you compare it to countries like Brazil, where some people are driven around in limousines while others live hand to mouth. But it is much less equal than countries like Sweden and Iceland, where pretty much everybody has the same standard of living.
There are many reasons inequality exists. Inequality of wealth means you are probably born with more stuff than other people, because your parents are well off, or their parents were. Much of the wealth in the world is inherited. Sometimes people are born with very little but, because they are very talented or smart or work very hard, they have very high incomes, so they earn a lot more money than other people. That's income inequality.
Income inequality means someone earned a lot of money in one or two years. It's very different from wealth inequality, where you might not earn a lot in one or two years but, because you have a lot of land or own buildings or something like that, you can always sell some and you'll be okay.
Is it better to be wealthy or have a high income? Short term, say less than five years, you want to have a high income. Long term, you'll want lots of wealth. One does lead to the other, eventually.
The parents of wealthy kids pass on what they've got to those kids, and so inequality goes on through time. It is part of the structure of society. We bake inequality into our society in this way. For example, because I went to college, you'll probably go to college. And because you go to college, you'll probably get a better job than the person who didn't. You'll have a higher income, live a longer and healthier life, and you're much more likely to become wealthy as a result. In certain parts of Dublin today, for example, almost everyone goes to college, while in other places only 15 or 16pc do.
You'll also pass that wealth on to your children. Across the world, around 15pc of all the extra stuff produced over the last 20 years went to the world's richest 1pc.
Sadly it is not true to say that if you just work hard you'll be okay. It is certainly not true in Brazil or the United States, and it's probably not true in Ireland. Luck, talent, and skill don't hurt, but it is true that society's structure is a bit like a race where some people in the race have a head start. They can be slower or work less hard and still win.
Global inequality is falling, thanks largely to the Chinese economy growing so quickly. There are two groups of countries now. The poor and insecure countries don't generate enough to help themselves grow, and so when we compare them to the group of countries which are secure and prosperous, they look much more unequal.
So there are three main reasons why some people are poorer than others. First, they don't have as much wealth as others because they weren't born with it. Second, they don't have as much income as others because they aren't as qualified, or as skilful, or as lucky, as others. And third, sometimes they don't have the opportunities others have. You're in a horse race, but the race you are in isn't a fair one.
Luckily we have a Government that takes a lot from those who earn a lot of income like me, and gives it to those with less income as well as paying for your school and the roads we drive on and other stuff.
The Government also taxes wealth but not as much. In the next Budget, the minister in charge of taxes will probably drop taxes to give some money back to people like me. But I don't need it as much as the people at the back of the horse race.
Thanks to a recent report by the Nevin Institute, we know that different types of taxes hurt poorer people more than richer people. Changing some of these taxes in the Budget, rather than the ones that help people like me, might make the race a little fairer.