To fix income inequality, look to EU-style policies

EU-style policies are the best-suited to reduce global inequality and poverty, a report by a team of economists said on Thursday, warning of catastrophe if the stunning concentration of global wealth is left unchecked. The World Inequality Report draws on the work of over 100 researchers from more than 70 countries found that during that over the past 35 years the global top 1 per cent of earners captured twice as much income growth as the bottom 50 per cent.

The report, drafted by a team including star French economist Thomas Piketty, used a massive database combining economic statistics and survey data from around the world.

They found that fast growth in developing countries such as China and India meant that the poorest half of the world population still saw their income grow significantly in recent decades. The middle class meanwhile got squeezed. “In recent decades, income inequality has increased in nearly all countries, but at different speeds, suggesting that institutions and policies matter in shaping inequality,” said the researchers.

They found market liberalisation and privatisations led to increases in inequality in Russia, China and India, but at different rates reflecting the speed at which they opened up their economies.

Meanwhile they found “the divergence in inequality levels has been particularly extreme between Western Europe and the United States, which had similar levels of inequality in 1980 but today are in radically different situations.”

The top 1 per cent of earners captured nearly 10 per cent of the income in both areas in 1980.

In 2016 it had climbed to 12 per cent in Western Europe but had more than doubled to 20 per cent in the United States.

The researchers said the spike in inequality in the United States was due “massive educational inequalities” and a tax system having become less progressive.

In Western Europe there was less decline in the progressivity of taxes, and wage-setting and educational policies were more favourable to lower and middle-income groups.

The team also looked to the future under various policy scenarios.

If the world follows US-style policies the top 1 per cent of earners will see their share of global income climb from just over 20 per cent to 28 per cent by 2050.

On the other hand the bottom 50 per cent would see their share slide from just under a tenth of global income to closer to seven per cent.

Continuing current policies would see a less dramatic divergence, but inequality would still keep expanding.

“Alternatively, if in the coming decades all countries follow the moderate inequality trajectory of Europe over the past decades, global income inequality can be reduced — in which case there can also be substantial progress in eradicating global poverty,” they said.

The report found that the average annual income per adult of the bottom 50 per cent of earners would climb from 3,100 euros ($3,650) in 2016 to 4,500 euros in 2050 if US-style economic policies are followed.

But EU-style policies would see income nearly triple to 9,100 euros.

The researchers recommended increasing the progressivity of tax systems, which they said would also reduce incentives for aggressive wealth accumulation.

They also urged creating a global register of ownership of financial assets, which they said “would deal severe blows to tax evasion, money laundering, and rising inequality”.

The researchers said the wealth held in tax havens has increased considerably since the 1970s and now accounts for about 10 per cent of global economic output.

The report’s authors acknowledged that economic inequality is to some extent inevitable, but warned “that if rising inequality is not properly monitored and addressed, it can lead to various sorts of political, economic, and social catastrophes”.

Piketty is the left-leaning author of the unlikely 2013 international bestseller “Capital in the TwentyFirst Century” that analysed the free market and the unequal concentration of wealth.

“There is a margin for manoeuvre,” Piketty told journalists ahead of the release of the report. “Everything depends on the choices that will be made” he said, calling for a public debate on the questions raised in the report.