We don’t have to put up with this

Rising income inequality has been described by U.S. President Barack Obama as the “defining challenge of our time.” Pope Francis calls for governments to redistribute wealth to the poor in a new spirit of generosity. Even IMF head Christine Lagarde has said inequality threatens the stability of the world economic system.

But what world leaders have not said is what they would do about it. How is equitable growth to be achieved? It is to address this question that I wrote the 2015 book Inequality: What Can Be Done?

There seems to be a climate of gloom and doom: a sense that little can be done to reduce economic inequality. My aim is to tell a more upbeat story. The key message is that the present levels of inequality and poverty are not inevitable. If we want to reduce inequality and poverty, there are steps we can take. They are not necessarily easy and they have costs. We would have to discard economic and political orthodoxies. But it can be done.

The first step is to restore the welfare state. Since 1980 there has been an unwinding of redistributive policies in OECD countries, with adverse distributional consequences. This is one of the reasons that poverty in Canada remains stubbornly high, with more than 1 person in 8 living on a low income. It’s one of the reasons income inequality in Canada is greater than in France, Germany or Japan.

To change this involves raising taxes. This is not easy, but I suggest a series of tax measures addressed toward reducing inequality, based on a return to progressive income taxation. On the transfer side, I argue for the raising of child benefit and the revitalization of unemployment insurance. I explore the potential of a basic income for all, a radical idea but one that has received support in the U.S. from Nobel Prize winners with very differing views: Milton Friedman on the right, and James Tobin on the left.

But reducing inequality is not just a matter of taxes and spending. Many of my proposals are concerned with the market distribution of income: what people receive in wages, interest and other forms of capital income. This means first of all addressing unemployment, and giving the reduction of unemployment the same priority as controlling inflation. Jobs, however, are only part of the story. The level of pay is important. In the EU, just half of the unemployed who find jobs earn sufficient to ensure that their families are above the poverty line. Poverty among working people is a major problem.

What about wealth? The highly unequal distribution of wealth lies behind the fact that the top 10 per cent in Canada have more than 40 per cent of total gross income. I propose a major new wealth transfer tax, with the tax based on the amount received over one’s lifetime in the form of bequests and gifts. Such a tax would contribute to achieving equality of opportunity, and the levelling of the playing field would be enhanced if the revenue from the wealth transfer tax were used to fund a minimum inheritance for all on reaching the age of 18.

I explore a variety of proposals to reduce inequality and tackle poverty. They are of course debatable. Some people will say the “equity/efficiency trade-off” means that national income and its growth will be reduced. I would respond that such an objection depends crucially on how one understands the working of a modern economy. When one allows for the imperfections of the market economy, it becomes apparent there are situations in which we can make progress on both equity and efficiency. Reducing inequality may go hand in hand with strengthening economic performance.

People may say that “in a globalized economy, one country cannot pursue such a path to less inequality.” But countries are not simply passive agents in the face of world developments. The impact on the distribution of income depends on how national governments react to a changing world.

The third objection is that “we cannot afford it.” Indeed, there are hard choices to be made. Taxes have to be raised and we have to reconsider how market incomes are determined if we are serious about reducing inequality and tackling poverty.

What we cannot say is that there is nothing that can be done.