Income inequality hampers the economic growth
The main theme in this blog has always been income inequality. We have discussed for example the history of inequality in the US, income polarization in Toronto or how income inequality leads to financial crisis.
The assumption has always been that there is no problem if someone gets really rich, like for example the guys from Facebook as long as there is enough for the people at the lower income levels. Nobel price winner Joseph Stiglitz however has some very simple facts, why income inequality hurts the economy.
Tax revenues for the governments are smaller. Since top earners like Mitt Romney pay a smaller percentage of tax than middle and low income people, logically tax revenue will decrease if inequality increases. Let say, 1000 dollars are taken by just one rich guy. He will pay 16% tax, which is 160 dollar for the state. However, if the 1000 dollar would go to 1 rich guy, 5 middle income people and 4 low income people, everyone lets say gets 100 dollar. The rich guy will pay $16 tax, middle income pays 5 times $30 and we assume the low income people pay only 10% tax, so it would be 4 times $10. Sum it up: $16 + $150 + $40 = $206. This very simple example just to illustrate, that if we distribute income more equally, there is more tax revenue and maybe something can be done about the infrastructure.
Those at the top end spend a smaller portion of their income than those at the middle or at the top. Yes, thats exactly why they are rich and stay rich. Just remember, how for example as a student you used to end up with no money at the end of every month. An underlying weakness of the economy is “deficiency in aggregate demand”, meaning if there is not enough demand for the products, companies will not invest and the economy can’t grow.
Countries with large income inequalities underinvest in education, technology and infrastructure. No wonder the school system in the US is in shambles, since the rich have private schools and don’t care. Same goes for health care or infrastructure. Who needs public transport, if you can drive 5 cars? However, the money spend for German Porsche or Mercedes is helping the economy much less, than an investment into e.g. a public transport system which would create jobs locally.
The solutions are not so complicated. Tax the rich, invest in the collective well beeing and make the country more equal, so everybody can live the American dream again, without moving to Denmark.
(Source: Los Angeles Times)
