Confronting economic inequality

December 1, 2019

The current levels of economic inequality are problematic and a serious threat to future political stability. Here are some solutions

There is a consensus that the current levels of economic inequality are problematic and a serious threat to future political stability. Inequality needs to be addressed from two angles — inequality within a country and inequality between countries and regions. Additionally, the economic inequality manifests itself in the form of income and wealth disparities.

Inequality is a fact of life. It even exists in nature. However, we can temper its extreme forms and have the power of deciding the extent of economic inequality acceptable to us. Should we be targeting inequality of opportunities or inequalities of outcomes? Or some mix of the two?

This is the question that confronts policymakers across the globe.

At the most fundamental level, a society should be able to offer its members access to a minimum level of opportunities supported by a framework of healthcare and education infrastructure. It is only fair that those with energy and ambition should have the right to reach the highest levels of wealth and income. Nevertheless, those left behind in this race, or not willing (or unable) to participate in it, should expect a decent quality of life. To start with, the measure of an acceptable quality of life may not be the same for a person in the USA and a person in sub-Saharan Africa. But over time one should expect this gap to get narrower.

More importantly, income and wealth should not become barriers blocking younger generations from access to fair opportunities, i.e. not restricting them to a few.

The wealth or income in a society is a definable quantum. The task for the policymakers is its re-distribution across the population such that it is not skewed towards the few in the extreme. But the measures should be such that they do not demoralise the wealth creators in society.

One tool, it is argued, is to introduce Universal Basic Income (UBI) or some variants of the idea. It allows every individual in a society a minimum basic earning to sustain himself (or herself). This has been tested in a limited format in some European countries. The results have been mixed and it has both proponents and opponents. Nevertheless, it is rational that the availability of an assured income stream as a cushion provides immense support to the most vulnerable. Variants of this concept include negative taxation (i.e. tax reimbursement for income levels below a threshold) and a guaranteed endowment for the youth upon completion of their basic education or reaching a certain age (say 25), to help them kickstart their own ventures.

Investing in a nation’s human capital is the most effective remedy to inequality. Studies have shown that proper nutrition and education in the early and formative years go a long way to further success (and health) in life. Measures such as child benefits to ensure proper meals and access to education, duly enforced, are essential. The results may be slow and manifest over generations but the returns can be tremendous.

Education and training should be modelled on more skill-based programmes which allow retraining as many jobs will become redundant with technological innovations (example: driverless cars).

Developing an economy that is on a stable growth profile will generate jobs and opportunities. This is a rather overarching statement. its elements include the fight against gender disparity, crony capitalism and other forms of corruption. This creates barriers against meritocracy. It is no-coincidence that the most egalitarian societies are also the least corrupt.

It is also incumbent upon developed nations to invest in underdeveloped countries. This needs to be in the form of commercial development and not aid, which is now proven to be highly ineffective in combating long-term poverty. If the OECD (Organisation for Economic Cooperation and Development) nations want to reduce illegal immigration, then they need to create an environment where the incentive to emigrate is less compelling. Increased prosperity in poor countries will only enhance the global scale of trade and commerce which is beneficial to all.

Creation of national (and international) pools of capital to direct funds into development initiatives should be expedited. Again, the purpose is not charity but the creation of opportunities.

It is also clear that the initiative and drive to make this happen will come from the governments. There is no fast-track solution. It is a policy-driven agenda which requires a steadfast and consistent implementation.

The billion dollar question is how to find resources to finance these plans.

The answer is infuriatingly simple yet paradoxical: taxes.

The reality is that technology and facilities that lead to great wealth for individuals and families are based on work done in public funded enterprises. They often use labour trained in public institutions and benefit from public goods such as roads. In addition, they are supported by the safety nets provided by the police and legal system. Paying due taxes only helps strengthen these sources and adds value to the economy at the same time.

The current taxation, globally, is not geared to provide this solution. It is overly complex which only encourages those with resources to find the best advisers to avoid tax. The tax net needs to be widened and tax collection to be more efficient.

Investing in a nation’s human capital is the most effective remedy to inequality. Studies have shown that proper nutrition and education in the early and formative years go a long way to further success (and health) in life. Measures such as child benefits to ensure proper meals and access to education, duly enforced, are essential. The results may be slow and over generations but the returns can be tremendous.

Income tax needs to be progressive with top earners paying significantly higher taxes. While I do not advocate returning to the levels it should be remembered that top band tax rate from post-WWII to late 1970s in the USA was 70 percent (now less than 40 percent).

Similarly, tax on sacred cows such as a tax on farming/agricultural income (above a threshold) should be considered.

Indirect taxes tend to be more punitive to low-income earners and as such should be applied only to luxury or high-value goods and services (first class tickets, luxury cars, etc).

Wealth tax is arguably more important than income taxes to stop the aggregation of capital/wealth in a few hands. This includes property/land and inheritance taxes. As substantial wealth is tied up in hard assets, these are easier to identify and resultantly tax.

Technology is now allowing for a faster implementation of these ideas. It is also restricting the potential of abuse or misuse of these measures. Use of now ubiquitous mobile devices, smart cards and biometrics are some of the examples.

For Pakistan, radical tax reform is a matter of survival. We have one of the lowest tax collection per GDP (14 percent) in the world (OECD: 33 percent+). The taxpaying base is abnormally small. It should be highlighted that the Islamic system of zakat is a wealth tax mechanism.

Pakistan has no inheritance tax system in place and introducing this will be no easy task. Those with interest in history will note that the introduction of inheritance tax (and later World War I) played an important role in breaking the shackles of aristocracy and the landed gentry on the British economy.

Tax havens need to be targeted and large multinationals operating in the country should be stopped from using measures such as transfer pricing to avoid taxes.

So the future is pretty clear: the taxes will rise globally. The particular challenge for Pakistan will be to raise tax revenues efficiently and then deploy these in a manner to create a more egalitarian society in the longer term.

Easier said than done.


The writer is a chartered accountant with several years of banking experience in Europe and the Middle East

Confronting economic inequality in Pakistani society