Welcome Guest Trikaal Capital - Income inequality

Displaying items by tag: Income inequality

“As of Nov 2016, India is the second-most unequal country in the world. The richest 1% of Indians own 58.4% of wealth. The richest 10 % of the Indians own 80.7 % of the wealth. This trend is going in the upward direction every year, which means the rich are getting richer and the poor are getting poorer.” – Wikipedia

Things are getting better for the rich. A Credit Suisse report shows that India’s richest 1% owned just 36.8% of the country’s wealth in 2000, while the share of the top 10% was 65.9%. Since then they have steadily increased their share of the pie. The share of the top 1% now exceeds 50%.

Key Causes of Rising Income Gap

·        Population

·        Regressive Taxation

·        Tax evasion

·        Liberalization and Unemployment

Population

Population growth rate: China 0.43%, India 1.19% (2016 estimates)

People are means of economic development. They are an asset if in adequate strength and prove to be a liability if excess in strength.

Population has exploded in India and has become a liability.

Even a school going child would know the harms of population explosion. But still to remind ourselves, the ill effects are – social unrest, shortage of drinking water, sewage treatment, rapid depletion of natural resources, extinction of many plant and animal species due to deforestation and loss of eco-systems, increased level of life-threatening air and water pollution, high infant and child mortality rate, unemployment, and hunger due to extreme poverty. Rising unemployment also leads to robbery, beggary, prostitution and other crimes. It also leads to overcrowding, traffic congestions, frequent accidents and pollution in big cities.

In rural areas, it has created a severe survival threatening structural problem - per capita availability of land is diminishing and the problem of sub-division and fragmentation of holdings is increasing. Coupled with lack of jobs, it is a disastrous development.

China’s one child policy has resulted in a low population growth rate even if it had been against a basic human freedom. It has proved to be a wise and daring compromise for the ultimate benefit of the nation.

Sadly, nothing is being done by the Indian government on this most critical issue that is a root cause of most of our problems today.

Regressive Taxation

India before liberalization had one of the most regressive tax regimes in the world. Four out of every five rupees collected as tax by the government came from indirect taxes, which are considered regressive because their burden is shared by citizens irrespective of income.

The tax reforms in 1990s were successful on this front as they had moderate tax rates, clean tax system with fewer exemptions and better tax administration. The share of direct taxes in the total tax receipts steadily rose till 2009; it was the first time when the share of direct taxes became higher than the share of indirect taxes.

But that process is now reversing. Share of indirect taxes have gone up by six percentage points since 2010. Direct taxes are still higher than the indirect taxes but it may be a matter of time before it reverses.

Redistribution of tax is a strong tool to reduce inequality, but India is not using it effectively. Its Gini coefficient (a measure of income distribution) is the second highest among lower middle income countries and is barely changed by fiscal transfers. Tax collections are poor and India’s tax code is regressive, meaning that the poor bear a heavier burden than the rich, which is not offset by social spending. The country spends only 2.5% of GDP on social protection compared with over 6% in many peer countries.

Tax Evasion

India performs poorly on tax collection, its total tax collection, currently at 16.7% of GDP, is low (about 53% of its potential).

Liberalization and Unemployment 

A research paper by renowned economists Thomas Piketty and Lucas Chancel showed that income inequality in India is at its highest level since 1922, the year the Income Tax Act was passed.

Source: http://wid.world/country/india/

Over the 1951-1980 period, the bottom 50% group captured 28% of total growth and incomes of this group grew faster than the average, while the top 0.1% incomes decreased.

Over the 1980-2014 period, the situation was reversed; the top 0.1% of earners captured a higher share of total growth than the bottom 50% (12% versus 11%), while the top 1% received a higher share of total growth than the middle 40% (29% vs. 23%).

India liberalized and opened up its economy since 1980s but it did it in a way that was very favorable to top income earners and capital owners.

On the other hand, growth at the bottom of the distribution was notably lower than average growth rates since the 1980s.

Technological advances have also affected labour income inequality as they benefit higher-skilled workers more than others. AI and automation is going to further widen the income gap.

Trickle down has not taken place till now and may not happen in future

Solutions

·        Strong population control measures

·        Widen tax net

·        Progressive taxes

o   The regressive nature of consumption taxation can be reduced by applying it only to certain goods, or applying it at different rates across sectors. For example, a higher consumption tax rate on services as opposed to goods will tax the richer more heavily as their consumption basket has more services than those of the poorer people.

o   If food is completely exempted from consumption taxation it will also lead to a more progressive system. Because food makes for a larger portion of the budget of a poor man compared to a rich man.

·        Improving the quality and reach of education

o   Investments in human capital are important for improving living standards, and are also likely to reduce labour income inequality.

o   New analysis shows that a rise in the share of workers with upper secondary education is associated with a decline in labour earnings inequality

·        Increasing spending on active labour market policies

o   Though higher social benefits can reduce incentives for work and employment but active labour market policies work by improving employment opportunities for labor.

o   Investing on technology/ employment offices that do job matching with labor skills available will be a big positive.

o   Focus on labor skill development courses and vocational courses, is the need of the hour as the demand for electricians, beauticians, painters, drivers, plumbers, etc. is rising very fast.

 

 

 
Published in Macros