By Prof S N Misra in Bhubaneswar, December 24, 2021: The job of holding up a mirror to the world can be a frustrating one; more so when the mirror highlights more wrinkles than we want to face. The just released World Inequality Report 2022 is one such discomforting mirror. It brings out how the top 10% of the population account for 52% of global health, while the poorest 50% hold only 8.5% of the total wealth.

The report also reflects how inequality showed spectacular increase after 1980s; particularly in countries like USA, Russia, and India. One of the main reasons which have contributed to this widening income inequality gap is reduction in the average corporate tax from 49% (1985) to 21% in 2018 and complicity of the ruling elite to favour rich corporate.

In the context of India, the report brings out how the top 1% of the income group hold 22% of total income while the bottom 50% hold only 13% of the total income. The middle 40% have a share of 29.7% of the total income.

In terms of wealth accumulation, top 10% account for 65% and top 1% 33%, while bottom 50% account for only 6% of the wealth and the middle 40% account for only 29%. This data would clearly show how in terms of owning immovable assets and wealth the rich have a disproportionate advantage compared to the bottom 90% who account for 36% of India’s wealth.

The report also does a trend analysis of India from beginning of the 20th century to 2021. The trend shows that top 10% who accounted for 52% of national income in 1901 accounted for only 30% of the total income during the 1980s.

However, after economics liberalization and pro rich tax policy of tax reduction, the share of top 10% has now gone up to 59%. On the other hand, bottom 50% who accounted for 15% of the total income in 1901 improved their share to 22% in 1980. This share has now gone down to 12% in 2020.

This clearly shows that after 1980, the poor have become poorer whereas the top rich 10% population have become far richer, thereby accentuating income inequality after economic labialisation from the 80s. In fact, as per calculation made by Prof Jean Dreze, the Gini Coefficient (measuring income inequality) has gone up from 31 to 38.

Prof. Simon Kuznets, the Nobel Laureate had brought out how the developing economies will witness higher income inequality as their income increases. However, after the per capita income reaches a high point (say around 10 thousand dollar) income inequality will go down. This hypothesis provided intellectual ballast to the general presumption that the developed economies will be more egalitarian than developing economies.

This hypothesis got a body blow when Thomas Piketty based on US tax data from 1910 -2010 demonstrated how after 1980, inequality has increased sharply in the US along with increase in per capita income.

This is attributable to a sharp reduction in the tax rate on the top income bracket.

Prof. Piketty in his seminal book: Capital, the 21st century has brought out how a just society in not about regulating the market but minimising lottery by birth. The tax cuts in the 80s under President Ronald Regan are the worst manifestation of patrimonial capitalism. Piketty makes a strong case for imposing global wealth tax and simultaneously increasing the corporate tax steeply on incomes above one million dollar. Prof. Atkinson who has done a pioneering study of income inequality (1997) also recommends that a tax rate of 65% on the top earning category and capital gain tax will reduce Gini coefficient by 5.5%.

The market economists believe that an undue increase in tax rate of the top corporate will discourage investment. However an IMF study of 2014 has been conclusively shown that any increase in tax rate up to 50% has negligible impact on investment. The World Inequality Report strongly recommends that even a token increase of 3.5% on the 15 earners will fetch 128 billion dollars, which can be invested on education, health and sanitation of the poor. This will require political will and political choice to happen.

In another stirring book the Great Leveller (2017), Walter Scheidel brings out how land reforms in developing economies like India have a poor record in alleviating inequality. Besides he brings out how falling union membership (34% to 8%), Union busting strategy during Presidency of Ronald Regan and a dip in minimum wages has dampened the income share of workers. Scheidel has assessed that average tax rate on top 1 % has come down from 42% in 1980 to about 27% in 2013. He strongly believes that peaceful reforms will prove unequal to growing challenge of inequality.

In the 42nd amendment (1976), Article 38(2) was introduced in to our Constitution, as per which the state shall ‘strive to minimize inequalities in income’. However, as brought out above, both income and wealth inequality has sharply increased after economic globalisation. One of the fault lines of free market economy is its emphasis on economic efficiency at the cost of economic equity & socio economic justice.

The Indian Constitution both in its Preamble and the Directive Principles of State Policy puts a high premium on socio economic justice for all rather than wealth concentration at the hands of a few. The way forward for India would be to embrace higher tax policy on the super rich than at present, imposing wealth tax and abdicate crony capitalism.

Improved access to quality education and up skilling of workforce, ensuring reasonable minimum wage for workers will minimize the income gaps. Higher investment in social sector would enable workers to be part of industry 4.0 and harness the full benefit of economic globalisation.

Prof Joseph Stiglitz in his book The Price Inequality debunks the myth that free market will bring prosperity to all. It is only through appropriate tax policy the yawning inequality gap can be significantly minimised. The recommendation of the World Inequality Report holds an important mirror for India.