Reducing income inequality while boosting economic growth - Research Paper Example

Task: Reducing Income Inequality While Boosting Economic Growth Introduction In several OECD countries, inequality in incomehas multiplied over time. In some states, top earners dominate a large portion of the gains in overall income, while for other countries income has recorded an insignificant rise. There is emerging consensus that economic performance assessment should not only focus on overall growth in income, but also consider income distribution. Some regard poverty as the significant concern but others emphasize generally on income inequality. A critical question is whether the kind of policy changes of enhancing growth as advocated for each OECD member mighty mean positive or weird side effects on inequality in income. Concisely, while pursuing growth and strategies of redistribution simultaneously, policy makers must realize the possible complementarities and trade- offs between the objectives. In as much as inequality in income can be reduced simultaneously with endorsing economic development the document illuminates the above issue, with regard to the 2011 OECD work. Firstly, it illustrates differences in inequality of income across members of OECD and factors behind them, for instance the differences of cross- country in either wage or inequality in non- wages and differences in worked hours and inactivity. Considerably, the document provides the redistributive role of both tax and systems of transfer. In each item, the analysis highlights ‘win- win’ policies that simultaneously reduce inequality and encourage economic growth. In addition, it identifies policies that include trade- offs between the policy goals. Thesis statement The document identifies patterns of inequality between OECD countries and demonstrates a new analysis of policy together with non- policy drivers in such countries. A significant finding reveals that education and policies of anti- discrimination, fully developed institutions of labor market and progressive systems of tax transfer can all help moderate inequality in income. Consequently, it is worthwhile noting that, the document identifies myriad reforms in policy that could result to increased divided by boosting per capita of GDP and reducing inequality in income in addition to flagging other policy aspects in which reforms would include a trade- off between the objectives. OECD countries entail five groups with regard to their patterns of inequality. For instance, nations like Australia, Ireland and United Kingdom and the Holland reflect dispersed wages and high part- time employment share, putting inequality in labor earning at above the average of the OECD. Means- investigated transfers of public cash and progressive taxes for household reduce the general inequality in income, but it retains its position above the average of the OECD. Similarly, some Nordic nations and Switzerland all entail comparatively low income of labor inequality due to narrow dispersion of wages and high rates of employment. Can transfers are normally universal; hence, they are less redistributive. Inequality in income for such a group is significantly below the average of the OECD. Empirical analysis by Garicano reveals that despite the critical role played by technological change and globalization in fueling labor income distribution, the variation in marked cross- country is certainly because of differences in institutions and policies. Consequently, a scholar can deduce the following conclusions about the policies and the institutions: firstly, policies of education matter. Policies that raise rates of graduation from upper education and tertiary education as well as advance uniform education access help diminish inequality. Secondly, well- designed policies institutions of labor market can decrease inequality. A significantly high minimum wage minimizes distribution in labor income, however if set at a high level it may diminish employment; hence, dampening its influence on inequality- reducing. Arrangements of institutions that uphold trade unions also assist lessen inequalities of labor earnings by providing an equivalent earnings allocation. Moreover, reforms of job protection that initiate more even fixed and temporary contracts help lower inequality in income through smaller dispersion in wage and possibly through elevated employment. Thirdly, policies that uphold immigrant’s integration and remove all discrimination forms can assist lessen inequality. Fourthly, tax and systems of transfer play critical roles in plummeting overall inequality in income. Three out of the average inequality reduction achieved across OECD countries is because of transfers. However, the general impact of transfers in cash diverges significantly across countries, showing the size and transfer progressivity. In certain countries, such as Australia transfers of cash all very insignificant in size but they target highly on the needy. However in other countries such as Germany large transfers restructure income mainly over the entire life instead of across the individuals, and they experience low progressivity. Lastly, among the varied taxes, income tax at personal level is usually progressive, whereas contributions of social security, taxes from consumption and taxes from real estate are usually regressive. However, one can build up progressivity by plummeting expenditures on tax that primarily help groups of elevated income. Additionally, whether principal or secondary residence, options of stock and the interest carried would double equity and promote a growth- promoting reduction in tax rates of marginal income in labor. Similarly, it would cut apparatus of tax averting for the top earners in income. It is significant noting that, the above finding together with previous OECD and other researches on GDP per capita influence on institutions and policies which in turn underpins the reforms that enhance recommendations of realizing growth- identify the existence of complementarities as well as trade- offs between inequality reduction and enhancing growth of the economy. Several policies embrace a double divided as they decrease inequality in income and eventually help boost GDP per capita. For instance, they facilitate human capital accumulation and they make potential of education not as much of dependent at either personal or social circumstances. In addition, it helps reduce dualism in labor market by encouraging immigrants’ integration and initiates involvement of females in labor market. Moreover, there is reduction of expenditures in taxes especially in housing investment. Consequently, it contributes to equity objectives and simultaneously allows a rise- friendly reduction in rates of marginal tax. Centrally, myriad policies may embrace a trade- off between income inequality reduction and escalating GDP per capita. For example, collective wage administrative extensions may cut dispersion of wage earnings among workers. However, if they place labor costs at very high levels employers they may destruct competition, reduce employment and probably harm productivity. Shifting the tax mix to less- distorting taxes would initiate work incentives, savings and boost investment; however, it could destabilize impartiality. Alternatively, one can utilize transfers of cash aimed at diminishing incomes in order to ease the above trade off. Finally, certain policies aimed at enhancing GDP per capita reflect significant uncertain influence on inequality in income. For example, avoiding excess and continued unemployment benefits can eventually increase employment but also widen income distribution among workers, with an enormous net influence on inequality. The same scenario holds with respect to maintaining minimum wages at affordable levels. Inequality measurement Research by Gregorio has indicated that the most inclusive concept of income is disposable income of an household that has been adjusted for activities such as public expenditure on education and Medicare. The above measures embrace various factors as discussed below. Firstly, there is the issue of labor income of an individual. Labor income dispersion among working population implies wage dispersion for regular employees and income dispersion for the groups who comprise the working – age population and the unemployed (Gregorio 400). Secondly, there is labor income from household. Working- age families diverge in dimension and make up, influencing the household’s total labor income. Another factor is market income from household. It entails household labor And capital income. In addition, there is the factor about disposable income of the household. It comprises every households and sources of income, after transfers of cash and taxes. Lastly, there is adjusted disposable income of the household. It adjusts disposable income for a household especially transfers of in- kind such as public health spending and social housing. Notably, it is significant highlighting that labor income from household, market income from household and disposable earnings from household are the most critical for the accumulation of inequality and they are the most significant to structural reforms. However, because of constraints of data availability, the document explores inequality at a certain point considering the influence of social mobility. Differences in household labor dispersion and market income across countries Labor income dispersion in household results from four key factors; hourly earnings dispersion among the fully employed, part- timer worker’s share, the rate of non- employment, and the formation of household. Countries differ significantly in earnings dispersion among the full- time, with likes of Chile and the US being the leading unequal, while Belgium and Switzerland being the leading in equality. Inequality is higher across countries with regard to part- time workers or the working population in general, this effect is significantly large in nations where part- time workers comprise a significant percentage of the entire employment and where rates of unemployment and inactivity are high. Members of a working household normally combine their respective incomes; hence, narrowing income dispersion due to the ensuing consumption economies of scale, whereas including dependants in households results to widening. Incorporation of capital income, a more concentrated factor than earnings of labor, increases households’ inequality. However, due to its general less significant size, income in capital is not a significant determinant of the aggregate dispersion in market income of a household. Labor income accrues approximately seventy-five percent of the average dispersion in the OED. Differently, the total capital income and self- employment accrues only an insignificant percentage of twenty five percent. Inequality in labor income as the main contributor tin market income diversion among household Looking on the entire OECD, income inequality after transfers and taxes according by Gini index was approximately twenty five percent less than income prior to transfers and taxes in the last potion of 2000s, whereas poverty measured after transfers and taxes was 555 less than prior to transfers and taxes. Consequently, disposable income distribution for a household still reflects significant variation across the OECD. However, even after computation of transfers and taxes the index of the Gini raged from less than 0.25 in Slovenia to 0.5 in Chile. Significantly, percentile ratios reveal a measure of inequality in income at certain points of the distribution in income of the richest centile households was three times above the income of the poorest centile households among numerous European countries and the Nordic. It is worthwhile noting that, such ratios stood over six for countries like Chile, Israel and turkey. Additionally, there are diverse differences among several countries in the top earners’ share in total income are too high, spanning from 4.5% in Sweden to 18.1% in the US. Reasons why the top earners have dominated the largest share of the cake Often, rising inequality in income reflect increasing income concentration at the top corner of distribution in income. For instance, in the US the top one percent of the population received eighteen percent of income in pre- tax in 2008, compared to the insignificant eighty percent in 1980. Although there is a rise in the total income share among OECD countries, there is also a considerable discrepancy between countries in when the increase started and the extend of income. Moreover, despite an increasing interest in the increase in top incomes, there still exist substantial differences over the grounds and their comparative significance. Scholars such as Gordon have given myriad prominent explanations such as taxation changes, changes in technology, globalization and talent market. Tax rates for the top earners have dropped considerably for quite some time. Consequently, it may have promoted the income declared by the top earners to the tax authorities. It is significant highlighting that, in a nation with top rate of marginal tax about 50%, a 1 % decrease in the rate of marginal tax would translate to an enhancement of 1% taxable income. Administrations of tax may manipulate the compensation mix, slopping the compensation mix towards less taxed compensation forms, and thus promote disposable income, especially at the top. For instance, capital achievements receive a lower taxation rate than the other incomes and in some countries, they are never taxed. Additionally, stock options receive preferential handling in tax in several OECD countries and the equivalent may remain among carried arrangements of interest. New technologies of information and globalization have increased the market for the top, promoting top income in the industries such as entertainment. The requirements for skills and responsibilities of the key managers have become a bit complex, large due to stiffer competition accompanied with globalization and deregulation. In addition, the management’s stability has dropped whereas the outside parts of key managers have advanced, raising their power of bargaining (Guadalupe 450). Outside options such as jobs overseas may demonstrate why shares of top income influence the rest of shares. For instance, the share of the top income in the US reflects a significant influence on the Canada’s share, whereas in the UK and Australia influence the share in new Zeeland. Globalization has also produced a sharp rise in capitalization market of the key multi- national companies, with the increase in chief pay closely due to the increase in the size of the company. The graph below represents data for pre- tax income excluding capital gains from every country apart from Australia and fin land. The data reflects tax returns. Source: Alvaredo, F. et al. (2011), The Top Incomes Database, www.parisschoolofeconomics.eu/en/news/the-top-incomes-database-new-website/; Graphical representation of Share of the top 1% of earners in total taxable income, 1980 and 2008 (Retrieved from Forces behind inequality Researchers such as Goos have revealed that globalization and technological change are critical in explaining the recent trends in inequality of labor income. They have also postulated that inequality in labor income is because of structural policies. Other suggested possible reasons are that several countries rely on transfers and taxes to influence outcomes of distribution. Moreover, schedules for income tax from labor have turned into significantly progressive although expenditures on tax have disadvantaged redistribution (Goos 60). From the above linear regression, it is clear that, each ever since 1990 the Development Report of humans has brought out the HDI, which was initiated as an alternative conventional, measure of national development, to measure things such as income level and economic growth rate. The HDI is a representation of a push for an expansive description of well-being and presents a complex measure of three crucial human development dimensions: health, education and income. From 1980 to 2012 the HID for France's rose by approximately 0.7% annually from approximately 0.728 to around 0.893 today, which ranks the country at 20 over the 187 countries with a likely comparable data. As a region, the HDI of OECD increased from approximately 0.756 in 1980 to around 0.888 today, ranking France above the average of the region. The HDI trends provides a significant account both at the nationwide and regional level and underscore the wide gaps in well-being and chances of life that persist to divide the world. Policies that enhance growth reforms and reduce inequality in income Studies by Goolsbee have revealed that, in order to address inequality appropriately in income, one must improve the quality of education and boost its reach. There is also the need to ensure and support equity in education. Other scholars such as Gregorio have agitated for the reduction of the gap between protection of employment on temporary and fixed work (Goolsbee 270). Additionally, there is the need to increase expenditure on market policies of vigorous labor. Moreover, enhancing immigrant integration and promoting women’s market incomes of their labor play critical roles in reducing inequality in income. Lastly, one must fight against discrimination and conduct taxation in order to allow prevalence of equitability in growth (Heller 70). However, it is worthwhile noting that increasing flexibility in determination of wages and shifting tax mix between personal and corporate taxes on income towards taxes on consumption and real estate brings an increase in inequality. Similarly, avoiding too high and long- term employment benefits and liberalization of product markets would produce ambiguous influences on inequality in income. Other factors, which would imply ambiguous effects on income inequality, entail lowering minimum costs of labor and moving from income either to inheritance taxes or to wealth. This is because; setting smallest wages significantly high would result to limited opportunities for job market among the youth and semi- skilled workers. Therefore lessening comparative costs of labor may promote labor market employment of such marginal groups. Similarly, shifting taxes from income to legacy or to wealth would augment GDP per capita, because property taxes entail the least distortive taxes. In conclusion, the document has discussed the critical findings of income inequality. It has sketched a comprehensive portrait of rising inequality in income among the OECD and the prospective motivating factors. It has reviewed changes in these factors and it has examined their significant influence on inequality. Particularly, it has examined the role of technological changes and globalization as well as regulatory reforms in tax regulations and benefit. It has assessed what a government can do in addressing rising inequality and it has concluded by examining the likely certain policy avenues. Significantly, the document has revealed that income inequality prior to transfers and taxes is entirely driven by labor income diversion and the existence of inactivity and part- time employment. Despite the issue of a wider dispersion, self- employment and income from capital play an insignificant role (Helpman 1240). Certain tax reforms and systems of transfer comprise a double divided in inequality diminution and increase of GDP per capita. Particularly, plummeting expenditures in taxes, which entirely advantage the rich, contributes to objectives in impartiality and allows for a growth- friendly reduction in rates of marginal tax. Lastly, the document has discussed other reforms such as trade- offs between the policy objectives. For instance, changing the tax to lesser disfiguring taxes from labor towards consumption would advance incentives to work and saving but also increase inequality at least at a certain point. Works Cited Garicano, L. and E. Rossi-Hansberg, “Organization and Inequality in a Knowledge Economy”, Quarterly Journal of Economics 121.4 (2006): 1383-1435. Print. Goolsbee, A., “Taxes, High-Income Executives, and the Perils of Revenue Estimation in the New Economy”, American Economic Review 90.2 (2000): 271-275. Print. Goos, M., Manning, A. & Salomons, A. “The Polarization of the European Labor Market”, American Economic Review Papers and Proceedings 99.2 (2009): 58-63. Print. Gordon, R. & Dew-Becker, I. “Controversies about the Rise of American Inequality: A Survey”, NBER Working Papers, No. 13982, National Bureau of Economic Research, 2008. Print. Gregorio, J. De and J. Lee, “Education and Income Inequality: New Evidence from Cross-Country Data”, Review of Income and Wealth 48.3 (2002): 395-416. Print. Griffith, R., R. Harrison and G. Macartney, “Product Market Reforms, Labor Market Institutions and Unemployment”, Economic Journal, 117 (2007). Print. Guadalupe, M., “Product Market Competition, Returns to Skill, and Wage Inequality”, Journal of Labor Economics 25.3 (2007): 439-474. Print. Heller, D. E., “The Effects of Tuition and State Financial Aid on Public College Enrollment”, Review of Higher Education 23.1 (1999): 65-89. Print. Helpman, E., O. Itskhoki and S. J. Redding, “Inequality and Unemployment in a Global Economy,” Econometrica, 78.4 (2010): 1239-1283. Print. Hoeller, P. “Less Income Inequality and More Growth – Are They Compatible? Part 4. Top Incomes”, OECD Economics Department Working Papers, No. 927, OEC Publishing, 2012. Print. Read More