COMBAT ECONOMIC INEQUALITY

Reducing inequality and poverty, and promoting equity, are very important macro-economic objectives. The widening income gap between the rich and poor has highlighted the need to understand the causes of relative inequality and poverty, and to construct suitable policies to reduce poverty and to narrow the income gap.

Policy towards inequality and poverty is influenced by the desire to achieve both horizontal and vertical equity. Horizontal equity means that, as a guideline for tax and benefits policy, individuals in the same financial circumstances have the same fundamental ability to pay taxes, and, therefore, should be taxed at the same rate. The principle of vertical equity suggests that, when individuals are in different circumstances and have different abilities to pay, they should not be taxed at the same rate.

The tax system tries to achieve both horizontal and vertical equity. Income tax is calculated as a percentage of earnings, so as income rises the tax incidence rises, meaning that individuals earning the same income will be taxed at the same rate, and those earning more or less will pay more or less tax. The system also has bands of tax, with a tax-free allowance, so that at very low income, no tax is paid, and at very high income the upper tax band will apply. Horizontal equality is achieved because everyone pays in the same tax band pays the same tax. This means that a high earning individual will get the same tax-free allowance as the low paid, and will pay tax at the same rate as others over the different bands of income.

The Organization of Economic Co-operation and Development suggests that reducing inequality through tax and transfer policies does not harm growth, so long as the chosen policies are well designed and implemented. They argue that redistribution efforts should focus on families with children and youth, and in improvements in human capital investment by the promotion of skills development and learning.

Governments can intervene to promote equity, and reduce inequality and poverty, through the tax and benefits system. This means employing a progressive tax and benefits system which takes proportionately more tax from those on higher levels of income, and redistributes welfare benefits to those on lower incomes.

Cash benefits are designed to help those on low or zero original income, and include contributory and non-contributory benefits.

Contributory benefits, such as pensions and insurance contributions, are those where individuals and employers make a contribution into the National Retirement and Insurance Funds. Non-contributory benefits, such as housing benefit, income support and child support, do not require a previous contribution to have been made. Generally, there are tests to see if individuals actually need these benefits, called means tests, though child benefit is not means tested and is a universal benefit available to all deserving families with children.

Direct Taxes

When you take account of direct taxes, those on lower incomes are being hit hard, while billions of ringgit each year are being lost through tax avoidance and evasion at the top. Progressive tax reforms would help to address inequality at root as well as redistributing economic power. 

Strengthen legislation and resources to abolish tax avoidance and evasion; implement and co-ordinate more progressive income and wealth taxes; establish a progressive Property Tax; and shift the tax burden onto environmentally unfriendly activities through green taxes.

Indirect Taxes

In contrast, indirect taxes are regressive, meaning that, as a percentage of income, the proportion of tax paid declines at higher income levels, and, as such, the burden of the tax is largely on the poor. This means that, as a rule, indirect taxes widen the income gap.

The progressive effects of direct tax, and regressive effects of indirect tax generally cancel each other out.

Benefits in Kind

Benefits in-kind are those services, such as healthcare and education, that are provided free or heavily discounted at the point of consumption. These benefits can make a considerable impact on final income, increasing it considerably for the poorest, and narrowing the gap between the rich and poor.

Criticisms of Progressive Taxes and Benefits

Taxes and benefits clearly compensate for the failure of labour markets to provide sufficient original income for all citizens. However, such intervention can be criticised because:

1. It may create a disincentive effect, which occurs when individuals are discouraged from working hard because they pay more of their income in taxes.
2. It may create a moral hazard, where some individuals may not look for ways to improve their own position because the state provides insurance against poverty, unemployment, and disability.

The National Minimum Wage

The long-term aim of a minimum wage is to remove the problem of poverty pay, which exists when the earnings from paid work do not result in a living wage and fail to push people out of poverty.

High Quality Childcare

High quality childcare can transform life opportunities for children and will help to address unequal starting points. Making it equally available and affordable to all families would give parents more choices about balancing their families’ needs and their working lives.  

Public funding supporting the supply of childcare in order to cap family childcare expenditure at 15% of income; increased standards of training and qualifications to ensure childcare is always high quality; and better working conditions for childcare workers, including a living wage, stable contract hours and career and pay progression opportunities.

Skill Development

Non-graduates are being increasingly funnelled into low-paid, dead-end jobs with little or no prospects of future progression. Addressing the lack of investment in training and development for staff and managers would broaden opportunities for purposeful and rewarding work.  

Promote pooled training investment by sector; invest in incentive structures to improve high-quality management skills at different levels; use state support to ensure apprenticeship schemes lead to progression at work across more industries; and establish better education, training and employment links at the local level.

Creation of Good Jobs

Everyone should have the right to a well-paid, secure and meaningful job. But the current jobs market is hugely unbalanced, both in terms of geography and job quality. We need to invest in good, environmentally sustainable jobs around the country. 

Co-ordinate and co-produce a national industrial strategy; establish a state investment bank with regional focus; funding for better jobs and training to guarantee full employment; and reform business to ensure workers have a collective voice.

Policies to Reduce Unemployment

Unemployment is a major cause of poverty and inequality. Unemployment can be reduced by:

1. Government sponsored job creation schemes.
2. A monetary or fiscal stimulus to aggregate demand.
3. Active labour market policies to increase employability, such as re-training schemes.
4. Welfare-to-work schemes which encourage labour market participation.

The real barrier to decisive action to reduce economic inequality is not a gap in evidence, the absence of public support, or the lack of policy ideas; it is the lack of political will. Immediate action by politicians to show a genuine commitment to tackling economic inequality is the solution!!! 

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