• Tax unfairness drives widening inequality

    by  • February 23, 2013 • Articles, Comment • 2 Comments

    Another day, another study showing how an unfair tax system is helping widen the gap between the rich and the rest. It’s a US study this time, which finds that the biggest reason for widening wealth gaps 1991-2006 is the capital gains and dividends going to the top 1%.

    These kind of windfalls are taxed at only 20% or so, whereas Americans who get their income from salaries can be paying 39%. It’s strikingly unfair, and has been for a long time.

    Of course in New Zealand, as a rule you don’t pay tax on capital gains at all, so our system is even more extraordinarily unfair. It also means that whatever figures we have for wealth gains by the top 1% will be massively understated, since we don’t collect data on their capital gains.

    The study’s also interesting as it’s another rebuttal to the idea that widening income gaps are caused by things beyond our control: impersonal, global forces like free trade, or the way that technology makes some jobs redundant and others more valuable, or the increasing premium for education.

    This study builds on a lot of recent work showing that that’s not so. Take the education story – the idea that inequality widens because people with degrees earn more. It’s a seductive theory, because fixing it sounds so easy, relatively speaking. Just get more people to get degrees: job done.

    But if in fact the main problem – as it clearly is in the US, at least – is the profits going to the top 1%, education is not the problem (or the answer). The top 1% are not better educated than the rest of the top third, say, of your average country. This is not about ‘returns to education’, as people like to call it.

    Instead, it’s about really difficult but political – not impersonal – choices, about how the tax system treats different classes of people differently. And that’s what needs to be solved.

    Max Rashbrooke

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    Max is an author, academic and journalist working in Wellington, New Zealand, where he writes about politics, finance and social issues. Sign up to Max's mailing list.

    2 Responses to Tax unfairness drives widening inequality

    1. Jim Sargent
      May 25, 2019 at 12:48 am
      140432

      In the recent discussion about capital gains taxes focused on the idea being yet another tax. I suggest this is the real reason why it is so unpopular. Correct me if I am wrong, butI thought the Tax Warking Group’s focus was on making the system fairer, not on ways to get new tax dollars. In other words the introduction of a capital gains tax would lead to a reduction in the income tax rate, with the focus on low income earners. In other words the bottom tax rate would be lower, and perhaps the starting rincome would be higher. The real purpose therefore was tax cuts for low income earners. If this was so, why didn’t this come out in the news reports? If this was not the point, why introduce a capital gains tax at all? I think the whole issue was very badly handled by the governments PR department.

      • Max Rashbrooke
        Max Rashbrooke
        May 27, 2019 at 12:01 am
        140438

        I’d agree that the whole thing was badly handled. Whether it was going to be revenue-neutral (tax increases balanced by tax cuts) was never 100% clear. Personally – and you may well disagree – I do think we need a larger tax take, because the things that need to be publicly provided – high-quality schools and hospitals, state housing, public transport and so on – just can’t be done well with our current tax take (30% of GDP), which is much lower than that of many other developed countries (40 or even 50% of GDP), e.g. Austria or Denmark.

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