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The Saga of Income Inequality: A Three-Dimensional Problem and a Non-Existent Solution?

The Saga of Income Inequality: A Three-Dimensional Problem and a Non-Existent Solution?

Income and wealth disparity is one of the defining problems of our time. In sophisticated economies, the wealth gap between the rich and the poor is at an all-time high. Inequality developments in emerging markets and developing nations have varied, with some countries experiencing declining inequality while others continue to experience entrenched disparities in access to education, health care, and finance (Gradín, 2021). As a result, governments and scholars are debating the extent of inequality, its origins, and what to do about it.

Inequality is a significant issue that is only becoming worse. The gap between the rich and the poor is expanding not only in rich countries. While emerging countries have achieved enormous progress in eliminating poverty in recent years, economic inequality has still risen in some of them. In a few of Asia’s economic powerhouses, income gaps have widened (Talpur, 2019). This phenomenon also spread to Sub-Saharan Africa and a few South American countries. In both industrialized and developing countries, income disparity is merely one component of larger economic and social imbalances. What is not clear is the answer that will solve this problem once and for all (Haller & Eder, 2017). As a result, it is possible to assert that one is presented with a challenging situation for which no efficient solution exists.

Amid widespread unemployment during the Covid-19 pandemic, calls for a universal basic income have gained fresh relevance. From political parties and think tanks to civic activists and trade unions, large numbers of individuals and groups are asking for dialogue regarding this proposed social welfare program in which all citizens are unconditionally awarded a minimum living wage every month, regardless of their employment status. Although not a new idea, universal basic income (UBI) has gained ground against the background of a broader social movement concerning the failure of welfare systems and the potential contribution of artificial intelligence to widening inequality. 

On a more pragmatic note… 

There are many who argue that UBI has the potential to eliminate bureaucracy and, therefore, cut public spending, while protecting employees in an increasingly unstable labour market. As Daniel Nettle (2018) conceives it, the scenario for a modest initial UBI scheme implemented in the UK, for instance, “would require surprisingly little disruption to the current tax and expenditure system”. Certainly, there would still be a benefit-cost structure and some means-testing in place (considering the changing costs of housing, daycare, or disability, a system of flat payments alone could not provide enough support). But UBI would replace certain fiscal policy elements: the tax-free personal allowance would almost certainly be eliminated, forcing people to pay taxes on their entire earned income. The idea behind this is that many people in the low- to middle-income categories would more than make up the difference in the universal payout.

However, the problem here is that, according to IPPR modelling, an unconditional, un-means tested payment at a high enough level to fulfil the Minimum Income Quality would cost about £1.7 trillion per year – nearly all of the UK’s GDP in 2016 (Baxter, 2018). This is what led Luke Martinelli (2017) to state that ​“an affordable UBI would be inadequate and an adequate UBI would be unaffordable,” especially if we consider the high levels of taxation needed to fund it. In contrast, a UBI based on current benefit levels would do very little in terms of reducing insecurity, poverty and inequality, and most likely prove to be ineffective (“UBI good idea”, 2021). 

What does empirical evidence tell us about UBI? 

A number of experiments conducted during the post-war decades showed that economic development could be achieved through the implementation of an equitable model. Some of these included the 1959 Cuban revolution, the 1967 Arusha Declaration and Nyerere’s road to socialism in Tanzania, as well as the Chilean attempt at socialism between 1970-1973. Moral and political arguments for equitable growth also found concrete expression in UBI trials in Canada, Switzerland, Finland, the Netherlands and even Alaska, though no experiment has been truly complete.

The state of Alaska is one of the first places where this has been tried on a statewide basis. In 1976, the state set up The Alaska Permanent Fund Corporation, a sovereign fund whose capital is based on the state’s mining and oil revenues, which have fed a universal dividend paid on June 30 of every year since 1982 (Coren, 2017). The case of Alaska proved that unconditional cash transfers are not guaranteed to decrease employment. In fact, research conducted at the University of Chicago and the University of Pennsylvania showed that the additional income that allowed people to buy more also increased the demand for jobs in the service sector (Coren, 2018).

Moreover, in 2003, Brazil became the first country in the world to pass a law that mandated the progressive institution of a conditional cash transfer program, Bolsa Família. In its immediate aftermath, Brazilians witnessed economic growth, improved social services and declining levels of inequality, leading former president of the World Bank, Paul Wolfowitz, to praise Bolsa Família as a model of effective social policy (World Bank, 2005).

Indeed, the program has clearly contributed to Brazil’s recent improvements in its efforts against endemic poverty, with clear positive impacts on the health, nutrition and survival of targeted individuals, education, and children’s growth. The initiative accounted for little more than 15% of the decrease in the Gini coefficient over the first decade of the twenty-first century (Hoffman, 2013). Nevertheless, Brazil is still one of the most unequal countries in the world, suffering from extreme poverty, especially among children. It is no wonder then that the issue of widespread inequality was placed at the centre of the 2013 demonstrations (Anbinder, 2013) and the most recent protests against the state’s current administration.

Lastly, we cannot deny that, among the few examples of existing (quasi-)UBI schemes, there has been a positive impact on poverty and inequality, notably in Mongolia, where the rather large universal transfers reduced poverty by 33.7 percent and inequality by 21 percent (Majoka and Palacios, 2019). However, framed in the context of a young democracy’s fledging, weak institutional order, the experience of Mongolia shows that design and implementation have an important say on the final outcomes of such an initiative; here, payments were made based on campaign promises, and uncorrelated with the level of revenues at the time of distribution. Moreover, similar to Alaska, Mongolia’s resources-to-cash scheme relied on natural resource revenues, which, as we know, can have highly fluctuating prices. Eventually, cash transfers exceeded mineral revenues, which ultimately led to increased debt. Recent public opinion surveys echo the rising unpopularity of universal cash transfers, with many Mongolians underlining that investments in physical or human capital, as well as in education and job creation, are preferable to either universal or targeted transfers (Yeung and Howes, 2015). 

UBI and generational wealth 

For many years, the relative relevance of inherited money versus lifecycle saving for wealth disparity has been vigorously disputed, initially on the basis of modelling aggregate flows. Recent microdata-based research has usually shown, to many people’s surprise, that inheritances are wealth-equalizing (OECD Tax Policy Studies, 2021). The significance of intergenerational wealth transfers through inheritance and inter vivos gifts in the build-up of household wealth and the establishment of wealth disparity has long been discussed. Transfer wealth is invariably far more unequally distributed than non-transfer wealth and overall wealth. Only around one-tenth of total wealth inequality is accounted for by transfer wealth. This reflects the role of transfer wealth in every country’s total wealth, with differences in transfer wealth inequality and its association with total wealth having only a little influence (Wise, 2004).

Although there is no real experience with a UBI policy in developed economies, studies have utilized income fluctuation. The influence of programs on labour supply has received a lot of attention, but it is probable that the more significant repercussions of a UBI would be intergenerational. However, no long-term and large-scale experiments have been carried out to examine the longer-term intergenerational repercussions of these efforts, as well as their implications at the macroeconomic level, or in the general equilibrium (Gentilini, 2020). The intergenerational links are modelled in a general equilibrium life-cycle Aiyagari framework with pay uncertainty, as well as a more creative “out-of-work” shock and a calibrated tax function (Barwell, 2016; Simpsom, 2021).

The endogeneity of these outcomes suggests that they are influenced by both the additional income provided by UBI, and the increases in taxes required to support this program. UBI provides for greater smoothing of expenditure and the guarantee of a minimum standard of living in an economy where people are subject to both income and job shocks, and where credit and insurance markets are flawed. It may also allow agents to take on larger projects at a lesser cost than if they borrowed. It can also have a positive intergenerational impact by encouraging parental participation in their child’s skill development (Widerquist & Howard, 2012). To estimate the net welfare impact of UBI, any beneficial outcomes must be balanced against the cost of higher distortionary taxes.

A fully-fledged UBI financed to cover the basic necessities for a household without work would be prohibitively costly – almost twice as much as all present transfers in a state economy. This would require significant additional income. The source of the extra cash is a first-order problem that will have a big impact on the policy’s distributional implications and capacity to help those who really need it (Wehner, 2019). Replacing present anti-poverty initiatives with a UBI, in particular, would be severely regressive unless significant extra monies were provided. 

UBI and taxation 

UBI is an acceptable and feasible way to adapt the concept of the social market economy to the era of digitalization, globalization, and long-term tendencies associated with a demographically aging society. It is an appropriate solution to the rising divide between capital owners and less skilled individuals who must support their lifestyles through low-wage labour. The market economy functions on a basic concept in any social welfare system: it aims to reconcile a wholly imaginary conflict between liberal and social worldviews through the peaceful means of social irenics, or harmonic reconciliation (Sammeroff, 2018). Market efficiency and social balance, freedom and social justice, are not mutually incompatible; in fact, they are mutually reliant. The strength of the social market economy concept is derived from its simplicity. The separation between allocation and redistribution is the primary focus. A free-market economy based on the premise of free allocation of production components and prices that reflect supply and demand in competitive marketplaces generates the most value added feasible. The most powerful precondition for a socially oriented transfer from the economically strong to the economically weak is to generate the highest value added feasible (Francese & Prady, 2018).

While the degree of redistribution necessitates normative political debates, positive economic analysis may effectively argue that a strong social policy is the most effective, and hence fair social policy. People, not specialized factors of production or regional or sectoral sectors, should be supported by an efficient social policy. Furthermore, it would avoid paternalistic behaviour and instead flow unconditionally (Straubhaar, 2018). The overarching goal should be to shift some buying power from those with higher incomes to those with lower incomes. While the degree of redistribution demands normative political discussion, positive economic analysis may convincingly demonstrate that the most effective, efficient, and hence fair social policy is a blind social policy. A successful social policy should help people, not specialized factors of production or regional or sectoral industries (Wehner, 2019). 

In a nutshell… 

Years of wage stagnation, worries of automation, robots, and job loss, as well as unhappiness with the current social safety net, have contributed to increased interest in universal basic income in the United States and other developed countries. Support for UBI has resulted in a variety of experimental efforts and legislative suggestions in the United States, Canada, Finland, and Switzerland (Guillen, 2020). Even so, UBI still lacks clarity regarding its structure, the problems it aims to solve, as well as the social safety net and its benefits. With all of these pilot programs and early attempts to use UBI, not much was learned; instead, they confirmed much of the existing research regarding its flaws. A complete UBI, which would provide a fixed benefit to everybody regardless of income, age, or other factors, and be financed to fulfil the basic requirements of a household without work, would be prohibitively costly, reaching a level almost twice as much as all present transfers in the United States (Guillen, 2020).

This would demand a substantial increase in revenue. The source of the additional funds is a first-order issue that will have a substantial influence on the policy’s distributional consequences and ability to support those who are most in need. Replacing current anti-poverty programs with a UBI, in particular, would be regressive unless substantial additional funds were committed (Gentilini, 2020). Current research on the effects of a UBI on labour supply, income, and family well-being can teach us a lot. In conclusion, UBI must solve its structural and methodological problems, and only then will it be possible to discuss its implementation and further functionality. 


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