Monday, May 24, 2010

Understanding inequality

After yesterday's post about the increasing agitation over growing income gaps, right on queue, here's Tapu Misa with another inequality invocation.

Maybe it doesn't matter that the two-thirds of taxpayers who earn under $40,000 (quite a bit less than the oft-quoted average wage of $50,000) will get between 9 cents and just under $10 a week after GST, while the hard-pressed top 2 per cent who've been struggling to make ends meet on $150,000-plus a year will pocket nearly half a billion in tax cuts.

Auckland University economist Dr Susan St John calls the tax package "a very significant shift from progressive taxation". More of the tax burden will now fall on the lower-paid middle and bottom ranks of taxpayers.

This means we're not likely to lose our ranking as one of the most unequal countries in the OECD any time soon.

It isn't at all clear what is intended by these numbers. One interpretation is that two thirds of tax-payers earn under $40,000.

Roughly two thirds of all the people that receive an income receive under $40,000. That is true. But all those people do not "earn" an income. It is paid to them as Super or a benefit. And yes, technically they pay tax but that only amounts to shifting some numbers on the government's ledger.

The average wage from paid employment was $48,360 in June 2009. People in paid employment pay tax on their earnings. They pay tax on their recompense for contributing directly to the economy. That thing we all rely on to keep us afloat.

Inequality, as epidemiologists Richard Wilkinson and Kate Pickett argue in their 2009 book The Spirit Level: Why More Equal Societies Almost Always Do Better, hurts us all. As well as links to higher crime, ill-health, shorter life expectancy and a range of social pathologies, inequality drives a wedge between people, corroding trust and raising levels of anxiety. Perhaps we shouldn't be too surprised then that an annual Massey University survey has found we've become more tolerant of income inequality, even as we've become more unequal.

Perhaps the reason New Zealanders have become more tolerant of inequality is because the last 30 to 40 years has shown that even as equality of opportunity has increased many have failed to take advantage. Perhaps they are more tolerant of inequality because they perceive growing numbers of people who appear to be the cause of their own misfortune.

If we lived in a country where the vast majority of people worked, and they were getting pitiful wages I too would be jumping up and down about inequality. Had I been alive in the 1930s I would have been a socialist. But we have been down that track of government intervention to give everyone a fair shake of the stick and it hasn't worked. The result has been the bedding in of a large group of permanently poor people.

325,000 working age people are on a benefit and if their children are counted the number rises to over half a million. And even during the economic boom, when NZ briefly boasted the lowest unemployment rate in the OECD, the number was only 20 percent lower. That's a major cause of New Zealand's inequality.


Lou Taylor said...

Well said Lindsay.

Anonymous said...

Well said Lindsay. Kiwiblog also addresses this point, saying many low paid will go on to higher incomes as their skill levels increase.

Also many who earn low incomes often are in the early stages of owning a business. They plan to increase their income over time through developing increased turnover, but in the meantime they pay their employees market rates and take home whatever is left over. Been there. Done that.


TimM said...

It is a case of tough love. The kids will complain bitterly that we're not letting them eat lollies for breakfast, lunch and dinner. The immature but caring left will want to give them everything they want, and do it right away. The people actually footing the bill are looking over the figures and saying 'we can give them three basic meals and a waterproof raincoat, but we can't afford the playstation for another decade'.

PK said...

*** The Spirit Level: Why More Equal Societies Almost Always Do Better, hurts us all. As well as links to higher crime, ill-health, shorter life expectancy and a range of social pathologies***

There is a graph posted over at theStandard supposed to highlight this.

I commented that the graph also shows that the more ethnically homogenous the population, the better the country's health and social outcomes.

I also noted that the graph omits the 2 top ranked countries for income inequality - Singapore & Hong Kong. Curiously, these countries have the lowest crime rates with Japan.

In other words, it isn't inequality that causes these problems per se, but the demographics of a country has a major impact.

Dave Christian said...

We tolerate growing inequality because we don't have a choice - at least not until we can think of a governance strategy better than democracy.

Right leaning politicians know that the children of many of their supporters are lazy, feckless, and often barely literate; Social inequality promises them high social status in spite of themselves. Serious moves to reduce social inequality would upset core right wing support.

For the left it is even more critical to leave it alone. Not only do the socially disadvantaged vote for left leaning parties, but social inequality persuades many socially advantaged folk to vote left (or at least gives them an excuse to vote for their own self interest).

For example, this is why taxpayer funded schools are perpetually allowed to fail children from lower socio-economic backgrounds. This is easily justified with 'We can't all be chiefs, there have to be some Indians' or 'The teachers are the experts and they know what they are doing'.