Many people, including a number of economists, are concerned with income inequality. They are concerned that a small number of people have more money, wealth... than the vast majority of citizens have. The precise measurement of such inequality is tricky.
To reduce or eliminate income inequality, many politicians and economists advocate taxing the wealthy people hard, e.g., a 70 percent tax was suggested by the American congresswoman Alexandria Ocasio-Cortez. The famous French economist Thomas Piketty suggested something like 90 percent tax on wealth. Tax the rich is a 2020 election policy for the Greens in New Zealand.
There is an ideological aspect to this issue, but I am not concerned with it.
However, I want to show you some data, which reveal that some countries have relatively low-income inequality and at the same time they are richer in terms of income per person, have low public spending, and low taxes. The data suggest that income inequality could be reduced without spending more, taxing more, or reducing anyone income. Instead of reducing somebody's income simply try to increase everybody's income.
To think in terms of economic theory, we should think about Pareto improvement, which is an efficiency condition whereby at least one person can be made better off without making anyone worse off.
Measurement is tricky as I said, however, for comparison, I use the UN measure of income inequality, which is the ratio of average income of the richest 10% of the population / the average income of the poorest 10%...Here is the table. I list the English-Speaking nations first, followed by the Europeans, the Scandinavians, and finally the Asians countries.
Australia, NZ, and the U.K. have the same level of income inequality. The U.S. has the highest level of income inequality in OECD. Canada is more comparable to the Europeans with medium level inequality. The Scandinavians have the lowest income inequality in the West, but the Asian countries have low-income inequality too. Japan's is the lowest in the world perhaps, followed by South Korea. Singapore and Hong Kong have lower income inequality than the U.S.
Given these figures, one might think that the Asian countries, Japan and South Korea in particular, must have high public spending on social welfare programs, high taxes to finance such programs, and an income per capita growth similar to the Scandinavians!
No, they don't.
In the Asians countries, particularly in Korea, however, public spending and taxes are significantly lower than the rest of OECD, and income per person growth is significantly higher than all other OECD countries.
This figure plots real income per person growth rate (data source:IMF-WEO) and government spending to GDP ratio. The Asian countries spend less as a percent of GDP and have higher income per person growth than the rest of the OECD. The English-speaking countries spend less and have higher income per person than the Europeans' have, and the Scandinavians have more spending the least income per person growth. Japan is somewhere in the middle. Still, Japan public spending is much lower than the Europeans' are.
This figure plots the real income per person and the tax-GDP ratio (OECD data). The Asian countries tax their people less because they spend less on social welfare programs, and have higher income per person than the rest.
The correlation between government spending - GDP, tax-GDP ratio and income per person growth is strongly negative across the OECD.
These significant differences in objectives and policies across OECD countries reflect the voters' demands for social welfare programs and the politicians' competition for votes.
Korea achieved a better income inequality outcome than the European countries and comparable to the Scandinavian countries, and much lower than Australia and New Zealand with less public spending, and a higher income per person growth rate. Similarly, Singapore and Hong Kong have much better outcomes than the U.S. Even Japan, which has the lowest income inequality in the world, has less public spending and lower taxes than all European and Scandinavian countries. So why can't we do that?
Nevertheless, I think that as long as the voters continue to demand forceful government actions against wealth accumulation, politicians will compete for votes and promise more. This pattern will not change soon.
