In the contemporary discourse on social and economic justice, bridging the vast divide of economic inequality through legislative efforts has emerged as a pivotal area of focus. The importance of this endeavour cannot be overstated; the disparities in global income and wealth distribution have a colossal impact on the public at large.
Long-term trends of income and wealth disparity in Europe and the United States reveal a stark contrast in the trajectories of these regions over the past century. At the start of the 20th century, Europe faced greater inequality than the US. Although there was a decline in inequality for both regions at the start of the 20th century, the United States had a sharp surge in inequality in the 1970s, while Europe saw a more gradual increase. The American case was, among other factors, driven by globalisation, technological advancements, changes in tax policies, and the financialisaton of the economy––all of which disproportionately benefited high-income earners. In the US today, the wealthiest one per cent owns 30.5 per cent of the total wealth of the people, while in Europe, the wealthiest one per cent owns 26 per cent.
While reposting “eat the rich” slogans and attributing all societal woes to a select group of billionaires might seem like a straightforward response, it oversimplifies the complexities of Western economic inequality. The responsibility does not rest solely on the shoulders of the ultra-wealthy. To effectively address and reverse the tide of growing economic disparity, policymakers must broaden their focus to include the needs and challenges of the poor and the middle class. Crafting and implementing better tax reforms, minimum wage laws, and universal basic income policies is crucial for fostering a more equitable and sustainable economic landscape.
The current trajectory of American tax policy is a disturbing trend towards regressivity—a system where, shockingly, the wealthiest individuals pay a smaller proportion of their income in taxes compared to those in the middle class. This regression is easily recognisable in the Tax Cuts and Jobs Act favouring the wealthy, lower tax rates on capital gains, increased estate tax exemptions, and deductions and exemptions that disproportionately benefit higher-income individuals. This paradigm shift in tax policy not only exacerbates wealth inequality but also undermines the foundational principles of fairness and equity in the U.S. tax system.
Similarly, in the landscape of UK wage policy, minimum wage legislation appears to mark a step back. The pace at which the minimum wage has increased trails behind the rise in the cost of living. As of 2023, the real living wage across much of the UK—excluding London—stands at £12.00, juxtaposed against a minimum wage of £10.42 for those aged 23 and above. This discrepancy sharply demonstrates that the minimum wage falls short of covering the cost of living, highlighting a significant gap between policy and the economic realities faced by workers across the nation.
Universal Basic Income (UBI), a bold reimagining of social welfare where the state ensures a fixed, regular payment to every citizen without condition, signifies another economic policy failure. A UBI trial in Finland, aimed at exploring if a guaranteed income could boost employment, failed to significantly increase job market participation among the unemployed. Despite hopes that UBI would incentivise work by providing financial security without the disincentives of traditional welfare schemes, this was not the case. The results indicated that while recipients reported improved well-being, the impact on employment was minimal. The trial’s outcome suggests the need for further research and policy design to effectively address unemployment.
The first step towards reducing economic inequality is debunking the myth that such efforts impede economic growth. In reality, equitable distribution of wealth, notably increasing the earnings of the working class while preserving the middle class, actually propels economic advancement.
The next step in decreasing economic inequality lies in the realm of fiscal policy. A primary example of this is progressive taxation, more commonly known as a “wealth tax,” which can effectively redistribute wealth. This supports growth by increasing opportunities for lower-income households and promoting social stability. Further examples of tax policies are keeping the estate tax, which taxes inheritance thus addressing inherited economic inequality and incentivising spending over holding wealth, and automatic tax cuts and benefits that are triggered when the unemployment rate rises above a certain threshold.
Another major player in supporting the middle and working classes is to enhance the quality of public education, which is shown to reduce the income gap. This includes providing universal early childhood education and increasing childcare support. Universal preschool and childcare, for example, would financially benefit low-skilled and low-income workers and also boost women’s participation in the workforce. Likewise, improving access to quality higher education––through tax credits, expansion of grants, cancellation of outstanding loans, and funding institutions to give more scholarships––is paramount to shrinking the income gap.
The next step in legislation is financial inclusion, specifically legal and regulatory frameworks that support greater accessibility to formal financial services. Financial inclusion aptly combats poverty and income inequality by making advancement opportunities more accessible for the disadvantaged. In tandem with this, labour market policies are a vital component in lessening inequality by supporting job creation for poor and middle-income workers, without impeding efficiency.
Labour market changes in the past decade have worked in the opposite direction, increasing inequality and suppressing wages. Policy actions that increase the power of employers and diminish that of workers are largely to blame for this shift. The effect is stagnant wage growth, which could be reversed with a labour market policy approach to restoring workers’ bargaining power, minimum wage increases, and stronger enforcement of labour standards.
These are, of course, only a few of many possible pathways to closing the income gap and reducing overall economic inequality.
As with any socio-political issue, there are a host of people who stand against these policy implementations. Harvard economist and professor N. Gregory Mankiw defends the economic principles and legislation that have led to worsened inequality, citing the importance of productivity incentives and innovation in a competitive market economy. His journal article Defending the One Percent is a relevant case study as to why the argument for economic advancement is not a relevant obstacle to progressive legislation.
By invoking the spectre of a perfectly egalitarian utopia, Mankiw paints a picture of severe economic inefficiency for which he blames progressive economic policy implementation. Though Mankiw’s critique initially presents a compelling narrative with the potential to sway public opinion against proposals for more equitable policies, a closer examination reveals significant shortcomings in his claim. He relies on an exaggerated scenario far removed from the policies currently under discussion. Such a tactic serves more as a straw man argument, strategically unsettling voters and policymakers rather than engaging with the actual proposals on the table.
It is important to recognise that the debate at hand is not about propelling society towards an unrealistic extreme of total equality, as Mankiw’s hypothetical suggests. Rather, it is about addressing the deep-seated economic inequalities that mar the modern Western world, with proposed measures aiming to temper these disparities, not eradicate them. Contrary to Mankiw’s alarmist scenario, progressive tax and labour legislation is designed to provide relief from the acute issues of inequality, not to usher in the sort of utopian vision he bases his commentary on. This distinction is essential for a nuanced understanding of the debate over economic policy and social equity.
Addressing economic inequality in the Western world demands a multifaceted legislative approach. Enacting policies that favour equitable wealth distribution is not just about mitigating disparities but is fundamental to fostering a more just, prosperous, and stable society. As the discourse evolves, we must move past simplistic critiques and focus on practical, evidence-based solutions that can bridge the gap between the wealthiest one per cent and the rest of society. Embracing these reforms is not a leap towards utopia, but a step towards rectifying the imbalances that threaten the fabric of our communities, ensuring that economic growth and social progress go hand in hand.