Having
money from economic growth flow to poor people rather than the rich
feeds into a lift in the rate of economic growth and lower unemployment.
Conversely, as income inequality increases, the potential for economic
growth is constrained.
The economic case for maintaining a progressive income tax structure
and targeting welfare payments to those most in need is overwhelming.
The issue can be illustrated through a simple stylised example which
outlines how a higher cash flow to the poorest is growth enhancing while
a higher cash flow to the rich boosts savings, but keeps economic
growth lower.
Take a situation where there is a $1bn addition to the economy via
growth. That $1bn can be distributed in many different ways but let’s
initially assume the 10 richest people in Australia each receive all of
that gain, with $100m going to each person.
According to the BRW Rich list, the tenth richest person in Australia has wealth of $2.65bn while the richest,
Gina Rinehart,
has more than $14bn. Economic theory and research suggests that the
extra $100m to each of these uber wealthy people would be almost totally
be absorbed into their wealth and there would be only a very small
increase in economic activity as a result.
According to research from the Brookings Institution and the Reserve
Bank of Australia, the marginal propensity to consume of high-income
earners is substantially less than for low-income earners. In other
words, poorer people are likely to spend the bulk of any extra income
while the wealthy are more likely to save it.
Looked at another way, would Gina Rinehart, Anthony Pratt or Harry
Triguboff increase their spending over and above their current
consumption patterns if their income had a one off boost of $100m? The
answer is an overwhelming no. More likely the extra $100m would merely
find its way into their assets and wealth. Any impact on the
macro-economy as a result would be small.
An
alternative is distributing the $1bn by allocating $1,000 to each of
the poorest one million people via a $20 a week tax cut or benefit
increase. In this scenario, there is a strong probability the vast bulk
of the $1bn would be spent to improve their living standards. Low-income
earners are unlikely to save or invest the extra income.
Now think of how the different distribution of the $1bn will affect the economy and jobs.
If the money finds its way to those on low incomes, there will
inevitably be higher aggregate spending, more jobs and quite simply a
stronger economy. And if the income distribution continues to be skewed
to those on low incomes, there will be a lift in the growth potential of
the economy. Unemployment would be structurally lower and there would
be a self-supporting cycle of stronger activity as a result.
In most sober analyses of income distribution, no one is suggesting
governments have a policy framework to crunch the rich and blindly give
the money to the poor. Rather, the idea of greater income equality and a
more even distribution of wealth reiterates the importance of a
progressive income tax structure. It also highlights the economically
sensible nature of targeted welfare assistance to those on lower incomes
and a tightening of payments away from high income earners.
This is where the current tax breaks to very wealthy Australian
superannuants and the business sector need to be radically overhauled.
Not only will changing policies in these areas enhance economic
growth and see a structural lowering in the unemployment rate, they have
the other benefit of being fair, decent and compassionate.
Let’s hope the next election covers the issues of income inequality and how redistribution is such a vital element for growth.
Stephen Koukoulas is a Research Fellow at Per Capita, a progressive think tank.
