GLOBAL income inequality has worsened over the past four decades, a report finds, with the wealthiest one per cent of the world’s population capturing twice as much income growth as the bottom half.

The world’s middle class, made up mostly of people in North America and Europe, has by some measures fared the worst. Globalisation has boosted incomes for hundreds of millions of people in developing countries, particularly China and India. And it has lowered pay for manufacturing workers and other middle-income employees in the developed world.

The World Inequality Report 2018 is based on an interactive collection of data compiled by an international team of researchers that includes renowned economists Thomas Piketty and Emmanuel Saez. Their previous research drew attention to widening inequality in the United States by highlighting the disproportionate income gains enjoyed by the richest 1pc since 1980.

The new report argues that countries can reduce inequality through more progressive taxation and by subsidising education. It points out that the United States and Western Europe had similar levels of inequality in 1980, with the top 1pc holding about 10pc of income. But by 2016, the top 1pc in Europe held a 12pc income share, compared with 20pc in the US.

‘If rising inequality is not properly monitored and addressed it can lead to various sorts of political, economic and social catastrophes,’ authors say

That divergence occurred partly because the US tax code became less progressive, while European policies provided more support for education, which benefited lower- and middle-income families, the report said.

Policy choices can also worsen inequality, says one of the study’s authors, Gabriel Zucman, an economist at the University of California, Berkeley. The tax cut now moving through Congress will mostly benefit wealthier Americans and worsen the wealth gap, Zucman says.

While details remain in flux, the House and Senate proposals would either eliminate or severely limit the estate tax, which would make it easier for wealthy families to pass on fortunes. It would also lower taxes for so-called pass-through businesses, which include law firms and hedge funds. Most pass-through income flows to richer taxpayers.

“It’s pretty clear that it would reinforce the rise in inequality,” Zucman said.

The World Inequality Report shows that income gaps soared after 1980, though they levelled off after 2008 after the financial crisis. The richest 1pc of the world’s population saw its share of global income slip from about 22pc in 2008 to just above 20pc in 2016. At the same time, the share of global income going to the bottom 50pc rose slightly in the same period, to just under 10pc, thanks to gains in populous and fast-growing China and India.

The share of income earned by the bottom 50pc of Americans sank from more than 20pc in 1980 to 13pc in 2016, it said.

The authors of the report said the data it analyses were collected from a wide range of government sources over 15 years. One of the goals of the study was to push governments to be more transparent about financial data to ensure that debates over inequality and the policies that affect incomes and wealth are well-informed.

“Economic inequality is widespread and to some extent inevitable,” they said in the report’s summary. “It is our belief, however, that if rising inequality is not properly monitored and addressed it can lead to various sorts of political, economic and social catastrophes.”

While incomes for the top 10pc of wealthiest people have soared over the past four decades, the gains have been most dramatic in India, Russia and the United States. In the Middle East, Brazil and sub-Saharan Africa, inequality remained stable at very high levels, forming an “inequality frontier,” the report said.

The report said that the transfer of public wealth to the private sector has left governments without the resources needed to invest enough in education, health and other measures to help counter inequality.

“While national wealth has substantially increased, public wealth is now negative or close to zero in rich countries,” it said.

Following Europe’s example in adopting policies to benefit middle- and low-income earners could help counter the trend toward extreme inequality, it said.—AP

Published in Dawn, The Business and Finance Weekly, December 18th, 2017