An Oxfam report suggests that global inequality has reached levels not seen in over a century. The report stated that 62 individuals had the same wealth as the poorest 3.5 billion people. The wealth of those 62 people has risen 44 percent, or more than half a trillion dollars, over the past five years, while the wealth of the bottom half has fallen by over $1 trillion.
“Far from trickling down, income and wealth are instead being sucked upwards at an alarming rate,” the report says.
It points to a “global spider’s web” of tax havens that ensures wealth stays out of reach of ordinary citizens and governments, citing a recent estimate that $7.6 trillion of individual wealth — more than the combined economies of Germany and the U.K. — is currently held offshore.
The Lorenz curve is a useful tool used by those interested in statistics and economics to give a picture of distribution. Its plots the % of household income on the vertical scale against the % of households on the horizontal. An example is shown right.
The Gini Coefficient is derived from the same information used to create a
Lorenz Curve. The co-efficient indicates the gap between two percentages: the percentage of population, and the percentage of income received by each percentage of the population. In order to calculate this you divide the area between the Lorenz Curve and the 45° line by the total area below the 45° line eg.
Area between the Lorenz Curve and the 45° line / Total area below the 45° line
The resulting number ranges between:
0 = perfect equality where say, 1% of the population = 1% of income, and
1 = maximum inequality where all the income of the economy is acquired by a single recipient.
* The straight line (45° line) shows absolute equality of income. That is, 10% of the households earn 10% of income, 50% of households earn 50% of income.
* The Lorenz Curve itself shows actual distribution of income. The further the Lorenz Curve is away from the 45° line, the more unequal is the distribution of income. With the recent Oxfam report the inequality line has moved further to the right.
* Lorenz Curves are typically drawn from gross income. Once disposable income is taken into account, the Lorenz Curve will most likely move inwards. This is because, as we shall see, the net effect of taxes and other distributional measures of government is to bring everyone’s disposable incomes closer together.
* Those countries where the wealth is in the hands of a few, such as oil sheikdoms, will have Lorenz Curves extremely bowed.
Lorenz curves may also be drawn to show the extent of inequality in the distribution of wealth. Such curves are likely to be even further away from the line of complete equality than are those of the distribution of income. This is because most people have some disposable income while not everyone has assets.
Tools of Redistribution
If we are concerned with how well-off people are and how much inequality there is, looking only at individual or household disposable income is not enough. It is not simply a matter of how much cash income the government leaves us with. The use of taxes and transfers may be the main way of directly redistributing income, but this is not the only way by which government can influence well-being. A combination of approaches can better tackle the problem. In general we may consider that government influences the extent of inequality by:
• The way in which it raises taxes to pay for public goods that everyone has such as defence and parks. The tax system may be designed to take more from the higher income groups, while everyone gets similar benefits from the public goods. More importantly tax dodging by the super-rich is one of the main drivers of global income inequality and needs to be sharply curtailed.
• Giving transfers, such as family support and the sickness benefit, to those whose income is very low or who cannot earn.
• Providing collective goods mainly to the lower income groups.
• Providing targeted subsidies or subsidies received only by those with low incomes&emdash; e.g., housing loans and education grants.
• Providing general subsidies on basic goods such as bread, milk, GP services and electricity. These used to be far more important than they are today. Subsidies have the problem that they encourage waste.
• Ensuring that all employers pay a fair wage under minimum pay, equal pay and pay equity legislation.
• Ensuring that everyone has equality of opportunity. Those who wish to proceed to tertiary education, for example, should be given the opportunity.
• Encouraging training and acquisition of skills by all school leavers.