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  • Writer's pictureEmile Petraviciute

Progressive Taxation: A Solution to the UK’s Worsening Inequality Woes?

By Emilė Petravičiūtė, Research Strategist

It is difficult not to notice the proliferation of articles and research papers on increased poverty all around the world as a consequence of Covid-19. While the number of rough sleepers in London in Spring of 2020 was 77% higher than in Spring of 2019 the number of British billionaires increased by almost a quarter in the first year of the pandemic. The economy is indeed facing some extraordinary challenges and detrimental changes as a consequence of this ongoing public health crisis, however arguments claiming these dramatic distributional changes in income are solely a short-term, reversible consequence of Covid-19 are extremely naïve. The roots for the recent inordinate rise in inequality lie far beyond the current crisis.

The emergence of coronavirus has only highlighted the systematic trend of income inequality that appears, for all intents and purposes, inevitable in free-market capitalist systems. Income inequality in the UK has been steadily rising since the late 1970s, with the introduction of Thatcher’s often laissez-faire neoliberal economic programme resulting in adversely regressive distributional impacts that have yet to be entirely reversed. During Thatcher’s time in the office, the UK Gini coefficient, the most widely used measure of income inequality, went up from 25.3 to 33.9.

While it is often argued that some degree of income inequality is inevitable in a “healthy” growing economy and will diminish with the further onward acceleration of GDP, the majority of recent evidence suggests that not only has inequality been increasing in the richest world economies but also that it has significant negative implications on people’s wellbeing and welfare – the measurements that, in my opinion, economists and policymakers should be actually concerned about. In this article, I will briefly overview how, in the UK, income inequality is positively correlated to crime rates, life expectancy and disparities in education levels. I will then discuss the potential for progressive taxes to help alleviate this problem.

One of the most prominently noxious effects of inequality is crime. Crime rates and inequality rates in the UK have both been rising since the 1970s, with one paper positing the econometric conclusion that inequality is a cause of violent crime rates in urban developed areas, not just a symptom. One simple explanation for this is the fewer opportunities for the poor to legally obtain enough resources to survive in increasingly unequal societies. Comparing the maps that show the level of income inequality (lighter shades indicating less income inequality) and violent crime rates in London (lighter shades indicating less crimes), mostly confirm these findings. For example, the South West of London has both lower income inequality and lower rates of violent crimes.

Another major problem that stems from income inequality is disparities in health. Although possessing a world-renowned public health system, the UK is far from perfect in providing high quality health services to all, with the wealthiest' ability to afford private practices and better nutrition allowing them to lead healthier lives for longer. One worrying consequence of this divergence is its growing nature, with a recent report finding that the health gap between wealthy and deprived areas in the UK increased in the decade preceding 2020, a statistic likely to have worsened following the pandemic given the regressive distributional effects of Covid-19 (as a disease that has worse effects in deprived areas given the generally more crowded living conditions).

A particularly stark piece of recent research has found that females in the most deprived areas of the UK are dying at a younger age than the average woman in all of the world’s 38 OECD countries bar Mexico, suggesting inter-gender inequality remains a particular problem. Furthermore, infant mortality seems to be dependent on the father's social class in the UK, as seen in the graph below, with no such correlation being observed in Sweden, a nation renowned for its robust welfare state and progressive taxation system.

Finally, wealth disparities mirror educational disparities across the UK. Take for example the much lamented quasi-incestutous eltisit relationship between certain top boarding schools and Oxbridge that serves as a funnel into high-level British politics. This generalisation is justifiable – in 2018 roughly 42% of all Oxbridge places go to students educated in private colleges, while only 7% of all UK pupils attend private schools. The degree of this unfair association is so embedded that researchers at LSE found that students with same last names that have historically been seen as “high-status” (such as Baskerville and Darcy) have been attending Oxbridge consistently for eight centuries. Even when looking outside the most “prestigious” universities, young people from lower socio-economic classes are definitely underrepresented in higher education institutions in general. In the UK, only 3.5% of tertiary education students’ parents have below upper secondary education according to an OECD report from 2014. This means that there exists little social mobility, with economic inequalities proving highly influential in dictating access to education, a key determinant of later income level.

So, what now?

The question remains, what can be done about income inequality and its impacts? Given the utter absence of evidence in favour of tax-cutting trickle-down economics as a coherent policy method for inspiring growth and creating an egalitarian society in the long run, it seems logical that the solution to current inequality problems besetting the UK must be found in the opposite policy – progressive taxation.

The potentially levelling effects of taxation are well documented. However, while a lot of Western countries, including the UK, have to some extent implemented relatively progressive income taxes, what seems needed is an equivalent tax on capital. The rationale for this is simple; individuals with higher earning capacities are often those who have high capital income or have inherited a lot of wealth. Thus taxing both labour and capital income allows for greater redistribution than if only labour income is taxed.

Moreover, in “Capital of the 21st century” (2013), economic inequality expert Thomas Piketty argues that the causes of global inequality result from the fact that the private rate of return on capital has historically been higher than the rate of growth of income and output (the much debated r > g formula). Whilst the statistical evidence Piketty relies on is still heavily contested, it remains close to a truism that more progressive taxation on capital would help arrest the continued and seemingly unlimited growth of inequality, both in the UK and globally. In my opinion, there exists also a serious case for hypothecated taxes, for example with the revenue collected from this new capital tax being used to decrease social inequalities in areas such as health or education, reducing the impacts of income and wealth inequality whilst simultaneously providing further opportunities for social mobility.

However, we must consider the possibility that if one country increases their tax rate, the capital flows to another country with lower rates. A solution for this well-trodden justification of low taxes could be found in the imposition of a global tax rate, helping to avoid this exodus of capital. Similar plans have been unveiled for corporation tax following Biden’s ascension to office across the Atlantic, with the OECD last year proposing a minimum 15 percent rate globally, with 136 nations signing this agreement. Whilst critics such as Slavoj Žižek are quick to charge that this is utopian thinking considering the current context regarding the existing conditions of global capitalism, there seems to have been a profound shift in the prevailing redistributive mood as a result of the stark inequality-revealing effects of the pandemic, where poorer individuals fared the worst.

Whether these efforts can be sustained to successfully combat the multitude of vested interests, or whether this newfound progressive consensus crumbles in the face of inevitable pressure, remains to be seen. Perhaps it is naive to believe that the problem of redistribution in the UK will be solved by independently changing one aspect of our national system, and that instead one should recognise that inequality is an inevitable feature of capitalism, with a trade-off existing between how much of these imbalances we allow before considering alternative economic systems. It may even be fair to say that capitalism has systematically failed, and will continue to fail, in providing equal opportunities for wellbeing and that this constitutes a fatal design flaw within the model – but that would call for another article.

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