Equality: Some questions about an elusive goal

According to opinion polls conducted in several countries, rising inequality is the topmost concern of the majority of people.

But even if the vast majority wants greater equality, is there any unanimity or consensus on this? When people support greater equality, they typically want higher taxes on people earning more than them. 90% of us are vocally in favour of taxing the super-rich top 10% at much higher rates. However, we do not like to pay higher taxes on our income to reduce the gap between us and people earning much less than us. In other words, people are generally in favour of greater equality between them and the people above, while keeping the inequality between them and people below the same or even rising.

Next question: what should we mean by ‘equality’? Should this imply only equality of opportunity (in terms of income, wealth, housing, education, health services, etc.) at birth? We all know that even when there is no difference in opportunities at birth— as is the case with siblings of the same parents— they often end up having different outcomes in life, due to the differences in innate abilities, intelligence, and capacity for hard work or simply luck at different points in life. Just look at how the two Ambani brothers have fared in life (in material terms). Does that mean that if equal opportunities can somehow be provided to all people (however difficult it may be in real life), there is no further case for intervention to change the outcomes?

Clearly, at the individual, societal or government level, we do not think so. That is why, parents do not always divide their property equally among all the siblings; by following their own concept of fairness, they sometimes leave or provide more for the child (by will or otherwise) who is less successful or less fortunate in life. All governments (as per the society’s prevailing value judgment) provide subsidy to the poor by taxing the relatively better off in terms of income and wealth. People are entitled to subsidies or get taxed irrespective of whether these existing differences in income or wealth are due to an initial difference in opportunities or a difference in eventual outcomes.

At a more fundamental level, why should we strive for ‘equality’, in whatever sense one defines it? How much ‘equality’ is good? What are the practical limits to equality?

People opposed to equality, whether in initial conditions or outcomes, may argue that equality is not the norm in nature. Rather, ‘survival of the fittest’ is the norm in the animal kingdom. If one accepts ‘nature’s law’ to be the handiwork of God and the rest of the laws and norms as man-made, then even God does not treat people or animals equally. Hence, there is no natural or automatic case for equality.

That equality achieved by brute force cannot be sustained is exemplified by the eventual failure of communist states. Even in such societies, though thousands of ‘class enemies’ were killed to achieve an egalitarian outcome, there were huge differences between people (belonging to different hierarchies in the communist party) in terms of power and even material perks flowing from that power. So, even after the use of brutal force, egalitarian society remained an elusive goal.

In a multi-party democratic system, especially in a globalized world with the existence of international tax havens, there are practical limits to achievable income and wealth equality. The constraints come from two sides.

At some very high marginal rates of taxation (though there is no unanimity regarding the rates at which this takes place), people may abstain from earning additional income, which would make the very high rates ineffective. Of course, even in that case, it helps to contain further increase in income and wealth inequality. But then, a better distribution of the pie is achieved by reducing the size of the pie. This is the oft-mentioned trade-off between equality and efficiency. The second problem arises from tax evasion. Higher the tax rates, greater are the incentives to evade taxes (bribing tax officials also becomes more remunerative for both the tax evader and the bribe-taking officials) and to move funds to other countries with lower taxes.

It is also easy for the rich to get foreign citizenship and settle in countries with low rates of tax by investing a certain amount of money there. If, in the process, total tax revenue goes down (this is what the so-called Laffer Curve argues), the government would have less funds to finance schemes targeted at the poor and the goal of reducing inequality would suffer. As a result, no country in today’s world— capitalist or socialist— aims to have marginal rates of income tax above 70% or so, and for the same reason no political candidate can hope to win elections by promising a highly radical tax regime.

Another possibility is to impose much higher rates of tax on goods specifically consumed by the rich, like luxury cars, mansions above a certain value, yachts or business jets. Though this does not reduce income or wealth of the rich, it penalizes ostensible consumption by the rich (creating social discontent) while bringing in additional tax revenue to finance government expenditure directed towards the benefit of the non-rich. Here, the obstacle comes from lobbying by the manufacturers of such goods on the ground that it would hurt job creation in those sectors.

Finally, however radical be the electoral promises on taxing the rich, these get diluted to some extent once the person becomes the President or the Prime Minister. He/she will need to get approvals from the legislature and also cannot completely antagonize the rich contributors to the campaign kitty.

(The writer is a former Professor of Economics, IIM Calcutta)