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Fight wealth inequality with taxes, study says

December 14, 2017

Income inequality can lead to "catastrophes," but there are ways to fight it, according to the World Inequality Report. "Everything depends on the choices that will be made," says renowned economist Thomas Piketty.

Globe with 500-euro bills on top of it
Image: picture-alliance/blickwinkel

People living in the Middle East face bigger income inequality than anywhere else in the world, with Europeans being the least affected by the income gap, experts say in the latest World Inequality Report published on Thursday. The team behind it, which includes French economist Thomas Piketty, relies on the work of over 100 researchers in more than 70 countries.

"In recent decades, income inequality has increased in nearly all countries, but at different speeds, suggesting that institutions and policies matter in shaping inequality," said the researchers.

While "economic inequality is widespread and to some extent inevitable," they added, its rise could lead to "various sorts of political, economic, and social catastrophes."

Read more: Piketty says Europe needs 'common tax policy' to beat inequality

Europe vs US

The significance of policies is shown by the difference between the US and Western Europe, according to the authors.

In 1980, the two had similar levels of income inequality- both in the US and in Western European countries, the top 1 percent of earners would capture almost 10 percent of income. By 2016, however, the "one percenters" in the US increased their share of income to 20 percent. In Western Europe, the portion only grew to 12 percent.

The rocketing income inequality in the US is due to "massive" inequality in education, and a tax system that was transformed to demand less from the richest parts of the population. In turn, European governments enacted educational and wage-setting policies to boost low- and middle-income groups, the experts say.

Infografik Income inequality: how much money goes to top 10 percent of earners?

Poor Germans falling behind

In Germany, the richest European nation, the top one-tenth of the population now control around 40 percent of income.

Read more: Income inequality reaches new high in Germany

"Their share has risen since the mid-90s," says Charlotte Bartels from the German Institute for Economic Research (DIW). Bartels compiled the data from Germany for the World Inequality Report.

"The bottom 50 percent have lost a massive share of joint income in the recent years," she was cited by the German dpa agency as saying. "In the 1960s, they had around a third of it at their disposal, today it is only 17 percent."

Read more: IMF highlights need to combat inequality

More money, more taxes

The global middle class is set to be "squeezed" if the current trends continue, according to the report. However, this tendency could be averted if the world adopted the EU's "moderate inequality trajectory." 

"Everything depends on the choices that will be made," French economist Thomas Piketty told journalists ahead of the report's release. The left-leaning Piketty scored an international bestseller with his 2013 "Capital in the 21st century" and has since ruffled many feathers with his criticism of world leaders, including Germany's Angela Merkel.

Read more: French star economist Piketty turns down award

Government still have tools to fight inequality, such as boosting access to education, improving health policies, environmental protection, setting up "healthy" minimum wage rates, and adopting better representation of workers in corporate governance bodies.

Perhaps most notably, the authorities should establish so-called "progressive" tax systems, that demand people to pay proportionately more tax with accumulation of wealth. The experts also urged called for a new global register of ownership of financial assets to  combat tax evasion and money laundering.

However, all these moves have been made more difficult by the fact that "governments in rich countries have become poor and largely indebted," the report says.

dj/ng (AFP, dpa)