Einar H. Dyvik
Research expert covering Nordics and global data for society, economy, and politics
Get in touch with us nowThe dangers and drivers of economic inequality
Experts and researchers continue to disagree on the perfect level of inequality (or equality), but there is a wide consensus that too high levels of economic inequality poses a threat of destabilizing a country. Particularly when mixed with high levels of poverty, high inequality can lead to increasing crime, violence, and even revolutions, probably most famously seen during the French and Russian revolutions. More recent examples include the Cuban Revolution in 1959 and the Arab Spring, uprisings caused by food shortages and high unemployment levels in addition to anger at political leaders seen as abusive and corrupt. Furthermore, the increasing inequality levels are seen as one of the key drivers of populism and extremism observed in many established democracies.The factors driving economic inequality are complex and inter-related. One factor is an unequal distribution of wages and salaries, when a minority earns significantly higher wages than a majority of the population. Moreover, rapid economic development, as well as transitions from one economic system to another tend to cause high levels of wealth landing in the hands of a few. The latter could be observed after the collapse of the Soviet Union, when Russia and other former Soviet republics transitioned from a state-economy to a free market-economy, and a few individuals were able to gain control of vast shares of the countries' wealth and economic resources. In some countries, economic inequality is related to race and ethnicity. In the United States, for instance, inequality levels were higher among Blacks than other ethnicities. Gender is another factor related to inequality, with women only earning 35 percent of the global income.
Redistribution measures
The most common, and arguably effective tool to reduce income and wealth inequality, are taxes. When used effectively, different types of taxes can ensure more distribution as taxed income and wealth is distributed back to the public, either via public schools, hospitals, social security, and infrastructure. One of the most common taxes is income tax. Especially a progressive income tax, where the tax rate increases progressively with the income level, is seen as an effective tool for redistribution. However, since the 1980s, marginal top personal income tax rates have decreased around the world, coinciding with increasing levels of inequality during the same period. A wealth tax, where a taxpayer's assets is taxed, is another type of tax sometimes used by states for distribution. Critics argue that too high wealth taxes will reduce incentives to accumulate wealth, which ultimately leads to a lack of job creation. Some also argue that a wealth tax drives tax evasion. Nevertheless, it is estimated that the United States could increase its tax revenues by around 446 billion U.S. dollars by introducing a wealth tax.
