Growing income inequality is driving public mistrust

16 January 2024 –

This year’s World Economic Forum at Davos is focused on the theme of “rebuilding trust”. The topic could not be more timely, with public trust in governments still low in many countries. Yet if those gathered in Switzerland are serious about tackling declining trust, they must also raise tough questions about growing inequality.

We are living in a time of phenomenal extremes. Between 2019 and 2020, global inequality grew more rapidly than at any time since the second world war. When it comes to income inequality, the most compelling example is the exorbitant pay divide between chief executives and workers. In 2022, CEOs in the US were paid 344 times as much as a typical worker, compared with 21 times back in 1965.

Equally concerning is the so-called wealth gap, with the fortunes of billionaires having grown by 109 per cent over the past decade. According to Oxfam, during the pandemic, a new billionaire was created every 30 hours. But this wealth hasn’t trickled down to the 1.7bn workers living in countries where inflation is rapidly outpacing their wages.

Such divides are the sign of something fundamentally wrong with the system. The concentration of immense wealth in the hands of a few can also bring disproportionate influence over governments, thereby entrenching even deeper divides. The results? As Earth4All’s Social Tension Index concludes, with worsening inequality, social tensions will continue to rise in this century, thereby fuelling populist nationalism and the erosion of democracy and public trust around the world.

Yet economic inequality is a political choice. While billionaires have massively increased their wealth, governments have become significantly poorer, with the share of wealth held by public actors now close to zero or negative in rich countries. To address the issue, governments will have to raise funds, while also redistributing income and wealth. Here are three critical tax-based measures that they can take.

First and foremost, governments must increase tax progressivity. Countries with such schemes have lower income inequality, because their governments have sufficient revenues for social spending. But in high-income countries, the top marginal tax rates on corporate income have declined in recent years. And only a few governments in low and middle-income countries use progressive taxation to reduce inequality. Indeed, some are being forced by IMF-driven austerity policies to cut public spending. Progressive taxation must therefore be prioritised.

The second step is wealth taxation. A wealth tax starting at just 2 per cent annually for multimillionaires and rising to 5 per cent annually for billionaires could generate $2.52tn a year. Taxing the super-rich may also be key in addressing the climate crisis — the richest 10 per cent account for about half of global carbon emissions.

Third, governments must enact windfall taxation on the extreme profits that have been generated by corporations in recent years. Oil companies including BP, ExxonMobil, Chevron, Shell and TotalEnergies posted combined record profits of $200bn in 2022. As things stand, most of this money flowed back directly to executives and investors. Instead the revenue claimed back from fossil fuel industry windfall profits should be redistributed to those who are struggling with rising food and energy prices, or with the effects of the climate crisis. And of course it must be redirected to the just energy transition.

A few years ago, UN secretary-general António Guterres gave a speech in which he asked: “Will we succumb to chaos, division and inequality? Or will we right the wrongs of the past and move forward together for the good of all?” We are at a point where leaders must decide. A new global conversation on economic inequality is long overdue but essential if leaders are serious about restoring public trust.

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