20 Jan 2016

New Aristocracies Intensify Inequality

Alexander Ludwig sees low chances of social improvement as main reason for unequal distribution of wealth / "Tax increases should be considered without prejudice"

What is the reason for the more and more unequal distribution of wealth worldwide? On the occasion of the World Economic Forum in Davos, the development organization Oxfam presented a report according to which the richest 62 individuals have the same wealth as the bottom half of humanity. With respect to the causes, the organization cites, among others, the French economist Thomas Piketty who said that returns on capital increase faster than salaries so that inequality between rich and poor will unavoidably continue to grow. “Piketty’s argument does not go far enough,” finds Alexander Ludwig, Professor for Public Finance and Debt Management at the LOEWE Center SAFE at Goethe University Frankfurt. “The fact that capital returns are, in general, higher than wage increases has dramatic consequences only when the permeability between income groups and generations is too low.” As long as employees have a chance to accumulate capital and children from poor parents have a chance of promotion, the relation between returns and pay rises is not relevant.

Chances to climb the social ladder are fading

However, according to Ludwig, this is exactly the problem today: “We observe that inter- and intragenerational mobility has shrunk during the last decades.” While social classes had become increasingly permeable in the United States between 1950 and the 1980ies, the upper classes have been cutting themselves off more and more ever since. “Although the general access to education has risen, at the same time, educational institutions and networks among the elite have enormously gained in importance, so that chances to climb the social ladder are definitely lower today than a few decades ago,” the economist states. “In more and more countries, a sort of aristocracy is developing both in the economic and the political realm.”

A good example for this is Germany, Ludwig says, where, according to Oxfam, the inequality of wealth, income and chances has risen massively in recent decades: “The results of the educational study PISA have shown that the parents’ level of education is more and more crucial for the educational success of the offspring. This way, income differences are made permanent for generations.” At least, income inequality in Germany has remained constant in the last ten years.

Deregulated financial markets: multiplying money becomes easier

As a further reason for the rapid wealth growth among the rich Ludwig points to the deregulation of financial markets. “When you look at the trend of financial market deregulation and the development of the income of upper classes, you can see a clear correlation.” Today, it is simply easier for rich people to multiply their money than a few decades ago. The recent financial crisis had stopped this trend temporarily but the losses of the rich have much more than averaged out ever since.

Tax increases a possible instrument

In order to counteract the increasing inequality, Alexander Ludwig suggests to make income taxes more progressive so that people with small incomes have to pay less and those with higher incomes have to pay more. Also, he says that a moderate wealth tax would be appropriate. As it is difficult to differentiate between private and company wealth, claims for tax increases in this area are usually counteracted in Germany with the argument that they would put too much load on family enterprises and, thus, threaten economic output and jobs in certain areas. “Tax increases should be considered without the usual prejudice with respect to small and medium companies”, Alexander Ludwig demands. He grants though that further studies about the overall economic consequences of a small wealth tax are necessary.