What is really causing wealth inequality?

Economic or “wealth inequality” is undeniably a huge problem, not just in Britain but across the world. Increasingly it seems that those at the top are collecting vast quantities of wealth while those at the bottom are left to scratch a living from their low-wage labour. So perhaps it isn’t so surprising that there has been a surge of the anti-establishment Left, and we are seeing more and more often socialist rhetoric used to spur on large mass movements of people across Europe.

But what is causing this wealth inequality? Well, in some respects the socialist Left is correct – it is largely down to the economic policies pursued by their governments. Is it the fault of capitalism, however? Certainly not, since true capitalism operating within a truly free market has never been allowed to take place. Don’t blame capitalism – blame these things:

  • Firstly, large companies and rich individuals are able to exploit loopholes in complicated and extensive tax codes. People from poorer incomes cannot afford the lawyers and researchers to enjoy the benefits of these loopholes, and so the richer you are, the less tax you pay. A simpler tax code would reduce this particular inequality.
  • We also have an extensive system of government subsidies, which create lobbying groups, special interest groups, and are very hard to take away once they have been provided. One prime example of this is the railways franchising system – where private companies, rather than operating to make a profit, take government subsidies in return for providing sub-standard services. Another example would be farming – it may seem to be well-intentioned to support struggling British farmers, but in fact all that happens is that wealthy landowners buy up farmland (for which they receive a subsidy whether or not they actually farm it), and thus we are left with a direct transfer of wealth from the government (or perhaps more accurately, the taxpayer) to the landowner.
  • Another form of subsidy is quantitative easing and bank bailouts. Unelected central banks support insolvent or failing banks which should in a free market system go out of business. No one asked for this system, but it goes on anyway.
  • Low and 0% interest rate policies do not help the situation either. Debt becomes cheap to service, and we see the situation that we have now, asset prices, specifically the price of property, becomes inflated and unaffordable. This means that the ordinary person cannot afford to buy his own house, and even more so these days, to rent a property to stay in.
  • The interest on debt is tax deductable – encouraging…yet more debt. Debt causes long-term inflation, and while the rich may use tax deductability of interest against their assets, life becomes more expensive for the ordinary person.
  • The only way that many people can attempt to close the gap between themselves and the top 1% is by working, i.e. providing labour. However, the government taxes labour as a commodity through income tax, taking money out of workers’ wages. Meanwhile, those at the top whose wealth derives from assets, land ownership, and company management are taxed at much lower rates. This keeps those at the bottom firmly down, whilst those at the top reap the benefits. Income tax should not be the main source of government income – tax something like land or corporate assets instead!
  • One of my personal main gripes is the debt-based system of currency. 97% of money is created by banks lending money, mostly to other banks. In the USA, whenever the Federal Reserve creates 1 new dollar, there is a dollar of debt created with it. Those who work in the financial sector benefit from this newly created money, but if you don’t, you will be one of the ones left with dealing with this debt 10 years down the line…sorry about that.
  • Since 1971 the money supply has increased by 67 times, but the official tracker of inflation, the Consumer Price Index, tracks only the 10% of money which has gone into consumer goods. It ignores that which goes into financial markets and property, meaning that house and other financial and physical asset prices are able to rise without proper regulation.

Generally speaking, the main culprit here is our money system. Over the past 100 years the purchasing power of money has fallen by an average of 5% per year. Those with financial assets or property of some kind have been protected, whilst those relying on their savings or salaries have been, to use a neologism, screwed over. There is a great deal of correlation between different items on the list above, and their combined might only serves to worsen economic inequality further. There are other government policies which cause inequality such as the pensions system and council tax banding, but I have reserved what I believe to be the main culprits to this article.

Perhaps the worst thing about this list is that everything presented here is within the power of government to resolve. Wealth redistribution does not solve inequality, it merely reallocates the inequalities to different places and different levels. Wealth is created by work and innovation – two things which are driven by individuals. So long as we tax labour heavily, subsidise and encourage debt and asset ownership,  pander to special interest groups and business lobbies and remain mired in bureaucracy, it is likely that we will remain in a society where wealth is polarised to two extremes: the rich and the poor.

Where did I learn all of this? Basic economics; one need only read Adam Smith, Bastiat, Ricardo or any of the great classical thinkers to discover that interventionist economics and favouritism leads to low standards of living and inefficiency in an economy. Ultimately, this comes down to a question of whether or not we live in a world where there is economic freedom or economic slavery, and increasingly, it seems to me that the latter is true.

“I want the government to be limited to its essential functions, which are to guarantee the security of people and property, to prevent and repress violence and disorder, to ensure for all the free exercise of their faculties and the proper reward for their efforts.” – Frédéric Bastiat

Alex blogs at Burkeanthinker. Follow him on Twitter: @burkeanthinker

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The views expressed in this article are that of the author and do not necessarily reflect the views of Conservatives for Liberty