Ten Hypotheses About the Inequality Debate

Claims of increasing inequality are constantly making the headlines. In response to such claims, many are calling for the "rich" to be subject to higher levels of taxation and for further development of a social state. How economic inequalities develop, and the consequences that this will have for German politics, can be summarised in ten hypotheses.

1. In the last two decades,  global poverty and income inequality have not increased, but decreased. This is due to the integration of newly industrialised countries, in particular of China, into the global economy.
2. In industrial nations the inequality in market incomes has been increasing since the 1980s. In the USA, the increase in the incomes of the wealthiest ten per cent of the population has been particularly significant.
3. In Germany, inequality in market income has also increased, with the greatest rise being seen between 1995 and 2005. Since 2005, however, levels of income inequality have remained fairly constant.
4. Disposable incomes are in fact much more important than market incomes. The taxation and transfer system serves to significantly reduce inequalities in the majority of industrialised nations.
5. In Germany, the state redistributes more wealth than almost any other country included in the OECD data. Since 1995, inequality in disposable incomes in Germany has therefore increased to only a very small extent. The proportion of the population included in the poorest 25 per cent of the population has remained generally stable. The proportion included in the wealthiest 10 per cent of the population has increased slightly, but remains below the EU average.
6. It is more difficult to measure wealth inequality than income inequality. According to available studies, in comparison to other countries, the wealth of households in Germany is low. They further claim that this wealth, however, is very unevenly distributed. Such studies provide a distorted view, however, as they fail to take pension claims into account. These are more significant in Germany than in many other countries.
7. If policy-makers decide to increase redistribution of wealth through taxation, than they must choose an instrument which minimises potential damage to growth and employment. In this respect, it's advisable to steer clear of a tax on net wealth. Amongst all taxes based on individual wealth, a land value tax would be the least damaging.
8. Investments in education play a central role in limiting income inequalities. Larger amounts of public funding should be invested in nursery and primary schools. Universities should charge tuition fees based on students' incomes.
9. In order to prevent poverty in later life, all individuals should be obliged to invest in a private pension scheme. Efforts by the state to encourage investment in private pension schemes should target those most in need.
10. Interventions in price mechanisms, such as a state-set minimum wage or rent controls are not efficient tools for redistributing wealth.

The claim that poverty and inequality are generally increasing is incorrect. Over the last several decades, levels of global poverty have fallen dramatically. Income inequalities have also reduced. This is the result of advancements in newly industrialised countries. In wealthy industrialised countries, inequalities in "market income" are increasing.

But ultimately, "disposable income", income after taxes and transfers which individuals are able to spend, is the most important. The social state cushions the impact of increasing inequalities. In Germany, incomes are distributed to a much greater extent than in nearly any other country. Political bodies ought to concentrate on reforming the German welfare state in order that it continues to provide cover in the future.