Inequality highest in 30 years, OECD finds

Last Updated: Dec 06, 2011, 11:06 AM IST

Income inequality is at its highest levels in three decades, according to a new report from the Organization for Economic Development and Cooperation. The trend is no accident, the group says, but rather the result of a combination of spending cuts on social programs and lower taxes on the wealthy.

Tax and benefit systems play a major role in reducing market-driven inequality, but have become less effective at redistributing income since the mid-1990s. The main reason lies on the benefits side: benefits levels fell in nearly all OECD countries, eligibility rules were tightened to contain spending on social protection, and transfers to the poorest failed to keep pace with earnings growth. As a result, the benefit system in most countries has become less effective in reducing inequalities over the past 15 years. Another factor has been a cut in top tax rates for high-earners.

“There is nothing inevitable about high and growing inequalities,” said OECD Secretary-General Angel Gurria.

The United States, which has seen a wave of national protests focused on the gap between rich and poor, did not fare well in the report. Of the 34 nations in the OECD, the US has the fourth highest level of inequality, after Chile, Mexico and Turkey.

Some other findings for the United States:

– The wealthiest Americans have collected the bulk of the past three decades’ income gains. The share of national income of the richest 1 percent more than doubled between 1980 and 2008 from 8 percent to 18 percent.

– The richest 1 percent now makes an average of USD 1.3 million in after-tax income (compared to USD 17,700 for the poorest 20 percent). During the same time, the top marginal income tax rate dropped from 70 percent in 1981 to 35 percent in 2010.

– The rising incomes of executives and finance professionals account for much of the rising share of top income recipients. Moreover, people who achieve such a high income status tend to stay there: only 25 percent drop out of the richest 1 percent in the United States, compared to some 40 percent in Australia and Norway, for instance.

– The main reason for widening inequality in the United States is the growing wage divide. The gap between the richest and poorest 10 percent of full-time workers has increased by almost a third, more than in most other OECD countries.

Bureau Report