Income gap only fuels social unrest

Baby boomers who benefited from the welfare state they inherited from their parents' generation have snatched those benefits away from subsequent generations, says <strong>David Aislabie</strong>

By David Aislabie

THE post-war New Zealand I grew up in was the envy of the world -- an egalitarian paradise and a great place to bring up children.

It is a sad irony that the baby boomers who benefited from the welfare state they inherited from their parents' generation should be responsible for snatching those benefits away from subsequent generations.
From the late 1980s, the gap between the rich and the rest increased faster here than anywhere else in the OECD. The top 1 per cent in New Zealand have more than doubled their income in that time, from $158,000 per annum to $337,000 (inflation adjusted). In contrast, average disposable income for the bottom 10 per cent is $11,000, and for the bottom 40 per cent of income earners inequality is made worse as they struggle to pay for necessities with rising housing costs accounting for up to 42 per cent of their income.

Wealth inequality is double income inequality, with the top 10 per cent owning over 60 per cent of household wealth, and the bottom 40 per cent owning 3per cent of the wealth.

High income earners can invest considerable surpluses to create further wealth and so the gap widens. Respected economist Thomas Pikety concluded that the main driver of inequality was the tendency for returns on capital (average 5 per cent a year) to exceed the rate of economic growth. To prevent the accelerating inequality, he recommended a progressive annual tax on capital, and to avoid discouraging innovation and enterprise he suggested inherited wealth should be taxed at a higher rate.

New Zealand, it seems, is a tax haven not for just foreign super rich, but also our own. The Inland Revenue identified 197 high-wealth individuals (defined as owning or controlling more than $50 million of assets) and found half declared personal incomes of less than $70,000 in the 2012 tax year.

Inequality is also exacerbated by the growing income divide between management and workers, which has widened since 1985 by 22 per cent compared to the OECD average of 15 per cent.

Chief executives now get 22.5 times the pay of average workers. These obscene salaries and bonuses were highlighted by the recent announcement that the chief executive of VW will receive a bonus of $19 million despite the scandal of their car exhaust emissions cheating which wiped billions of profit from the company.

Another example of bias in favour of the rich was the Victoria University study which shows welfare fraud ($30 million annually) targeted more than tax fraud ($1 billion-plus per year).

The average welfare fraud was $76,000 with offenders having a 67 per cent chance of imprisonment and a 100 per cent repayment requirement, compared to average tax fraud of $229,000 and offenders having an 18 per cent chance of imprisonment and only having to repay 5 per cent.

The Stiglitz Commission pointed out that acute inequality matters. It is politically destabilising, economically damaging, fuels financial instability, and is socially destructive and unjust. Wide income gaps divide communities, creating alienation and violence, and inequality and deprivation disproportionately affect groups such as Maori, Pacifica and recent immigrants, as well as women and children.

High income inequalities waste human resources, leading to a large share of the population out of work or trapped in low paid and low skilled jobs. It also weakens the economy by depriving people of spending power.

Neoliberal policies have suppressed wage growth for workers, deepened poverty and worsened social vulnerability; but high income earners have greatly benefited from the shift from progressive taxes to regressive GST and the absence of a capital gains tax. These policies have fuelled household debt to one of the highest rates in the OECD.

�These ideas will be explored in meetings at the Davis Theatre tomorrow (July 21) and next Thursday (July 28) at 7.30pm. Speakers will cover the daily experiences of inequality, and potential solutions.

�David Aislabie has a masters degree in environmental management, and is a human biology lecturer at UCOL and and an organic farmer.