The Disturbing Wealth Gap and Why it Matters ?

If economist Karl Marx were alive today, he would have famously proclaimed that his assertion was correct. He once famously remarked that things like religion and race do not matter. The world is essentially facing one battle i.e. the battle between the haves and the have nots. Everything else is just meant to obscure the have nots and distract their attention from the only issues that matter.

The entire world including developed nations like the United States are facing a disturbing wealth gap! This has lead to controversial political movements like the “Occupy” movement wherein protestors were forcibly occupying places like Wall Street, which they perceive to be symbolic of this inequality.

While the occupy movement may have been largely misdirected, but there is indeed some essence to the underlying argument. The wealth of the world is indeed concentrated in the hands of a few people. In this article, we will understand in detail what the wealth gap is and why it matters.

What is the Wealth Gap ?

The Wealth Gap is a situation where in a small minority of the people control or own vast majority of the world’s wealth. This wealth gap is reflected both in the distribution of assets as well as the distribution of income. In this case assets include both movable assets like automobiles and immovable assets like estates.

The laws of nature do not support equal distribution of wealth. Some people are naturally more talented and hard working as compared to others and therefore will have more wealth. That is just an accepted norm. However, the wealth gap refers to systematic corruption which stacks the odds in the favor of rich people. This means that the same rules do not apply to everybody. The rich play by a different set of rules than the poor and as a result it is highly unlikely that people born rich will become poor and vice versa.

It is true that quite a lot of people are self made millionaires and billionaires. However, the odds are really dismal. Probability states that most of the people will die in the same economic class that they were born into.

The Twisted Pareto Principle

A famous Italian economist called Pareto once coined the 80/20 rule. He said that the rule applied to a lot of things and one of those things was income inequality. He stated that 80% of the world’s wealth has always resided in the hands of 20% of its population. This left the common man flabbergasted and fuming as they thought that such a distribution was unfair.

If those people were to see the statistics of today, they would certainly resort to rioting. Consider the fact that that top 1% of the world’s population owns more than 50% of the resources! It is like Pareto’s principle but on steroids. Also, this same 1% make close to 25% of the world’s income. The figures are simply astounding.

If the top 10% percent are considered, they make 16 times more in the form of income as the bottom 10%. These statistics belong to countries like the United States which have an extremely developed legal system. In third world countries the wealth distribution is much worse. In such countries, a handful of people control everything and everyone else works for them.

The Class Warfare Allegation

Politicians have been reluctant to discuss the wealth gap issue since they are usually accused of indulging in class warfare. The accusation made is that politicians are making the rich people fight with the poor people. This is not rooted in the fundamental economic principles of capitalism and politicians are enacting such populist measures to please the majority. These actions are sometimes claimed to be infringing on the right of the rich.

For instance, Donald Trump proposes that a onetime tax be levied on everyone with a net worth of over 250 million dollars. He wants to tax these people out of one third of their wealth! Such a tax would eliminate the national debt of United States. However, such an allegation is ludicrous if you consider the issue. Why should the rich pay for debt that was amassed largely for populist policies like Medicare and Social Security that were aimed at the poor?

Controversial Tax Policies

The poor however believe that the odds are stacked against them. They believe that the government does not follow progressive taxation and that the rich are not taxed as much as they should be. This topic became even more apparent when Warren Buffet, who was formerly the second richest man in the world, famously remarked that his maid pays a higher rate of tax than he does!

  • Income Tax: The income tax that is applicable to the rich has been cut into half over the past few years. The capital gains tax, where rich make most of their money, has also been cut into half! Moreover there are so many loopholes in these tax laws that they are sometimes referred to as Swiss cheese laws! The rich basically pay taxes in the 10%-20% range whereas the poor are taxed at a much higher rate.

  • Estate Tax: Politicians do not argue to impose more taxes on the rich. Instead they argue to abolish taxes which are already in place. For instance, the political movement to establish the estate tax has already gained momentum. Even though this tax is applicable only to 0.6% of the population, politicians are strongly arguing in favor of abolishing this act. Such enthusiasm for an issue that affects so few people makes the larger population suspicious to say the least.

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Managerial Economics