5 Ways We Can Fix Inequality — Without Increasing Income Tax

We already have the solutions in front of us — it’s about bringing them together

So it’s been established that economic inequality is bad.

One commonly used approach to counter it is to increase income tax on companies and high earners; then make re-distributive transfer payments to lower and middle-class folk as welfare.

This, however, has many shortcomings. Notably, it:

• occurs long after the point in time at which the dollar was first earned
• relies on complex formulae on how much and in what way re-distribution should occur
• stokes the fires of class warfare (particularly during political campaign seasons) of rich versus poor.

Instead of just increasing income taxes, here are five ways in which we can structurally improve economic inequality:

#1: Worker Representation On Company Boards

Management manage an organisation and workers work in it — but never the twain shall meet.

This results in a chasm between perspectives, poor decisions made by executives who don’t appreciate the implication for things on the ground, and an adversarial relationship between the two parties.

Almost two-thirds of European Member countries address this challenge by using “co-determination”.

This involves appointing workers (either directly elected by other employees or union representatives) onto company boards.

Studies show that during times of economic headwinds (such as the GFC) — when people are particularly vulnerable — companies with board-level employee representation were better able to avoid mass job cuts.

This is because being part of executive discussions lets workers better appreciate business challenges and be part of negotiating labour-related solutions.

These typically include: implementing job-sharing arrangements, reducing salaries, re-skilling of staff and improving overall conditions without needing to resort to outright job cuts.

Such cuts would have disproportionately impacted working-class people which in turn would dampen the entire countries’ unemployment figures, consumerist driven economy, and place greater strain on welfare services.

#2: Increase the number of large co-operatives

A co-operative is a type of business where all the shares of the business are owned by either workers, customers or a mix of both.

They are renowned for having much less salary inequality between the lowest 10% and highest 10% of workers when compared to non-cooperative firms of similar size.

At Spain’s Mondragon for example — the difference between the highest and lowest income worker is 9:1, whilst at Cooperative Home Care Associates (the largest worker co-op in the US), this difference was 11:1.

This is in stark contrast to most other large companies where the CEO would earn 100s of times more than the lowest employees.

If people are earning more at the bottom end and less at the top you automatically start to make great strides in addressing inequality — at the very source where it begins to emerge rather than after the fact.

Additionally, in a cooperative — your “share” of ownership is the same as all other members of the cooperative.

You can’t simply invest more money into it and become a “large shareholder”.

This not only inherently makes things fairer but it gives the opportunity for far more people (i.e. all the members) to partake in the benefits of business ownership.

Co-ops aren’t limited to just being some small scale community endeavour. Some of the world’s largest companies are cooperatives.

Examples include:

• Mondragon — a ~€12 billion revenue Spanish organisation involved in finance, retail and manufacturing;
• REWE — a €50 billion revenue Germany retailer; and
• Crédit Agricole — France’s largest bank that is one of the top ten in the world in terms of revenue and profits

#3: Move Focus From Shareholder To Sustainability

On August 12th 1981, superstar CEO of General Electric, Jack Welch, took the stage at a New York City hotel to address an audience on growing fast in a slow-growth economy.

This turned out to be a watershed moment in western corporate history.

The next four decades of corporate and related-government policy in capitalist countries focused first and foremost on maximising shareholder value.

The problem with this approach, of course, is that we live in a society, not an economy.

Shareholders grew rich…well some of them.

The wealthy own the vast majority of shares (just 10% of people own ~84% of American shares for example) — which gives them a disproportionate control of companies share of the profits.

The plethora of others who also owned shares but in smaller quantities benefited far less from the spoils. That is to say nothing of the other key stakeholders in an organisation’s activities like employees, customers, the community at large and the environment — who were largely left out in the cold.

There is, however, an alternative.

Many companies have started to focus on corporate social responsibility as a way to show the market how they behave beyond the numbers.

By being demonstrably ethical and equitable in labour relations (across their international supply chains), product safety, environmental sustainability, and corporate governance — they are helping investors be better informed and de-risk their investments.

There are even sustainability indexes such as the Dow Jones Sustainability Indices, FTSE4Good, and the MSCI KLD 400 Social Index.

If banks start to price interest rates on loans (and investors do the same on shares) in line with how a company is rated on these indices — it would exert significant pressure on organisations to reform.

#4: Inheritance Taxes to Replace Consumption Taxes

Wealth inequality is orders of magnitude greater than income inequality.

For example, the top 1% of income earners in the US have 13.4% of wages. Whereas the wealthiest 1% of Americans have 35% of the assets.

By levying inheritance taxes on those with very high net worths (thereby avoiding burdening the middle class) — we start to unravel the inter-generational wealth-incumbency bias.

In addition — it will also further encourage wealthy oligarchs into supporting charity and philanthropy.

Proceeds could be used to partly alleviate consumption taxes which disproportionately impact working-class people.

#5: Introduce Universal Basic Income

The idea has been around for half a millennium — well before Andrew Yang began to talk it up in 2020 US elections.

The premise is basically that everyone gets an unconditional payment from the government.

By structuring it in such a way that those on higher incomes have their UBI payment amount completely offset by slightly increased income taxes mean that — the wealthy are no worse off but the poor and middle class have a base amount of money.

What do you think? Are there any other ways we can re-structure our society to tackle and prevent extreme inequality?

Let me know in the comments below.

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