Article
05 Oct 2021

On the Question of Wealth Inequality

Leadership
Contributor(s): Citi Global Insights
Global wealth inequality is rising and policy makers in the East and West are trying to respond. In a new report, summarized here, Citi Research’s David Lubin takes a closer look at the latest turns in a debate that cuts to the heart of societal change.

China policy makers have reiterated long-held views around common prosperity recently as concerns rise about inequality across the globe. 

In China, wealth inequality has grown substantially in the past couple of decades, as the first chart below shows. Data suggests that the top 10% of the population took 41% of national income in 2015, while the bottom 50% took only 15%. That’s a far cry from 1978, when the share of national income going to both groups was 27%. A similar trend is visible in China’s wealth distribution: in 2015, the top 10% had more than 65% of wealth, while the bottom 50% had less than 10%.

Wealth inequality in particular has risen sharply in China during the past decades…

Source: Citi Research, World Wealth and Income Inequality Database

…which sets the background for the government’s new emphasis on ‘Common Prosperity’, which could affect the tax regime

Source: Citi Research, People’s Daily

Common Prosperity has become a dominant theme of Chinese policymaking. It’s not new. The term has a history in CCP thinking that dates back to 1953. The new emphasis on this idea by the party leadership could open to the door to redistributive policies, including property taxes, capital gains taxes, income tax increases for high-earners, more rigorous tax collection and salary caps for some individuals.

Party officials are at pains to stress that Common Prosperity is not a sudden lurch towards egalitarianism—a concept associated with the Mao era—or some Robin Hood-esque attempt to rob from the rich and give to the poor.

But it does seem clear that a desire exists to raise labor income’s share of GDP. As Xi Jinping put it in January: “We cannot allow the gap between the rich and the poor to continue growing—for the poor to keep getting poorer while the rich continue growing richer. We cannot permit the wealth gap to become an unbridgeable gulf”.

China has been on a sustained, ‘cross-cyclical’ effort to restrict the property sector’s access to credit…

Source: Citi Research, CEIC, IMF

…but the economy’s dependence on the sector has increased in the past two years

Source: Citi Research, CEIC, IMF

 

Meanwhile, inequality in the West is at least as pressing a concern as it seems to be in China.

Several observers have noted that the labor share of GDP has been decreasing over the last several decades in a number of countries. Several explanations abound for this, such as capital-biased technological change, automation, global integration, declining relative price of capital and network effects.

A recent Bank of England working paper claims that when the labor share is measured appropriately, this phenomenon is US-specific and not global in scale. While the debate on this remains open, it is clear that at least in the US, the labor share has been decreasing steadily in the post-WWII period and then decreased sharply in the first decade of the 21st century. It has then moved largely sideways since 2010, except for spiking briefly in 2020 (this was almost mechanical, as GDP, which plunged in 2020, enters the denominator when calculating the labor share). In any case, it remains significantly lower than at the turn of the century, which could be further exacerbating inequality given that capital ownership tends to be concentrated among individuals in the top of the income distribution.

It is not just the US that has seen a rise in inequality during the past few decades…

Source: Citi Research, National Sources

…and there is evidence that the pandemic has intensified the pressure on lower-income groups

Source: Citi Research, National Sources

 

The coronavirus pandemic has arguably intensified the problems of inequality. In the US, the Gini coefficient of income inequality increased again in 2020 to a new high. And other measures of inequality, such as household income ratios, have continued to rise too. Given that long-term unemployment can have a negative effect on future earnings, the disproportionate effect of the pandemic on workers who, on average, earned less to start with could contribute to rising income inequality for years to come. Equally, demographic groups that were hardest hit during the pandemicyounger workers, less educated workers and womenwere the ones that typically participated less in the labor market and earned lower wages even before the pandemic.

Just as in China, inequality is sparking a debate about public policy in the West. In the UK, for example, ‘levelling up’ is a theme of government policy, and in the US, the Biden administration’s proposal for a multi-trillion-dollar spending bill aims to be offset by new tax revenues, ensuring that the wealthy and large corporations pay their fair share of taxes. In April, the Biden administration proposed the Made In America Tax plan, which aims to implement a series of corporate tax reforms to raise revenues by dissuading corporations from shifting their production and profits overseas.

The full report goes on to discuss whether inequality is the cause or the consequence of the decline in real interest rates in the West.  For more information on this subject, please see Global Economic Outlook & Strategy - On social change and markets, published on September 22, 2021.

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

 

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