Economics 9708/43 — May/June 2018

Inequalities of wealth

In 2015, the vast and growing gap between rich and poor was revealed in a report from the charity Oxfam.

Oxfam said that between 2010 and 2015, the total wealth of the world’s poorest 50% had fallen. In the same period, the wealth of the world’s richest people had increased. In 2010, the 388 richest people in the world owned the same wealth as the poorest 50%. This fell to 80 people in 2014 and to only 62 people by 2015.

The report recommended that governments should do three things: make greater attempts to prevent tax avoidance; invest more in public services; and ensure there are higher wages for the low paid.

On taxes, the report emphasised the need to end the use of tax havens to hide large amounts of money. It estimated that the use of tax havens by multinational companies denies developing countries at least US$100 billion a year in tax revenue. In tax havens, which include the Cayman Islands, Dubai, Hong Kong, Liberia, Luxembourg, Singapore and Switzerland, taxes are either non-existent or levied at a low rate.

The Cayman Islands, in the Caribbean, refers to itself as an ‘international financial centre’. Almost 20000 international companies are registered there. An official explained its function is to assist global capitalism to work. For example, if an American company and a Japanese company agree a business deal in their own countries they would pay tax. They would be more likely to agree the deal if it were done through a company in the Cayman Islands where no tax is paid.

It is not only the developed world which makes use of tax havens. Oxfam reported that as much as 30% of all African financial wealth was thought to be held in tax havens. The estimated loss of US$14 billion in tax revenues would be enough to pay for healthcare that could save the lives of 4 million children a year and employ enough teachers to get every African child into school.

To help the lowest income earners in society, government social welfare spending has become more important than ever. As well as preventing tax avoidance, a traditional cure for the problems from rising inequality has been to redistribute income through taxation from the richest to the poorest. However, this can lead to resentment and can impede economic growth.

A better cure would be to encourage innovation that would benefit everybody. A combination of the internet and computer revolutions is transforming the world economy which has led to economic growth. Inevitably the leaders of these kinds of enterprises have become some of the world’s richest entrepreneurs.

Sources: The Times, 18 January 2016, The Guardian, 18 January 2016, The Guardian, 19 January 2016, The Independent, 20 January 2016, and taxhaven.org, accessed 20 January 2016.