The huge cost of inequality.

The two richest people have as much wealth as the bottom 5.5 million. The tax system is one of the world’s least progressive. Essential services are failing. This is Australia.

No nation with a recognisable economy has ever been entirely equal. None is ever likely to be.

There are good arguments in favour of some inequality. If everyone was guaranteed the same rewards regardless of skill or effort, why would anyone try? Could destitution be far away?

But too much inequality corrodes social cohesion and reduces economic performance but most of the developed world is now in that situation. We have allowed the gap between rich and poor to expand to such an extent that almost everyone, in the end, suffers.

Everyone, that is, except for the few at the very top. Money and political power go together, so they have an outsized role in making the rules under which the society and the economy work.

This chart shows Australia’s history of inequality from the first world war until now. When government policies favoured reducing inequality by increasing income redistribution, the proportion of income going to the top 1% and 10% fell. And so the bottom 50% did a bit better. But not much better.

The big winners of the era from the 1920s to the late 1970s were the prosperous middle class – those above the bottom 50% and below the top 10%. And, despite their support for conservative economic policies, those in the upper middle were the big losers of the neoliberal era.

From the Great Depression through to the late 1970s, redistributive policies and the rise of the welfare state produced a substantial decline in inequality. It was also, not coincidentally, a time when overall prosperity benefited everyone. A smaller percentage went to the top but, because the whole economy got much bigger, they got more too.

That reduction in inequality had a lot to do with why economic output increased so markedly. When people at the lower end of the scale have extra money, they are much more likely to spend it – because they have to. People at the top are far likelier to save or invest because they are already able to satisfy most of their needs for consumption.

So putting more money in at the bottom is the most efficient way of increasing overall demand in the economy. When you do that, it gives suppliers – companies – the incentive and opportunity to increase production to meet that extra demand. So everyone is better off, including companies and their shareholders.

It is, if you like, trickle-up economics.

But between the late 1970s and the Global Financial Crisis in 2007, trickle-down economics dominated policy in most developed nations, including Australia. As we’ve seen, when you put money in at the top, it tends to stay there. It’s saved, not spent – and, because, consumption and production are both lower than they should be, the whole economy suffers.

During that long neoliberal era, policy has been ineffective at boosting incomes and wealth at the lower end. We can see that in the income figures: the richest 20% of Australian households earn, on average, more than ten times as much as those at the other end of the scale.

People on low incomes have little opportunity to save or invest, so the differences in wealth are much greater. The top 20% has 92 times as much wealth as the bottom 20%. If you survive from one pay to the next, you have no chance of amassing a nest-egg. Much of Australia’s household wealth is tied up in the house, so people without the capacity to save also cannot buy into the real estate market.

Superannuation helps to even things out, but not by much. It’s a form of compulsory saving, so people who wouldn’t otherwise save or invest in the stock and bond markets are able to do so. But because it’s linked to income, the basic disparity remains.

People at the bottom of the socio-economic scale are heavily reliant on government payments. They’re likely to be unemployed: only 5% of the income of the bottom 20% comes from wages. Government benefits are designed to allow people to survive but not to save. Any household relying on benefits automatically joins the lowest quintile.

That chart also emphasises another characteristic of inequality: even among the top 20% it is wages, not returns from investment, that keeps us going. The entire economy relies almost totally on wages, so if they are suppressed, either by low growth or by unemployment, the entire economy suffers.

Disadvantage – and advantage – are entrenched. A good measure of social mobility is whether someone born into the lowest socio-economic echelon can expect to rise in society. But in most developed countries, it remains an unrealised dream for most. According to OECD research, it takes four generations in Australia for the descendants of someone in the bottom 10% to move half way up the income ladder.

On usual reckoning, a new generation is produced every 25 years, so moving from the bottom to the middle would take a full century.

At the other end of the scale, rich people tend to stay where they are: the OECD refers to Australia as having a “sticky floor and a sticky ceiling”. And social immobility is even stronger at the top end than it is at the bottom.

At the very top, we can expect the children and grandchildren of Australia’s billionaires to remain very rich indeed. Much of these people’s wealth was inherited: Gina Rinehart and her family, James and Gretel Packer, Anthony Pratt, John Gandel, Harry Triguboff, Fiona Geminder and Heloise Pratt all came from wealth and, in many cases, very great wealth.

The wealth of two people – Gina Rinehart and Andrew Forrest – is equal to the wealth of the bottom 21% of the population. That’s 5.5 million people.

The tax system doesn’t work

A progressive tax system, in which richer people pay more, is supposed to reduce inequality, but Australia’s performance is one of the worst in the developed world and on a level with that of the United States.

People at the top of the wealth and income scale – and particularly those at the very top – have many options to minimise or eliminate tax. Wage earners do not.

The wealthier people are, the more likely it is that they derive much or all of their income from investments, either in privately-owned companies or in shares and bonds. Dividends are theoretically taxed either by the firm paying corporate tax or by the shareholder paying tax on income and capital gains.

But corporations have many ways of avoiding tax. In 2020-21, 840 companies – 31% – paid no tax at all. Much of this is due to a huge tax loophole which allows any losses in one year to be set against taxable income for the future – potentially forever. Tax liabilities can be further minimised or eliminated by clever accounting schemes, such as shifting profits to tax havens.

Much of this extra money flows to wealthy investors, rather than to the government. And there are many other ways the money they receive can be protected from the taxman. Capital gains from investments held for more than a year are taxed at only half the normal rate. Trusts allow income, and therefore tax liability, to be spread across many people, including children. The Australian Taxation Office has tried to crack down on this rort but with limited success.

According data from the tax office, 66 millionaires who together earned almost a billion dollars, paid no tax in 2020-21. Accountants were able to get their clients out of over $400 million in tax.

Those accountants were paid an average of $219,000 for their services. That too was tax deductible.

None of these schemes are available to ordinary wage earners, who have few options for claiming major deductions. Someone on the average income of around $95,000 a year can expect to pay 28% in income tax as well as other taxes and charges such as the GST.

The failure to ensure everyone pays a fair share of tax is a main reason why the nation’s health and education systems are in such poor repair. Programs like Medicare, the Pharmaceutical Benefits Scheme, and funding of schools and universities are powerful influences in improving equality and social mobility. Poorer people are more likely to need these public programs than rich people.

All of these factors have contributed to Australian households carrying some of the highest  debt in the developed world. In only four OECD nations – the Netherlands, Switzerland, Norway and Denmark – is personal debt higher than it is here.

House prices do not provide an excuse for Australia’s poor comparative performance. Although they have risen sharply, they have also done so in other countries – often more than here.

Inequality: early death

Despite the myth of a fair go for all, Australia is a highly unequal society. It’s unfair, but far more than that. These levels of inequality have destructive effects on almost every aspect of life, all of which impinge on the ability of the economy to create wealth and which, therefore, make everyone poorer than they should be. Dead people don’t go shopping.

The most egregious effect of inequality is in its impact on lifespan. Put simply, money buys you a longer life. Children born today to parents who are among the poorest 10% of Australians can expect to die much sooner than those at the other end of the scale: 8.7 years earlier for boys, six years earlier for girls.

This, too, has economic effects. A recent US-based study, the Global Longevity Economy Outlook, calculated that people aged over 50 contributed $US45 trillion to global economic output, or 34% of the total.

“By participating as consumers, workers, caregivers, volunteers, and in countless other roles, their impact is extensive.” the report said.

“Rapid population ageing around the world ensures that this group’s economic importance will grow substantially over time, yet current public policies and business practices often fall short of maximizing their ability to innovate and spur economic growth that benefits all generations.”

Inequality: education and prospects

Access to education is a key factor in social mobility, but that depends on how rich your parents are. Australia claims to have free and secular public education funded on the basis of need – but schools in wealthier areas are far better funded than those in disadvantaged areas. This is a powerful force entrenching intergenerational disadvantage and ensuring people on the bottom stay there – and people on the top stay where they are too.

Education largely determines how much people earn in adulthood, what sort of job they have, and even whether they have a job at all. The data is quite clear: at the lower end, 51% of 24-year-olds are in full-time work or education; at the other end, it’s 82%. On a relative basis, someone in the richest tenth of the community is 60% more likely to be in work than someone at the other end.

A system designed to fail

The fact that income and wealth inequality in Australia is not materially worse than in many developed nations does not make it right or wise. It’s a fair indication that the way modern nations govern themselves needs to change.

Who is the economy for, if not for the majority of the people? But how can we claim that when, in 2022, the bottom half of the population had 4.6% of the nation’s personal wealth and the top 10% had 57%?

That failure has many costs.

One is that when people can’t spend money they don’t have, there’s less demand, less production, less employment and lower profits for companies.

Another is that the bottom 20% of the population depends mostly on government welfare to live. According to the last federal budget, welfare payments this financial year will cost $250 billion. That’s over a third of all government expenses and around 10% of GDP. If even a fraction of that could be redirected into health and education, it would address massive social inequity.

Too many people stay on welfare for too long, sometimes for life. The answer is not to cut them off but to provide a better life with more options and more hope – if not for them, at least for their children.

The most effective cure for entrenched poverty and welfare dependency is education. But current education funding favours the rich minority at the expense of the poor majority.

No country, and no economy, can function adequately without the security of health care. Once, Australia had universal health care; it doesn’t any more.

It will take massive political will to change all that. It will also require money. And that means a higher tax bill for those most able to afford it, and for the corporations who benefit from a taxation system hard-wired to benefit them at the expense of the community.

But in the end, everyone – including those at the top – would benefit from an economy that worked closer to its optimum.

In the end, it comes down to this: what sort of country do we want Australia to become? One of rich, gated enclaves surrounded by want? Or do we want something fairer and freer?