The following article will guide you to learn how to account for income and wealth differences in non-socialist countries.
In most market-based economies (i.e., in non-socialist countries) the distribution of income and property is extremely unequal. A few rich persons own most of the property and get the major share of the national income, while the masses live in extreme poverty.
Even in a country like the USA, about 40% of the people earn less than what would give them an acceptable standard of giving. It is estimated that in India in 1992-93 the top 20% of the households accounted for 49.4 per cent of the total household income, while the bottom 20% for only 7%. Even today the position is almost the same, as nearly 40 per cent of Indian people still lie below the poverty line.
The degree of inequality is measured by calculating how much of the country’s income is enjoyed by the different groups of people. At one extreme we find absolute equality where the lowest or middle or highest 20 per cent (for example) would get 20 per cent of the country’s total income. At another extreme we find the absolute inequality where everybody (say, 99 out of 100 persons) has no income, except one person, who has all the income.
Causes of inequality:
Inequality of income and wealth in the non-socialistic countries is principally due to the following reasons:
(i) Differences in ability and efficiency:
Abilities of different persons are not the same. People with greater natural ability earn more and accumulate more than others. The difference in ability may be due to natural or mental or physical or educational factors. Natural differences in talent and efficiency cause differences in earnings.
(ii) Difference in environment and opportunity:
Rich people, because of their high position in the society, get better opportunities and so their incomes become greater than the incomes of the poor people, who do not get much opportunity in the society.
(iii) The system of private property:
Another major reason of the inequality of income in the capitalistic society is the system of private property. Owing to such system, the people are allowed to own and accumulate their savings and property. Accumulation is mostly found in agricultural landed property.
(iv) The system of inheritance:
Inequality of incomes is perpetuated through the system of inheritance. When a rich person dies, his heirs become the owners of vast property left behind by him; and such inheritance increases the degree of inequality of property. Some people inherit fertile and well-situated lands while others only lands of inferior quality. Similarly, some inherit large bank balance from their parents while others only debts.
(v) Freedom of business and profit motive:
In a capitalistic society, the businesspeople and traders enjoy almost complete freedom of enterprise, which itself is guided by the profit motive. Capitalists are engaged in the production of those goods and services wherefrom they get maximum profit even at the expense of social welfare. Such a freedom increases the income and wealth of the capitalist class even through exploiting the working class, who become gradually poorer.
(vi) Growth of monopoly houses:
In a capitalist society, monopoly business houses thrive, aggravating the degree of inequality.
(vii) Inflation and black money:
Inflation is very frequent in capitalistic market economy and such a situation increases the black money at the hands of the rich people, making them richer and the poor poorer.
(viii) Feudal land tenure system:
In a capitalistic society land tenure system is feudal, creating rich zamindars and poor landless cultivators. This aggravates inequality in income and wealth.
It is to be noted that sometimes inequality of income is justified as it may provide an incentive to some people to work hard save and to take risk. The desire to earn high income and to accumulate large wealth is the chief incentive to entrepreneurial activity. So, such inequality should not be abolished. Moreover, it is agreed that the equality of incomes is not possible; as all men are not alike and their abilities are different, it is quite natural that their income levels should also vary.
But such inequality of incomes is likely to have harmful effects on society. It disturbs the smooth working of the productive system. In a rich society, the luxury articles or non-essential items of consumption are produced in large quantities; as a result there is shortage most essential consumer goods. Moreover, when aggregate consumption in is low, as the poor people have limited of income; there may be economic depression.
Methods of reducing inequality:
The degree of inequality of incomes can be reduced by:
(i) Reducing the incomes of the rich people and
(ii) Increasing in the incomes of the poor people.
(a) Incomes of the rich people can be reduced by adopting the following measures:
(1) Unearned incomes, land rent, profits, etc. are to be taxed at high rates and black money is to be seized or to be taxed at panel rates.
(2) Income and property are to be taxed at progressively higher rates, i.e., the rates of tax should increase faster than the increase in people’s incomes and wealth.
(3) Restrictions are to be imposed on inheritance by progressive death duties. Similarly, taxes are to be imposed at high rates on the gifts. Inherited fortunes are to be taxed at progressively higher rates.
(4) Growth of monopolies is to be controlled, so that there is no undue concentration of wealth and economic power in private hands.
(5) There may be also a ceiling, i.e., maximum limit on personal incomes, as also an urban as well as rural property.
(6) Most of profit making concerns are to be nationalised.
(7) Restrictions are to be imposed on the acquisition of private property.
(b) Along with these measures, steps are also to be taken to increase the incomes of the poor people by adopting the following measures:
(i) Benefit schemes particularly for the rural poor such as employment, housing, etc. are to be undertaken to increase their income and opportunities.
(ii) Minimum wage laws are to be passed and these laws should fix the minimum wages for all recognised occupations.
(iii) The resources that are taken from the rich people are to be spent for the benefit of the poor people for their education, health, social security, etc. Old age, pensions, sickness insurance schemes, medical benefits, hospital facilities for the poor people, free education, etc. are the several measures which are undertaken by many modern countries to reduce the inequality of incomes.
(iv) The government should also supply necessary consumer goods to the poor people at fair prices through the public distribution system. More and more employment is to be created for the people of low-income groups.
Effects of these measures:
It is to be noted that inequality of incomes will remain in a modest market-based economy where there is a freedom of private property and enterprise. It is only in the socialistic society where equality of income and property can be established within a short period of time by state acquisition of the means of production. In developed countries like India, the government has been directing its economic policy towards the goal of equal distribution of income and wealth.