Capitalism and Income Inequality

A recent study issued jointly by The Center for Budget and Policy Priorities and The Economic Policy Institute indicates that nationally the average income of the richest 5 percent of families in the U.S. is more than 7 times that of the poorest ones, and in some wealthier states the differential is more than 12 times.

But that is a mild contrast when compared with Hong Kong. The median household income of the richest 10 percent Hong Kongers is 32.5 times that of the poorest 10 percent, according to a 2006 study published in June last year by the Census and Statistics Department. Although admittedly it’s not an apple-to-apple comparison, it should paint a clear enough picture.

The U.S. study attributes growing income inequality to factors like globalization, the shift from manufacturing jobs to low-wage service jobs, immigration, the weakening of unions and the declining value of minimum wage. It also assigns blame to the fact that those in the highest reach of the income scale also reap benefits from the growth of the stock market in the form of interest, dividends and capital gains from sale of stocks.

According to an analysis conducted by the Hong Kong Democratic Foundation, globalization and technological advance are blamed for driving down wages of low-skill workers in Hong Kong, while migration of production facilities to the mainland means less job opportunities for low-level workers. The structural shift in employment from manufacturing to financial services is another attribute to higher income disparity.

It seems the contributing factors for worsening income disparity in both economies are more or less similar. But why is the Hong Kong disparity so much more egregious than that in the U.S.?

Perhaps the chief reason is that the two economies didn’t start off on equal footing in the first place in terms of social fairness. This excerpt from the Hong Kong Democratic Foundation’s study may shine some light:-

“Hong Kong's high Gini coefficient relates to the relatively low level of government intervention to redistribute income.

In terms of taxation, the Hong Kong system does little to lower inequality. Property tax and stamp duty are mainly paid by the better-off, but betting levy is believed to fall more on the lower income groups. Salaries taxation is progressive, ranging in bands up to [19%], but it is subject to a cap of [16.5%] of assessable income, i.e. beyond a certain level it is a flat rate tax. There is no tax on capital gains (although gains deemed to be trading in nature are taxable), and in practice individuals' securities trading gains are not assessed. There is no tax on dividend income nor, from [2006], on inherited wealth. Overall, the rich pay little tax. The ‘wealth condensation' effect is particularly marked in Hong Kong: the rich can easily get richer.

On the expenditure side, transfer payments exist in Hong Kong - the Comprehensive Social Security Assistance (CSSA) scheme - but their overall scale is much lower than in most developed countries. Hong Kong has no unemployment benefit and no state pension (except for civil servants).

Government intervention in other aspects of the economy is also rather modest in Hong Kong. There is no statutory minimum wage. Equal opportunities legislation, which can help reduce inequality, has only recently been enacted.”

As the U.S. is way ahead in applying democratic principles and socially fair government policies (in relation to those in Hong Kong), all the American people need is to make minor adjustments to their policies as recommended in the recent study, provided they do something about their “supercapitalism” and corporate greed that has mushroomed under the Bush administration. Those suggested measures include:-

“Specifically, states can close the budget gaps that the downturn has caused without widening income gaps.

For example, states can avoid raising sales taxes and fees that hit low-income families hardest, and rely more on income taxes. Or, they can enact or expand tax credits to low-income taxpayers to offset the impact of regressive tax increases.

State policy makers can also bolster the safety net in order to improve economic opportunity for those struggling to make ends meet. States can:

(1) update unemployment insurance systems to better reflect today’s workforce,

(2) extend the amount of time workers receive benefits during an economic downturn,

(3) raise the state minimum wage and index it for inflation, and

(4) maintain or improve support services such as transportation, child care and health coverage.”

Having a tax policy that favors the rich, no unemployment insurance, no minimum wage and close to nothing safety net, Hong Kong has always been a laggard on social fairness compared to the U.S. without the exacerbating factors kicking in. It goes without saying that in times of economic recession (as in the States) or run-away inflation (as in Hong Kong), it is the low income group that gets hit hardest. But at least the American elite has sprung into action and come up with solutions. When is Hong Kong ever going to take the issue seriously?