The rise of inequality

This article draws heavily on a commentary in Ram & McRae’s 2013 Budget Focus. One of the issues identified in the segment of the commentary dealing with inequality, a companion of poverty, is a National Minimum Wage for Guyana. Since then, the Minister of Labour announced a National Minimum Wage for the private sector of $35,000 per month, $8,000 per week or $200 per hour. I have not seen the report of the committee appointed by the Minister of Labour which made the recommendation, but it would be interesting to learn of the statistical, economic and social factors that could inform the anomaly of a private sector minimum wage that is considerably lower than the public sector minimum wage.

Another issue dealt with in the commentary was education and its relevance to poverty. Well, in an ironic twist, in what is now more than a rumour, a senior government official is selling their Pradoville 2 house for more than two hundred million dollars, an example of inequality whereby land belonging to a poor community can be expropriated and handed out to the politically powerful to be enriched.

It is not that inequality is a uniquely Guyanese phenomenon. In fact, a couple of years ago, four then famous and powerful men ‒ Hu Jintao, David Cameron, Warren Buffett and Dominique Strauss-Kahn – who would not usually have a lot in common, were all worrying and warning loudly about the dangers of a rising gap between the rich and the rest. Mr Hu put the reduction of income disparities, particularly between China’s urban elites and its rural poor, at the centre of his pledge to create a “harmonious society.” Mr Cameron said that more unequal societies do worse “according to almost every quality-of-life indicator.” Mr Buffett, one of the world’s richest men, has become a crusader for a higher inheritance tax, arguing that America risks an entrenched plutocracy without it. And Mr Strauss-Kahn argues for a new global growth model, claiming that gaping income gaps threaten social and economic stability. Mr Buffett may be surprised to learn that we abolished our inheritance tax, which we called estate duty, as a form or economic recovery.

Tough luck
It is surely a message to our politicians that dissatisfaction over the increasing disparity cannot for long be contained by band aids and palliatives while the political class continue to flaunt their often ill-gotten gains.

There is no single cause of income and wealth disparity. In Guyana politics plays a big part. If one is well connected then a choice scholarship in a university in a western country is followed by a high-paying contract job with the government. The poorer ones would consider themselves fortunate to receive a scholarship to study in Cuba. But even before that stage is reached, the child who happens to have been born in rural Guyana ‒ which means nothing more than outside of Georgetown ‒ is at a considerable disadvantage compared with their Georgetown counterparts. Not that Georgetown is homogeneous either. In fact, those children whose parents can afford to send them to private lessons or private schools are far better placed than the rest to avoid the poverty trap.

In health it is the same story. For all the progress that has been made, even the Georgetown Public Hospital is not the facility of choice but one of necessity. As Raymond Gaskin pointed out recently, that facility does not perform many standard medical tests and explains why high priced private facilities are doing so well. In fact that hospital and its drug purchase policy are as stark a case as you will find of a policy that favours the haves over the have-nots. Despite all the exposure, the policy continues unabated.

Mr Jagdeo was shameless on wealth accumulation for the few chosen by him at the expense of the many. Take Pradoville 2 where land costing tens of millions was sold for next to nothing and is now valued at as much as one hundred million.

There was price control on acquisition but no control on disposal. Even in the government’s most successful policy initiative, the rich and the powerful are treated differently from the ordinary folks.

Losing the way to socialism
Guyana, a country whose constitution proclaims that it is a country in transition to socialism has been transformed into one where success is measured by wealth and opulence, however obtained.

Not that the debate over widening inequality is always so personal. Can you imagine Obama or David Cameron or Angela Merkel commandeering public lands, let alone selling them to themselves, or any of their children being one of the handpicked few given such land at a knockdown price? No, our politics is cruder than that while the debate elsewhere is higher than that.

Elsewhere, the widening inequality is often the result of the choices governments make in how they allocate resources, their perception of reality, and their ideological positions. It is also the result of a powerful and troubling shift in market rewards for a small minority relative to the rewards available to most citizens. Unlike Guyana, the debate elsewhere is at least informed by some statistical data and empirical evidence. I doubt whether the government members of the committee of the National Assembly dealing with economic matters know the number of employed persons in the country, let alone the number of persons who are unemployed, a key consideration in addressing poverty and inequality.

The cause
It is easy, and therefore wrong, to attribute to the Economic Recovery Programme introduced by Desmond Hoyte the cause of the growing inequality in Guyana. Yes, the ERP may have emphasized and contributed to the situation, but inequality has always been part of the economic landscape of this country with slavery and the plantations the more obvious examples. Ram & McRae is of the view that the ERP was absolutely necessary to reverse the decline in Guyana’s economy in the eighties; that inevitably it would benefit some more than others; and in some ways more directly than others.

When the individual elements are disaggregated the winners and losers became very apparent. The estate tax was one of the first of the taxes to go followed by a drastic reduction of the marginal tax rates.

Those whose income derived from capital such as shares or deposits are taxed at a lower rate than their employees. Adam Smith’s theory of tax equity has been discarded as was the notion that one of the objects of taxation was the redistribution of income. If indeed our tax system does any form of redistribution, it is from the poor to the rich.

Unfortunately even those who know better seem unwilling to challenge the statement repeated nauseatingly by the business community for the lowering of marginal rates of tax. The statistics provide no evidence of the mantra that lower corporate taxes lead to more investments and jobs. Let those who make such a case in and for the private sector provide the evidence. In fact the lowering of the rates has allowed for higher dividends which as a rule are tax exempt. The public, but not the policy-makers, can be forgiven for not knowing that the bulk of the shares in both private and public companies are held by a handful of individuals.

What tax reform?
The PSC’s main talking point on tax reform is because President Ramotar said he was appointing a committee to look into the tax system. The PSC’s only interest is in reducing tax rates, or as the more brazen advance, abolition of all taxes on income. If, as the PSC argues, the lowering of rates leads to higher investments they should ask for higher capital allowances so that only those who invest will benefit.

If they believe that entertainment is good for business, then restrict it to business entertaining only. While the law sets the standard for tax deductibility of expenses as being wholly and exclusively incurred in the production of income, businesses routinely claim deduction for all “entertainment,” which includes any dining out with the family and friends.

It is well known that for the executive, dining at the top restaurant is a non-tax benefit but the meal allowance to the junior staff is taxable. And that the all-expenses paid motor vehicle and driver provided to the manager is tax free but the $4,000 per month travel allowance to get the driver home in the evening is taxable.

The government must discontinue facilitating inequality by rewarding the wealthy with special concessions. It must strive for pro-fairness, pro-growth tax reform and avoid, especially in a period of sharply rising inequality, providing tax changes that do nothing for those at the bottom.

Attitudes to income inequality are changing. When the chorus of globalisation was drowning out all other voices, it used to be thought that the rising tide would lift everyone, that inequality itself was less important than ensuring that those at the bottom were becoming better off. More recently, the 1% movement in the US managed in its brief life to draw attention to inequality itself and its harmful consequences. And in the UK, the book The Spirit Level suggests that countries with greater disparities of income fare worse on all manner of social indicators, from higher murder rates to lower life expectancy. It also argues that inequality perverts politics as the economically powerful wield an unhealthy clout over a plutocratic elite.

It is always easier to distribute a larger pie than a diminishing one. That puts Guyana in a fairly fortunate position as GDP has been growing, albeit lopsidedly since the Chinese factor does not filter down into Guyana. Our challenge will be how to achieve a satisfactory measure of redistribution without harming growth and development.

It seems that a good example is our next door neighbour Brazil which has become a bit more equal, due entirely to policies initiated by the Lula government and continued by his successor.

The question is, are we interested?

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