Causes, Consequences and Measures to Reduce Inequality of Income Distribution

It is not enough for a country to attempt to increase its national income.

It is also necessary to ensure that it is evenly distributed. But inequality of income is an important feature of capitalist economies.

The socialist countries like the U.S.S.R. and Communist China have established systems whose aim is to reduce inequalities of incomes.

Even they have failed to attain perfect equality. In the capitalist countries, on the other hand, it is generally recognized that inequalities will remain and that cannot be helped. Some economists make even virtue of this necessity and they see lot of good in these inequalities from the point of view of capital formation.

Causes of Inequalities:

There are several causes which give rise to inequality of incomes in an economy:

(i) Inheritance:

Some persons are born with a silver spoon. Rich inheri­tance gives them a start in life and if they are reasonably prudent, they keep up the lead. Some persons are born landless; others inherit a few acres and still others thousands of acres. Parents of some persons die penniless or still worse die under debt passing the burden of debt on to their children, while others leave huge cash balances for the benefit of their heirs. So long as the system of inheritance lasts, inequalities are bound to be perpetuated.

(ii) System of Private Property:

Under the system of private property, a person is free to earn, free to save and free to own property. Once acquired, property breeds further and there are large accretions thereto almost automati­cally. If there had been no system of private property, people will altogether lose incentives to work and to save. Property is the very basis or cause of inequality of incomes. First a man earns and acquires property; and then his property starts earning. That is why some earn less and others more. Differences in property lead to differences in incomes.

(iii) Differences in Natural Qualities:

No two persons have the same natural talent. Some are more gifted than others. Persons who are endowed by nature with superior intelligence, better physique and greater capacity for hard work must surpass others in the race of life. Some inherit a feeble mind in a feeble body, and they naturally lag behind.

(iv) Differences in Acquired Talent:

It is true to some extent that environ­ments make the man. Natural or inborn qualities are considerably modified by environments. A child may be born intelligent but if he is not lucky enough to receive proper education, the latent abilities remain undeveloped. On the other hand, a child of mediocre ability, if properly nursed, brought up and educated, will more than make up for the lack of natural gifts.

There is no doubt that if one undergoes technical training of the right type after a course of general education, his efficiency will improve. Commercial education may also improve efficiency and raise a person’s income-making capacity. Differences in personal efficiency are thus an important cause of inequality of incomes.

(v) Family Influence:

It is generally recognized that the job that a person gets is very largely determined by the family influence. Ordinary graduates manage to get lucrative jobs through the influence of relations and friends, whereas brilliant graduates without helpful contacts may have to be content with low-paid jobs. That is why unequal incomes are earned by different persons. In this world, family contacts make a lot of difference to what people earn.

(vi) Luck and Opportunity:

Some persons are lucky enough to get a good chance and they may make the most of it. Kennedy’s assassination gave a chance to Lyndon Johnson. It sometimes happens that a person comes to know of a vacancy and gets it. A business man happens to start business in a place which turns out to be one of very favourable location.

It is sheer chance. It is well known that under-developed regions do not offer good opportunities for employment, whereas the developed regions have ample opportunities. This is also an important cause of inequality of incomes. These are some of the causes which give rise to inequality of incomes.

Consequences of Inequality:

Inequality of incomes leads to some very serious economic and social consequences:

(a) Class-conflict:

It has created two sections in society—the ‘haves’ and the ‘have-not’s—which are ever on the war path. This has resulted in ever mounting social tensions and political discontent.

(b) Political Domination:

The rich dominate the political machinery, and they use it to promote their own exclusive interests. This results in corruption, graft and social injustice.

(c) Exploitation:

The rich exploit the poor. The consciousness of this exploitation leads to political awakening and then agitation and even political revolution. Thus inequality of incomes is an important cause of social and political instability.

(d) Creation of Monopolies:

Unequal incomes promote monopolies. These powerful monopolies and industrial combines charge unfair prices from the consumer? And crush the small producers. The bigger fish swallow the small fry.

(e) Suppression of Talent:

It is said that ‘slow rises merit by poverty depressed’. It is not easy for a poor man to make his way in life, however brilliant he may be. It is a great social loss that brainy people without money are unable to make their due contribution to social welfare.

(f) Undemocratic:

Democracy is a farce when there is a wide gulf between the rich and the poor. Political equality is a myth without economic equality.

(g) Moral Degradation:

The rich are corrupted by vice and the poor demoralized by lack of economic strength. Thus inequalities spoil the rich and degrade the poor. Vice and corruption rule such a world. The poor man finds it almost impossible to regain the virtues of honesty and integrity. Human dignity is lost altogether.

(h) Promotes Capital Formation:

However, there is one good which comes out of these inequalities of incomes and that is that it facilitates savings. If the national income of the country is evenly distributed among all its citizens, it is clear that it will be only thinly spread over the whole population. Everyone will have nothing left for saving. It is only when income is unequally distributed that there are people who are so rich that in their case saving is automatic.

It is only a minority of the people who have the saving habit. To the rest if income comes, it is squandered away. Under a system, where there are large accretions of wealth in certain patches, not only is the capacity for savings greater, but the ability to invest and gain is also greater. There are people who save and turn their saving into capital. Thus inequality of incomes helps capital formation in a country.

Measures to Reduce Inequalities:

In the present era of social and political awakening, it has become a major plank of political policy that inequalities of incomes should be reduced, if not eliminated. India also has decided to set up a ‘socialistic pattern of society’. With this end in view, the government strives to prevent the concentration of wealth and income in a few hands.

The following are some of the measures which can be suggested to reduce inequality of incomes:

(i) Fixing Minimum Wage:

One step that can be taken in the direction of more egalitarian society is to guarantee each citizen a minimum wage consistent with a minimum standard of living. In India in 1948, the Minimum Wages Act was passed in pursuance of which minimum wages are being fixed for agricultural labour and labour in what are called the ‘sweated trades’. This is a step which will level up the incomes from below.

(ii) Social Security:

Another important measure is the introduction of a comprehensive social security scheme guaranteeing to each individual a minimum standard of economic welfare. The social security scheme that we envisage must include provision of free education, free medical and maternity aid, old-age pension, liberal unemployment benefits, sickness and accident compensation, provident fund and schemes of social insurance, etc. In that manner, substantial benefits can be assured to persons whose incomes are low. Such benefits of course have a money value. This will be another step towards leveling up incomes.

Social services like public parks, libraries, museums, community air-conditioned halls, community radio and TV sets, refrigerators may be provided on a liberal scale, so that the poor are able to enjoy almost all possible amenities available to the rich.

(iii) Equality of Opportunity:

The Government may devise and set up some sort of machinery which may provide equal opportunities to all rich and poor in getting employment or getting a start in trade and industry. In other words, something may be done to eliminate the family influence in the matter of choice of a profession. For example, the government may institute a system of liberal stipends and scholarships, so that even the poorest in the land can acquire the highest education and technical skill.

The recruitment to all jobs may be made by an impartial Selection Board or Public Services Commission. Recruitment even in the private sector may be done by employment exchanges or independent selection agencies. In the same manner, to give start in trade and industry, the Government may give financial aid or loans at very reasonable rates repayable in easy installments to all those who wish to enter trade and industry.

In India, several concessions are being offered to scheduled castes and backward classes or persons living in backward areas so that the evils of their backwardness may be minimized. Lot has been done under the 20-Point Economic Programme to help the poor and lift them economically, such as abolition of bonded labour, scaling down or writing off of debts, provision of house sites, etc.

(iv) Steeply-graded Income Tax:

Mere leveling up will not bridge the gulf between the rich and the poor. It will also be necessary to raze to the ground the high mountains of privilege. For this purpose all possible fiscal devices should be adopted. One such device is the steeply progressive taxes on incomes. This will prevent, to some extent, a rich man from getting richer still. Other direct taxes like the super tax, excess profits tax, and capital gains tax and limitation of dividends, etc., may also be imposed.

(v) High Taxes on Luxuries:

All conspicuous consumption by the rich may be ruthlessly crushed by means of heavy taxation of the consumption of luxuries by them. This will take away from the rich the power to display their wealth. This will also take away the incentive to amassing wealth for exclusive private enjoyment. Expenditure tax in India sought the same objective. (This tax has, however, been abolished.)

(vi) Steep Succession Taxes and Estate Duty and Wealth lax:

Lest inequities should be perpetuated from generation to generation, steeply-graded estate duty and/or wealth tax may be imposed. In 1964-65 and again in 1966-6, rate of estate duty were made steeper in India. They want up to 40%, which is almost expropriator. (However in the Finance Act of 1985 the Estate duty was abolished and wealth tax rates were also reduced.)

(vii) Ceilings on Agricultural Holdings and Urban Property:

With a view the reducing inequalities between the big and small farmers, ceilings on agricultural land holdings can be imposed. This has been done in India and recently the ceilings have been to lowered to 10-18 standard acres. The main purpose of land ceilings is to bring about a wider and equal ownership and use of land.

As a counterpart, a ceiling on urban property can be imposed so that inequalities in urban areas can also be toned down. More radical socio­economic reforms seem to be in the offing in India. These are some of the measures that can be adopted to reduce inequalities. But inequalities can be reduced, they cannot be eliminated altogether. In fact, absolute equality is unattainable.