A new report from the International Monetary Fund suggests that the widely popular “trickle-down” economics just increases the gap of income inequality, creating injustices in almost every country. The study written by five IMF economists said that if governments want to increase growth, they should focus on helping the poorest 20 percent of citizens.
“We find that increasing the income share of the poor and the middle class actually increases growth, while a rising income share of the top 20 percent results in lower growth — that is, when the rich get richer, benefits do not trickle down,” the report said.
Trickle-down economics has been glamorized by wealthy Americans, who suggest that they shouldn’t be taxed as heavily because of their input in the economy. As the theory goes, the powerful moguls provide jobs and relinquish the money they earn back into the country in which they operate. But instead of boosting the economy by the spending power of the 1 percent, the system creates an imbalance, leaving the lower class well below the poverty threshold and the upper class even better off, according to the study.
The report analyzed 159 developed and developing economies from 1980 to 2012, searching to see how income is distributed differently in each system. It found that when the income share of the top 20 percent increased by 1 percent, economic growth slows down 0.08 percent in the following five years. Meanwhile, a 1 percent increase for the bottom 20 percent leads to a 0.38 percent increase in the country’s GDP in the following years.
Tax policies, globalization, weak trade unions and technological progress have all contributed to the widening gap of income inequality, according to the study. The IMF warns that if nothing is done to distribute the wealth more evenly throughout the lower class, then the gap will only become more apparent.
“Raising the income share of the poor and ensuring that there is no hollowing-out of the middle class is good for growth,” the IMF economists said in the report.
The report encouraged more investment in health and education policies aiming to reduce poverty. It also said more progressive taxation would shrink the gap if the fiscal policies were better enforced to not give wealthy property-owning citizens opportunities to evade their taxes and avoid losing a percentage of their large income.
The IMF’s biggest task right now is taming Greece’s unstable economy, but the approach of the global financial lender has opposed the suggestions for mitigating income inequality given in the report. The report suggests that strengthening workers’ rights decreases the gap between rich and poor, but the IMF has been pushing to ease labor market regulations.
“More lax hiring and firing regulations, lower minimum wages relative to the median wage, and less prevalent collective bargaining and trade unions are associated with higher market inequality,” the report reads.
A 2014 report from the Washington Center for Equitable Growth showed that the top 0.10 percent share the same amount of wealth as the bottom 90 percent. To put that into perspective, it’s like saying one person has the same share of wealth as 900 people. The alarmingly increasing income inequality gap is at the widest margin in the U.S. since the 1930s, when the Great Depression rocked the nation.
The IMF did provide solutions for tackling the disturbing, but manageable, income inequality differences. The report's authors said that advanced economies policies should look at raising human capital while making tax systems more progressive -- meaning the richer the citizen, the more they should be taxed. Currently, the U.S. relies on a tax bracket system that increases the percentage of taxes owed based on the citizen’s income class.
It’s yet to be seen if countries will react to the IMF economists' report and attempt to shrink the ever-expanding gap between the rich and the poor. While it’s far from Karl Marx’s even distribution of wealth, the IMF doesn’t want to see the wealthy’s wallets thicken while the poor beg for money.
Image credit: Flickr/epSos .de
Based in Washington, DC, Grant works as a program assistant at SEEP Network, an international development nonprofit. A proud graduate of the University of Maryland, Grant spent four months post-grad living in Armenia where he worked for Habitat for Humanity and the World Food Programme. Grant is passionate about humanitarianism and finding sustainable approaches to international development. He enjoys playing trivia with friends but is still seeking his first victory - he ceaselessly blames his friends lack of preparation.