Crises increase inequalities and entrench them. In Spain and in many other developed economies, the concentration of wealth has been increasing in recent years: the richest 1% have in their hands 17% of the national income, compared to the 13% they held in 2007, before the Great Recession. The most humble segments and those with less qualified jobs were the hardest hit by the bursting of the real estate bubble, and although they had been recovering ground in recent years, they had not yet managed to recover the level of income when the health emergency arrived. “The outbreak of the covid-19 pandemic slowed down this recovery process and the most recent evidence points to an increase in income inequality,” says the study Income Inequality and Redistribution in Spain: New Evidence from the World Inequality Lab Methodologypublished this Wednesday by the thinktank EsadeEcPol.
Is this increase in inequality explained because the rich get richer with crises or because the poorest end up being affected to a greater extent? “Both things”, explains Clara Martínez-Toledano, senior fellow of EsadeEcPol, professor at Imperial College London and co-author of the report with Miguel Artola Blanco and Alice Sodano. The researcher explains that the lowest incomes are the most affected by the increase in unemployment and the salary cuts that occur in recessions. “On the other hand, the stock market recovers faster than employment, and higher income individuals have more financial assets. This makes the richest 1% go from accounting for 13% of national income to 17%”.
These percentages refer to 2019 and have been calculated based on a new methodology that attempts to correct the gaps and limitations of traditional methods. The basis of the analysis are the so-called Distributive National Accounts, developed by the French progressive economist Thomas Piketty, among other authors, under the umbrella of the World Inequality Lab and based on a study focused on the United States.
The report published this Wednesday concludes that the levels of income inequality calculated through the National Distributive Accounts of the last two decades in Spain are higher than those obtained in previous analyses. He explains that income inequality decreased during the real estate boom (1997-2008), but the financial crisis stopped the trend in its tracks. “With the bursting of the housing bubble, the increase in unemployment and the cut in salaries, the poorest 40%, and to a greater extent the poorest 50%, experienced a greater drop in their income in relative terms than the 10% and the bottom 50%. 1% richer”, he points out.
These differences are closely related to the composition of income, as Martínez-Toledano explains, radically different depending on the population segment considered. For the wealthiest 1%, income from work (that is, salaries, pensions and unemployment) account for less than 35% of their income, due to the greater weight of financial capital over their total wealth. For the rest of the population, income from economic activity represents between 65% and 85%.
loss of progressivity
The study argues that taxes, social transfers and public consumption such as health and education only partially reduce inequality. “In 2019, the poorest 50% had 14% and 17% before and after redistribution, respectively. However, the patterns of inequality do not vary substantially through the redistributive action of the State”, she points out.
The weight of taxes with respect to national income has been very sensitive to the economic cycle since the 1990s, just as their contribution to the tax system has been changing after the Great Recession: corporate tax today collects about half that before the financial crash, while personal income tax has increased in importance. Changes that, according to the authors, “can profoundly affect the progressiveness of the system”, ―with the middle and lower groups being the ones that pay the most in proportion to their income―, which has been reduced since 2008.
More productivity and less unemployment
The analysis advances a series of recommendations to reduce the pre-tax income gap, through proposals in four different interconnected areas. The first of these is education: the researchers recommend promoting vocational training to reduce the high rates of school failure and committing to collaboration between study centers and companies. However, they clarify that policies in this sense are not enough, since individuals from the richest families have more opportunities in the labor market with the same academic degree. Therefore, it also recommends measures “focused on closing the social or class gap.”
Secondly, it proposes promoting policies that reduce the high rates of unemployment and temporary employment, “which greatly affect the lower classes”, as well as increasing productivity by betting on improving the added value of traditional sectors and promoting those where Spain has a comparative advantage. The third recommendation focuses on combating wealth inequality, for example by guaranteeing affordable access to primary residence so that groups with lower incomes can increase savings. Regarding the tax system ―the levels of fiscal pressure are lower than the EU average―, it proposes various measures, such as the reform of corporate tax and a review of taxes on property and wealth (IBI and heritage and inheritance and donations), eliminating deductions and reducing tax competition between communities.
“If improvements in productivity and employment are not achieved, as well as changes in the educational system, no matter how much we improve the design of the tax and transfer system, it will be very difficult to prevent economic inequalities from continuing to increase in the future, aggravated by trends such as demographic ageing, technological transformation or climate change”, concludes the document.