Inequality and Political Solutions

Austin-Texas-short-order-cook-via-Flickr-Commons-800x430
Austin, TX via flickr || Creative Commons

Nowadays, inequality discussions concern mainly income inequality and inequality in wealth that are purportedly the result of congenital capitalist tendencies. Even if one were to accept a few assumptions – i.e. that this kind of inequality does exist, grows greater over time, does represent a serious problem to be reckoned with and at the same time is emblematic of, begotten by, and a symptom of the systemic dysfunction of the modern-day capitalism – one is still faced with the problem of how to tackle it. Put another way, at the end of the day one invariably ends up grappling with pragmatic policymaking.

In part, that is because those clamouring to have inequality lessened tend to turn to the policymakers to do something about it. Consequently, even if people agree what should be done (the level of inequality shall be decreased), it doesn’t follow that giving more authority to politicians will get it done. Slovakia is a prime example.

Its reform cabinet (2002-2006) introduced a flat tax rate. All the rates – individual income tax, corporate income tax and VAT – were set at a flat rate of 19%. Disregarding for the moment the so-called ‘millionaire tax’ of 2007, the flat tax lasted well into the second cabinet of a left-wing politician, Robert Fico, who delivered a definitive coup de grace to it in 2013. First in line were the corporate income tax (raised to 23%), and a second rate of tax added, hitting higher-income earners at 25%. These measures befitted the patois of a leftist government chirping with ‘the need’ to narrow the gap between the rich and the poor.

As part of an overhaul of the taxes and levies, it introduced additional measures that mostly hammered the poor. Particularly hard-felt was the impact of levying contributions on part-timers. Around half a million part-time workers were moonlighting in Slovakia in 2012. The data from the Social Insurance Agency in Slovakia show that about a third were moonlighters who worked part-time on the side of a day job and more than 3/4 were earning no more than €200/m; 90% earned less than minimum wage. It is therefore reasonable to assume they were mostly lower-tier earners trying to make ends meet.

Before 2013, those working part-time paid a 19% direct tax and their employer paid another 1.05% of gross pay toward the work-accident and ‘guarantee’ funds. Came 2013, however, and part-timers were made subject to the same rules as regular full-time employees. Meaning that apart from a 19% income tax, a further 35.2% of gross pay had to be taken out of their pay check by the employer and another 13.4% by themselves in contributions. If then the employer decided to maintain the pre-2013 cost of employing a part time worker, s/he then received only 65% (pre-tax) of the former pay.

But not all the burden could be passed on to part-time workers and so they were laid off en masse. According to the Social Insurance Agency in Slovakia, the new rules brought about a decrease in the number of contracts by 200,000, which is a 1/3 of all such contracts. The number of part-time workers (one part-timer can have one and more contracts) went down by 25%.

The impact these measures had had with respect to the tax wedge and similar metrics were gauged by the Council for Budget Responsibility, an independent Slovak fiscal responsibility authority. Using econometric modelling and individual data, it considered (among other things) to what extent the policies impinged upon societal income inequality. The data were benchmarked against the two most widely used metrics: the Gini index, measuring inequality in incomes (the closer to 1 the wider the gap); and the Kakwani index, a measure of tax systems’ progressivity. The results of the analysis capture that – despite the government’s rhetoric – the changes in taxes and contributions legislature not only did nothing to lessen income inequality (the Gini coefficient remained relatively low at 0.27), but actually decreased the tax system’s progressivity (the Kakwani index of tax progressivity had gone down from 0.068 to 0.065). Thus it seems anti-inequality policies did not reduce inequality in Slovakia.

It is evident then that a leftist government steeped in egalitarian rhetoric eventually increased the tax burden of the country’s lowest earning workers and the difference in the tax wedge of the rich and the poor was narrowed. The analysis doesn’t even reflect some of the other measures the government did – such as increasing the highly digressive tax on tobacco by 2.59% in 2012, circumscribing spouse’s personal allowance, reneging on previous promises to roll back the compulsory licence fee on television-owning households and cancelling plans to tone down the temporary increase in VAT by 1% (although the rationale behind the initially conceptualised increase had been long gone). These measures also played a part in foisting the tax and contributions burden onto the shoulders of the poor.

Slovakia’s example is emblematic of how a government trying to patch up fiscal loopholes turns to targeting incomes of the most vulnerable, using their limited means to solve societal problems. From the government’s perspective, this is often the easiest way to procure the necessary funding – particularly in a social state, financed by indirect taxes like VAT and high contributions.

This is because Slovakia’s GDP comprises, for the most part, of foreign multinationals of considerable capital clout that export a lot of their production abroad (which is not subjected to VAT in Slovakia). Significant part of their gross value added is paid out abroad in interest, or special fees, which decreases the base taxed by corporate tax. This is the added value that politicians don’t have a direct influence over and can’t tax (these corporations pay taxes mainly abroad). As soon as fiscal turbulences arose, they didn’t hesitate to come after the wages of those who had hitherto been subject to their fervent oratory – the poor.

Robert Chovanculiak
INESS