Tuesday, November 20, 2012

An unfair and unnecessary comparison

A recent study by a renowned Swiss think tank (avenir suisse) showed that during the last 20 years real incomes of the middle class diminished relatively compared to those of people in the high or low income segments in Switzerland. The roots of this phenomena are identified by an increasing supply of workers from emerging markets, changes in technology and the corresponding higher demand for high-skilled workers. All these factors lead to pressure on average wages, namely of those from the middle class.
While still among the highest real incomes worldwide, the study argues that people in the Swiss middle class get increasingly dissatisfied as their opportunities to improve into the high income segment shrink and the differentiation from the lower income segment gets increasingly difficult. Therefore, people are somewhat trapped in the middle class. To counteract this development the study proposes to downsize and simplify the welfare state as all kind of social benefits for people in the lower income segment are primarily financed by the incomes of the middle class. Hence, taxes affecting the incomes of the middle class should be lowered.
In my opinion, this argumentation is problematic in at least two ways. First, a decrease in taxes for average incomes and a reduction of social benefits indeed allows the middle class to differentiate themselves from people in the lower income segment. But at what price? On the one hand, rising inequality by increasing the income of the middle class and making the poor poorer sounds not really fair to me, on the other hand it does not take into account people in the high income segment, who are completely ignored by the study I mentioned above. This brings me to my second point: the reduction of taxes for those having the highest incomes. During the last couple of years there has been a redistribution of income in Switzerland from the bottom to the top induced by various abolitions and reductions in the taxation of incomes in the highest segment. It is then again simply unfair to tell the middle class that their relative decrease in income is caused by social benefits, for example health care insurance or childcare for people in the lower income segment, when at the same time people in the higher income segment enjoy lower taxation.
The one-sided comparison of the middle class with people in the lower income segment is problematic because it diminishes solidarity in the whole society. In the US, for example, the incomes of both middle class and people in the lower income segment stagnated during the last 30 years, compared to those of the people in the higher income segment. Hence, the single comparison of incomes between the middle class and the people in lower income segment is not fair and, in my opinion, unnecessary. It leads to an increased discrimination among people and reduces the cooperative potentials in a society. Or in the words of Stiglitz (2012) “The other vision is of a society where the gap between the haves and the have-nots has been narrowed, where there is a sense of shared destiny, a common commitment to opportunity and fairness, […] which emphasizes the importance not just of civil rights but of economic rights, and not just the right for property but the economic rights of ordinary citizens.” (p.289).
Tom Schneider
Reference: Stiglitz, J.E. (2012). The Price of Inequality. New York: Norton.

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