Adjusting Capital Income for Inequality

Inequality as measured by Gini coefficients has been rising. One contribution to this is that the wealthy receive a disproportionate amount of income from capital, as opposed to labor. The above diagrams show how labor income inequality has indeed risen over the past five decades in both the US and the UK, however, capital income has essentially always been very concentrated. Branko Milanovic offers a few solutions to this,

Deconcentrating capital ownership can be done in at least three ways:

• By giving tax preferences to small investors so that they become more likely to own shares. One could envisage a government-funded insurance whereby shares up to a certain amount would have a guaranteed, very modest, real return (say, 1% per year) even in a case of a stock market decline.


• Workers should be encouraged through the existing mechanisms, like employee stock ownership plans, to become the owners of the companies in which they work. Obviously, when they leave they could choose to sell their shares, but the experience of having had some equity (acquired perhaps at preferential rates) may make them more willing to continue investing. In other words, the working class and small investors should enjoy the same tax and other advantages that today are granted only to the rich.


• Using capital grants funded out of inheritance taxes, as suggested by Atkinson (2015), would also broaden the ownership base.