Tackling Income Inequality

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Tackling income inequality
Sadiq Ahmed
The substantial reduction in poverty in Bangladesh since independence is a cause for celebration. A major reason for this decline in poverty is the rising per capita income, growing from less than 2 percent a year in the 1970s to around 5 percent a year in the 2000s.
Yet, it is worrisome that an estimated 47 million people are still below the national poverty line. Continued rapid growth in per capita income will help reduce poverty further, but the ability of higher growth to lower poverty is hampered by growing income inequality. Available evidence from the Household Income and Expenditure Surveys (HIES) suggests that income inequality as measured by the 'gini coefficient ' has been rising, growing …show more content…

Notable other countries that have experienced growing income inequality along with rapid economic growth include China and India. In economic literature, there is a debate popularised by Nobel Laureate Simon Kuznets about whether low income countries will have to experience some increases in income inequality before they reach a threshold level of income after which income inequality will fall.
The validity of this inverted U-curve relationship between growth of per capita income and income inequality, popularly called the Kuznets-hypothesis, has been researched extensively but inconclusively. A priori, there is no obvious reason that income inequality must increase in order to achieve high rates of economic growth. The observed phenomenon in many countries is a reflection of initial unequal distribution of wealth and assets and the fact that the underlying growth strategies and policies have not specifically addressed the inequality …show more content…

A closer look will suggest that a strategy to mobilise this additional funding is certainly within the reach of public policy.
In the first place, the government spends some 4 percent of GDP on subsidies, of which 3 percent of GDP is on energy. This can be cut by half through price increases and diverted to the above mentioned more socially responsive spending.
Secondly, a major reason for the resource constraint is low tax collection, especially from personal income taxes. Bangladesh collects a mere 1 percent of GDP from personal income taxes while the top 5 percent of the population owns 25 percent of the total national income. This yields an effective income tax rate of 4 percent, which is ridiculously low.
Increasing the effective income tax to even 10 percent would yield income tax from this group alone in an amount of 2.5 percent of GDP. Applying the tax rate to the top 10 percentile that owns 35 percent of the national income will yield 3.5 percent of GDP. This will require closing of loopholes that lets capital gains escape the tax net, introducing a modern property tax system, and improving tax administration and

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