How inequality is fading prosperity

Maintaining the dynastic power and excluding a large part of individuals from creating value in the society, this is the framework how most of big countries are wasting human capital potential and demographic bonus.

Just in few countries an individual who was born in the poorer quartile have a good chance to rise up to the top 25% income in 1 generation, such as in Denmark case. One curious data supporting it is that the total population of top 10 social mobility countries (Nordics, Benelux, Switzerland and Austria) sum up less than 1% of global population. This is reported in Social Mobility Index.

USA real growth in income was concentrated in the 1% “stockholders” Source: Credit-Suisse Global Wealth Report 2019

The USA occupy a modest 27th position in the list, while their bottom 90% class was squeezed with opaque income gain in 3 decades struggling while costs of health care and higher education increased sharply.

On the other hand, the highly populous BRICS are ranked respectively at 60th, 39th, 76th, 39th, 77th positions. This low social mobility is often related to insufficient provision of education and standardized opportunities.

Winners take it all

In the last 20 years the top 10% richer are taking a bigger slice of the economy pie in most populated countries (yellow)

The tax contribution capacity grows proportionally according to the wealth accumulation of a company/individual. But the graphic above come together with a sad story that the richer you get the less tax you pay. Unfortunately, multinationals, Big Techs and the ultra-rich follow the principle of fiscal contribution capacity by the inverse. They can afford to pay the best accountants and lawyers to benefit from tax avoidance. In this matter again the Nordic countries are the exception(with sharply progressive income taxation) that should be followed but aren’t.

Instead of all countries acting coordinately to fight against this unfair system, some of them compete with each other by offering even higher tax exemption with the premise of attracting “foreign capital”.

As there is no free lunch in the government budget, this fiscal deficit pressures the most vulnerable middle classes from which these resources end up being obtained as a consequence.

This tax evasion industry cost governments at least $ 0.5 trillion a year, but corporations have a fashion way of calling it “maximizing shareholder returns”.

Individuals have stashed $8.7 trillion in tax havens according to an estimation from Gabriel Zucman (2017), an economist at the University of California at Berkeley. But this assets can reenter in some economies buying real estate, investing and again choosing the tax-free or sometimes an anonymous route.

A renowned economist suggests a 20% global minimum corporate tax. So the tricky tools such as, transfer pricing, holding Intellectual Property on off-shores, creating artificial royalties and debts within their subsidiaries to mask its local profit, all these financial shenanigans would have their effects partially reduced. This could be a starting point that would give us a hope for change and prosperity.

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Venture Capital @ TM3, building best practices of ESG & GRI. Engineer, entrepreneur & minimalist. Worked with SaaS Startups, Wealth Management and Agribusiness.

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Andre Castelo Branco

Venture Capital @ TM3, building best practices of ESG & GRI. Engineer, entrepreneur & minimalist. Worked with SaaS Startups, Wealth Management and Agribusiness.