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Inequality Is Sky High. Here's How To Bring It Back Down To Earth.

The contrast between first and economy class symbolises much of what has changed in society over recent decades.

27/04/2017 7:10 AM AEST | Updated 27/04/2017 7:11 AM AEST
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"Inequality isn't just in the skies. Over the past generation, earnings have grown three times as fast for the top tenth of Australian workers as the bottom tenth."

On April 9, two jets left Chicago. One was a private jet with eight leather seats. The other was an overbooked United flight, which only departed after passenger David Dao was forcibly removed, suffering a broken nose and teeth in the process.

The contrast symbolises much of what has changed in society over recent decades. At the top end, some airlines offer in-flight showers to their first class passengers, and the private jet market has doubled. Meanwhile, economy passengers grumble about skinnier legroom and fatter surcharges for snacks and baggage.

Inequality isn't just in the skies. Over the past generation, earnings have grown three times as fast for the top tenth of Australian workers as the bottom tenth. Since the early 1990s, average CEO pay in large firms has risen from $1 million to $3 million. The top 1 percent share has doubled, and the richest 200 have a rising share of our national wealth.

How might we create a more equal Australia? Let's start at the beginning. No, actually, let's start before the beginning. Babies born too light (below 2.5 kilograms) or too early (before 37 weeks) are more likely to have health complications, less likely to do well at school, and less likely to earn a decent income. In richer Australian households, only 3 percent of babies are of low birth weight. In poorer households, that figure is 7 percent.

Over the past generation, earnings have grown three times as fast for the top tenth of Australian workers as the bottom tenth.

Reducing pre-birth inequality requires reducing the share of pregnant mothers who smoke, drink, use drugs or are subject to intimate partner violence. Among the promising interventions are targeted nurse home visits, paid parental leave, properly funded legal aid for family violence victims, and the ability to visit a doctor without worrying about the cost.

Next, there's education. The top tenth of Australian students are competitive with the best students anywhere in the world. But our lowest-performing students score at about the average level of students in Brazil, Indonesia and the Dominican Republic.

Raising educational attainment for the bottom performers requires delivering needs-based funding. With the change of government in 2013, schools will lose billions of dollars of needs-based funding. The Coalition's 'no strings attached' approach absolved states of any requirement to increase school funding.

In ensuring that resources are spent in the most effective way, we can learn from international examples. America's What Works Clearinghouse and Britain's Education Endowment Foundation are building a strong evidence base in those countries that allow state and local education authorities to confidently choose the best interventions.

In tax policy, reducing inequality needs to become a more central part of policy design. When I was appointed Shadow Assistant Treasurer, a senior policy economist suggested I keep close at hand a table of the deadweight costs of different taxes, and use it to judge any proposal. It's a useful rule of thumb, but not the whole picture. When inequality is high and rising, we also need to think about the equity implications of tax changes.

In tax policy, reducing inequality needs to become a more central part of policy design.

One example of how this plays out is the upcoming expiry of the Temporary Budget Repair Levy in a little over two months' time, which will reduce the tax rate on incomes over $180,000 by two percentage points.

Viewed through the lens of efficiency, this is nothing to go to the barricades over, given that income tax has a middling deadweight cost. But from an equity perspective, it's a travesty. The top 1 percent has doubled its share of national income over the past generation. Is it really fair to deliver a tax cut where more than nine-tenths of the benefits will go to adults in the top 1 percent? When payment cuts for low-income households have been permanent, why should tax increases for high-income earners be temporary?

The same goes for capital gains tax and negative gearing. These tax expenditures aren't merely inefficient -- combining to drive down the home ownership rate to its lowest level in 60 years. They're also inequitable, with half the combined benefits going to the top tenth of the population. In the case of negative gearing, the typical teacher or nurse gets less than $300 a year, while the typical surgeon or anaesthetist gets over $3000 a year.

On the industrial front, we should never lose track of the role that unions play in reducing inequality. Unions bargain for pay equity within and across workplaces, and fight particularly hard for those at the bottom. That's why falling union membership explains about one-third of the rise in Australian inequality over the past generation.

Laws that make it harder for unions to access workplaces, bargain collectively, and engage on an equal footing with management are all likely to increase inequality. Cutting weekend penalty rates will hurt low-wage workers the most. Unions are one of the most powerful social forces for egalitarianism. Building bigger unions is one of the best ways to make Australia more equal.

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This is an edited extract of Andrew Leigh's third 'Just Ideas' speech, delivered at the Australian National University on April 20, 2017.

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