Should the government tax the rich more and distribute the revenue to the poor? Or rather, should the government own all the properties (factors of production) to create an equal (or equally poor) society? The answer is, give tax breaks to the ‘capitalists’ in order to reduce inequality. Yes, this may seem as a case of juxtaposition, yet it is not be necessarily so.

Inequality matters, especially in Malaysia. Here, inequality can spark not only inter-class conflicts, but more worryingly, inter-ethnic tensions. In Malaysia, although the public perception on wealth inequality has only worsened, official data has shown otherwise.

Over the last decade, wealth inequality has reduced rather significantly. In 2002, the Gini coefficient (a tool to measure income inequality ranging from 0 to 1, with 0 indicating an equal society and 1 indicating an extremely unequal society) stood at 0.46. However, as per the latest Household Income Survey, the Gini coefficient has dropped to 0.401. Statistically, this means Malaysia is getting more economically equitable.

On a more interesting note, the intra-bumiputra Gini coefficient is 0.389, the lowest compared to the Chinese and Indian community. This is interesting as the Gini coefficient of the bumiputra has on average, been the highest of all three groups in the years, hitherto.

Not only that, to further substantiate the argument, the bottom 40 percent mean household income has grown 6.1 percent annually from 2002 till 2012, in contrast to only 5.6 percent for the middle 40 percent and 4.6 percent for the top 20 percent of households. Taking the figures into consideration, one can deduce that the growing concern of worsening inequality in Malaysia, is unjustified.

However, there will always be caveats. The statistical findings may not be entirely representative of the Malaysian populace, as out of 6.7 million households, 81,137 households were surveyed. This is only about 1.2 percent.

Now, this article is not to argue whether absolute equality is possible or not, but rather to highlight ways to reduce inequality and move in the direction towards an equitable state. There are many ways to achieve equality, for example through Marxian type state control of factors of production (which will hamper individual liberty) and also through taxes. Even the World Bank advocates for the use of taxes and transfers to facilitate wealth distribution within a society.

This can be best exemplified by the Nordic welfare state model, in which high taxes are levied to provide essential services as public goods at zero cost (although it is paid indirectly through taxes). Such model has remarkably succeeded, registering low Gini coefficients compared to other sovereign states.

But, taxes alone should not be the option. The state needs to look far beyond. Whilst welfare state concept may seem altruistic and compassionate towards the needy, it may not be sustainable, especially during the economic cycle’s recessionary period.

This article agrees that public spending on key areas in Malaysia such as education and healthcare needs to be increased (and means-tested at the same time), however, over-reliance on the public purse is detrimental as well. The need to find the middle ground is inevitable.

Therefore, Malaysians need to discover the concept of ‘welfare society’, rather than too much dependence on welfare state. Welfare society basically extends the idea that the society itself plays a major role in re-distributing wealth. Sounds too utopian? Pretty much, yes. As aforementioned, there is a need to find a middle ground between welfare state and welfare society.

Inequality exists everywhere

While the government should levy higher taxes and introduce appropriate transfers, it should also encourage corporations and business entities to reduce inequality in their payrolls. This is how it works. Inequality exists everywhere, especially in one’s workplace. The senior manager of the company may pocket a high monthly salary, but this may not replicate among the ordinary staff. In such companies, intra-company Gini coefficient will be high.

Not only that, there are concerns that capital owners (owners of business entities) do not reward their employees appropriately in relative to the profits made by the business. This concern is also justified. In Malaysia, the compensation of employees, CE (labour cost) stood at 34.3 percent as of 2014. Shockingly, in 1971, the CE stood around 33.8 percent. Not much difference along the years.

CE needs to be increased to more than 40 percent to ensure better allocation of reward for the labour of the workforce. Some countries have even CE above 50 percent. A higher CE ensures that wealth is not extremely concentrated in the hands of the ‘capitalists’.

This article suggests that the Malaysian government provide attractive tax breaks and other perks for companies that has low intra-company Gini coefficient (say, below 0.35) and high intra-company CE (say, 40 percent). The figures are made-up to simplify understanding, but should be altered appropriately according to the current situation.

Such initiatives will help to reduce the inequality within corporations and companies, and further complement efforts to boost equality at macro level. This measure may also help to reduce the gender-wage gap in Malaysia that discriminates the women, if computed for the eligibility of tax breaks.

The Department of Statistics’ findings has shown that there are differences in the wage received by the women compared to their male counterparts. In 2014, the median monthly salaries and wages of male employees was RM1, 600 compared to female employees at RM1, 500. The gender wage gap in 2014 stood at 5.8 percent compared to only 4.6 percent the previous year.

However, it has to be reminded that these measures will not create income equality out of nowhere, but rather, it will facilitate the reduction of inequality. We have to be mindful that the shadow economy (unregulated economy) in Malaysia is large at about 30 percent of the national gross domestic product (GDP). Thus, these measures may not produce much success under the unregistered companies.

All in all, achieving equality in income is not about forcing the corporations to pay more. A higher pay should commensurate with better productivity and skills. At present, only 27 percent of Malaysians are categorised as ‘skilled workers’, having tertiary education. And only 10.4 percent of the workforce are degree holders. This needs to change.

The corporations and the government need to collectively find ways to enlarge the pool of skilled workers in favour of knowledge-driven economy. Past evidences have shown clearly that higher education does contribute to better income.

As highlighted by Khazanah Research Institute, in 2013, those with a degree would have a median wage of RM 3,890, which is 159 percent higher than those with SPM qualification. Thus, reducing inequality should not be a zero-sum game, but rather a win-win situation.

Inequality in Malaysia may not be too overwhelming, but a sudden downturn in the economy can worsen economic conditions, may create ripple effects on racial relations. The Chinese are still seen as dominating the economy although the real situation is, most Malaysians are somewhere in the same range of economic standards.

In tough economic times, fuelled by ridiculous racial slurs incited by unscrupulous beings (politicians in many cases), inequality may invite racial divide. Thus, it is pertinent that this subject matter be dealt with great concern. Welfare society may be idealistic, but through education and appropriate government policies, the transition to a welfare society can be facilitated.

GANESHWARAN KANA is a final-year economics undergraduate in University of Malaya. He blogs at universaltheboss.blogspot.com