Rising spread of income inequality

  • Robert Stubbs

Importantly, these trends of rising income inequality also are reflected in our widest measures of personal income in Bermuda and over the same time period. The data presented in Figure 1 is taken from Bermuda’s Household Expenditure Survey of 1993 and the just released 2016 Bermuda Census, and it reflects the entire income of Bermuda’s household sector.

Here, household income includes not just all occupational job categories but the household income of retirees as well. Additionally, income for each household is not restricted to the annual income derived from main jobs or pensions but, in fact, all income including capital income — such as rents, dividends and the proprietary income of partnerships and the self-employed — and government transfers, such as Bermuda’s financial assistance programme. As such, it is Bermuda’s widest measure of personal income and the consistency in its methodology of calculation from 1993 to 2016 makes the data directly comparable.

The data in Figure 1 reflect the differences between average and median household incomes in Bermuda. Both the median and average are measures of central tendency, but the median gives us the value of “the man in the middle” whereas average measures are influenced by changes in values across an entire distribution.

To illustrate the difference with a simple example, if three individuals were paid $10,000, $20,000 and $30,000 annually, both their median and average value would be $20,000. Now if the top-paid individual’s income were to increase to $60,000, while the other incomes remained the same, the median measure would still be $20,000, while the average would rise to $30,000.

In 1993, Bermuda’s average household income stood at $65,676 while the median income, the “household in the middle,” was $52,295 — or, in other words, our average income exceeded the median by 26 per cent. In 2016, our average household income was $131,074 while our median income was $93,713, bringing the excess of average over median incomes to 40 per cent.

Clearly, in the 23 years to 2016, Bermuda’s household income gains in the top half of our income distribution exceeded those in the bottom half by a considerable margin. As indicated by this data, since 1993 Bermuda’s rising income inequality has not only been sustained over an extended period but has been widespread when including all forms of household income.

And how severe is our income inequality? How do we compare internationally? For technical reasons, Bermuda’s average-to-median ratio is our best measure of income inequality in making international comparisons. Unlike other countries, our Department of Statistics does not publish household income on an “equivalised” basis, so our data is not directly comparable to that of most countries.

Equivalised incomes adjust household incomes for the size and composition of each household so individual household incomes are directly comparable in terms of their ability to maintain the same standard of living for each household occupant. Measures of central tendency are least affected by switching between equivalised and unequivalised income data, Of every region of the world, Central America and South America have the very highest levels of income inequality, so by this measure Bermuda is fast approaching the rarefied company of the most unequal countries in the world.

In fact, this data indicates that of the two countries most familiar to Bermudians with notoriously high levels of income inequality, the United States and Britain, both have lower levels of income inequality today than Bermuda had in 1993, before the onset of our latest prolonged period of widening inequality. Without question, Bermuda’s level of income inequality has reached levels in 2018 that can be classified internationally only as extreme.

Finally, in spite of the island’s severe data limitations, yet another informative international inequality comparison is provided in Figure 3. Here Bermuda’s average-to-median income ratio is shown relative to that of London which, of all Britain’s cities or regions, has the most severe income inequality. The Greater London Authority publishes household income data on an unequivalised basis, so the data displayed here is even more comparable than the earlier comparisons made with the OECD.

Compounding Bermuda’s problem of income inequality is our antiquated tax system. More specifically, the gross regressivity of the island’s tax structure not only magnifies the intensity of our inequality, producing greater inequality in after-tax incomes than pre-tax incomes, but our reliance on inherently regressive consumption taxes promotes greater disparities in the standards of living among households of varying income.

Figure 4 illustrates the extreme regressivity in Bermuda’s tax structure. Here each of the island’s main tax revenues — payroll taxes, customs duties and land tax — are represented in terms of their tax incidence across Bermuda’s income distribution.

Tax incidence makes the important distinction between who ultimately bears the burden of taxes paid versus who is legally responsible for payment of a tax. If payroll taxes are increased but companies ultimately recoup the cost of higher taxes paid by giving employees lower increases in their future take-home pay, then the incidence of payroll taxation falls on the employee rather than the employer. Similarly, if a hike in customs duties is fully passed on to the end consumer, even though the importer is legally responsible for its payment, the incidence of custom duties falls on the consumer.

As shown in Figure 4, the incidence of taxation in each of the Bermuda Government’s major revenue streams is regressive. The regressivity of Bermuda’s payroll tax is largely because Bermudians have resisted the adoption of a personal income tax, which would capture the taxation of capital as well as labour income. As a consequence, the island taxes only about two thirds of households’ income, and high-income households — as the holders of the overwhelming majority of the island’s capital — are receiving significant preferential treatment under the present system.

Such preferential treatment results in even greater inequality of income post-payroll taxes than inequality before taxes, and Bermuda’s heavy reliance on customs duties not only raises the island’s cost of living, harming the economy’s international competitiveness, but further amplifies the regressivity of our tax structure as the incidence of customs duties as a share of household income falls inordinately on the poor.

Not surprisingly, the island’s extreme income inequality, severe tax regressivity and exorbitant cost of living provide the perfect cocktail for widespread economic deprivation and poverty.

This is Part II of a three-part weekly series.

Robert Stubbs is an economist, CFA, holds an International Bond Dealer Diploma and has completed the ACAS actuarial exams. He was formerly Head of Research for Bank of Bermuda