I nequality and Islam
By Nayyer Ali MD

Barack Obama has been taking aim at income inequality in America, as he should. Over the last 30 years, while the American economy has doubled in size, the vast majority of Americans have not seen a meaningful rise in their standard of living. The reason is that almost all the added wealth this country creates is being captured by the upper class, with little for the middle and almost nothing for the poorest. In fact, it is not the top 20% or even top 5% that have taken most of this wealth, it is the top 1%, whose share of national income has risen from 8% in 1973 to 22% in 2012, while the top 10% now take home 50% of national income. In contrast, the bottom 20% of Americans collect 5% of national income.

Obviously we live in a free market economy, and income will vary due to intelligence, work ethic, luck, skill, health and other factors, including who we marry and what career path we choose. Even under a harsh communist dictatorship it was impossible to create complete income equality, and we do want to maintain a strong incentive for people to work hard, to invent new products and services, and to start and grow new businesses. If people cannot profit from these activities they will not pursue them, to the detriment of all.

But there has to be some general fairness to the process. It is not clear that the massive growth in inequality since the 1970s has been required to have a healthy American economy. In fact, the economy did very well in the stretch from 1945 to 1975 when income inequality was much less. Both rich and poor gained equally as the economy grew. We need to get back to that more balanced approach.

On a global scale, the inequality of wealth, as opposed to annual income, is even more dramatic. The richest 75 people on Earth have more wealth than the poorest 3.5 billion. For the poor, they live hand to mouth, and can save no money and have no real wealth saved up, while a person like Bill Gates controls over 50 billion dollars by himself.

How can we reduce this income inequality? One approach would be to raise the minimum wage in the US, which is way too low. It should go from 7.25 dollars per hour to something closer to 13 dollars.

But this alone would not move that much money from the richest to the poorest and the middle. To really redistribute wealth would take a much heavier tax burden on the rich and more generous social programs that benefit the poor and middle class, such as health care and college education. It seems to be inherent in capitalism that the wealth accumulates in the hands of a few, leaving many with much less.

Islam, of all the world’s religions, has a powerful solution to this problem. It is one of the five pillars of the religion, the payment of Zakat, or charity for the poor. Zakat is paid not on one’s income, but on the wealth you have saved. It is not owed on your home or basic household assets, so poor and middle class people with no real savings don’t owe Zakat. But for the rich, Zakat is a heavy tax indeed. At 2.5% of wealth, it would cost Bill Gates over a billion dollars a year. Total household wealth in the US is currently about 75 trillion dollars, about 9 trillion of that is in homes and another 20 trillion in pension plans. But that still leaves probably 40 trillion dollars in wealth that would be subject to Zakat, and that would mean about 1 trillion dollars per year in Zakat. Americans currently give around 250 billion dollars a year to charities, but most of that goes to religious institutions, universities, and museums, with the charity going to directly help poor people amounting to less than 50 billion dollars per year. The US government spends about 250 billion dollars per year to help the poor with programs like food stamps, welfare, unemployment insurance, the earned income tax credit, and student aid. Imagine what another trillion dollars would do. It would dramatically and totally alter the lives of the lower half in this country.

While most Americans are not going to start paying Zakat soon, it does suggest one idea that may attract support from liberals. Instead of taxing income, we should also tax extreme wealth, say 0.5% of everything over 10 million dollars every year. We could use those funds to dramatically increase the earned income tax credit, ensuring that everyone who works in America lives a decent life. We could also raise taxes on capital gains and dividends for the extremely wealthy. Currently those items are taxed at only 20% instead of 36% if it were ordinary income. People who make more than a million dollars per year in cap gains or dividends should have to pay the same tax rate on that income as the rest of us do on what we earn.

 

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Editor: Akhtar M. Faruqui
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