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Financial Inequality Deepens

Georgia Ranks 8th in terms of Inequality of Financial Revenues among Georgian Citizens.

According to information of Geostat, national statistics service of Georgia, in 2016 GINI coefficient in terms of total revenues made up 0.40 and this is a worsened indicator as compared to the previous year. The coefficient was 0.39 point in 2015. It should be noted that starting 2007 GINI index (inequality indicator) was declining slightly from 0.43 or maintaining the existing position.  In 2016, for the first time over the past 8 years, the situation worsened.

GINI coefficient is a mathematical concept that was developed by Italian mathematician Corrado GINI in 1914. Today this is the most accurate method for measuring inequality of distribution, where the figure 0 signifies the most equal, and the figure 1 signifies the unequal (or from 0 to 100). Naturally, the real practice is different. Despite the level of poverty in the society, they receive certain revenues anyway.

The higher GINI coefficient, the bigger social differentiation and the state should carry out due policy to narrow this inequality. It is said that if revenues of the 10% richest part of the society  exceeds revenues of the 10% poorest  part of our society ten times, social tension  and estrangement ripen.

This coefficient is historically high in Georgia. In 2016 the figure recorded 0.40 point (that is 40%) in terms of distribution of total revenues, while the figure is higher and totals 43% in terms of distribution of money revenues. This difference proves that the lower  the family incomes, the more the family tries to receive revenues in natural form – agriculture products, while the families with higher revenues receive  comparatively less natural products.

The developed world’s indicators prove that GINI coefficient exceeds the medium level in Georgia. Even in Post-soviet space only Russia has a little worse indicator. As noted above, Georgia’s GINI coefficient equals to 40.0 (per cent). For example, in Scandinavian countries this indicator is 25 on average and this is the world’s best indicator.

African continent records a comparatively high index (about 70). Even in the region, where indicators of Post-Soviet countries are comparatively higher, Georgia’s coefficient is higher than indicators of both neighbors and post-Soviet countries, excluding Russia and Turkey. For example: Russia – 42% and Turkey – 40.2%. As to Armenia, GINI coefficient is 31.5 there. The indicator is 33.7 in Azerbaijan. Georgia’s indicator is identical to Senegal (40.3), Mali (40.1), Tunis (40.0) and Jordan (39.7). Characteristic sign of these countries is that there is no middle class or/and the middle class is very small.

However, research by Brookings Institute of the USA, which decided to calculate GINI coefficient by different methodology, shows that GINI index was calculated not due to household revenues, but due to payment of taxes. It turned out that Georgia ranks 8th worldwide in terms of unequal distribution of revenues. This signifies that in the process of standard calculation of GINI coefficient, households are asked about their revenues, taking into account both financial and natural revenues, while Brookings Institute method calculates inequality only due to financial revenues, because indicators are analyzed bycalculation of taxes paid by population.

It should be noted that in the countries, where the medium living level is high or poverty level is low, inequality problem is not relevant, because comparatively poor population is able live normal life thanks to their incomes. For example, low-income segment  in Norway or Sweden are much richer than poor population in Georgia. Not only financial inequality is at a high level in Georgia, but also poverty level is also very high.

According to information of Georgian statistics department,  21% of population live in absolute poverty and this is a very high figure. This signifies every fifth person lives under poverty, about 800 000 persons. It should be noted that poverty level was declining over the past years and growth was recorded only in 2016.

Finally, it should be noted that governments of all countries try to ensure equal distribution of revenues in population by using progressive system of taxes.

All developed countries, including  such liberal economies as the USA and Great Britain, practice progressive system of taxes  and this signifies that higher-income citizens pay higher taxes.

As to Georgia, there is a proportional payment regime in our country and introduction of progressive tax is banned by the basic law. According to article 94 of the basic law, Government is obliged to hold referendum on growth or change of taxes. At the same time, it is inadmissible to hold referendum on tax transformation, for example, introduction of progressive tax. Referendum may be conducted for only growth in taxes.

Georgia’s current taxation regime deepens inequality, while the Government does not plan to revise it. Otherwise, it is unclear why people, whose monthly revenues are lower than cost of living, pay taxes. If the poor and rich pay the same tax, problems with inequality and poverty will always exist in the country. Developed countries have long realized this and now it is our turn to understand this to tackle these problems and develop useful taxation policy for our population.