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Friday, April 24, 2015

The 1 Percent rule and social impact

Economic Inequality is on a rise everywhere in the world, especially in developed countries including Britain and US. Rich have become super rich, poor have become poorer and middle class has already starting dimnishing rather merging with the poorer ones. Society structure in changing at rapid pace from a flat shape to hour-glass structure. I would explain the hour-glass structure later in this post. The reason for this rising economic inequality is - "TRICKLE DOWN ECONOMY or the 1% RULE"

Recently some of these traits of trickle down economy or the 1% rule has started being included in Indian Finance Budget 2015. You must be wondering what is this Trickle down Economy? Trickle down economy basically means that give tax sops to the superrich, or the 1% of the people of country, so that they have enough money to spend it back and this money returns in the society in terms of new jobs/investments. However this move have already started backfiring in developed countries. Events like "Occupy Wall Street" is one classic example of the seriousness of this rich-poor divide.

Trickle down economics is currently being implemented in almost every industry in the world, Companies have starting following the so called "Hour Glass" employee heirarchy structure. Now many of us our not even aware about what is this "Hour glass" structure? Simply put it means pruning the middle management/managers and moving to a structure where there are directors and the lower level employees like team-lead, engineers etc. This structure ensures that the 1 percent rule is also implemented partially as majority of the finances are distributed in top 1 percent of the employees(not according to performance, but according to the seniority of the managers). A recent survey of CXO's salary in Britain has revealed that an CEO is paid 78 times the average employee salary of the same company. This survey results would however differ from payscale offered in different countries/sectors.

The 1 percent rule ensures that super-rich pays very less tax when compared to an average tax-payer, whereas they earn many times an average citizen of a country. It has been noticed that if super-rich are taxed heavily then they route their profits to a tax heaven and in this way economy suffers, Governments thought that this should be plugged and hence decided to lower the tax rates for the superrich, so that money remains in the country itself, This move ignored the increase in society divide between rich and poor. Hence showing that rich become even richer and Poor becomes poorer. Since the economic crises of 2008, the average employee salary has remained almost stagnant in US, whereas CXO's salaries have increased many times, thus increasing the financial divide of the society even further. There are plenty of tax saving schemes for the top managment ie leasing a car on company's name instead of buying it directly. Can't they pay for their own car, WAIT, why would they do so, as this would save the tax amount.

Top 1% of population of a country(or the super-rich) see rest 99 percent as an business oppurtunity. One major disadvantage of this trickle down economy is that it is silent killer of the middle class. Therefore the whole idea of no taxes for super-rich, which initially was thought to raise the number of middle-class citizens is infact killing the middle class by merging them with the bottom half of the hour glass society. Super-rich keeps on sucking more money from the poor and middle class and earns lot of profits. They have money and invest their tax free money into companies which work for the poor (like Wal-mart) or open up ultra luxury products businesses(luxury real estate, luxury consumer goods). You all might have already seen this trend starting in India too as more and more HNI's invest in luxury apartments, villas, high end cars, bikes, consumer goods etc, and this trend is surely here to stay as Indian government has proposed various schemes in union budget 2015 which benifits the HNI's . Some of these include abolishing property tax etc.

This whole idea of trickle down economy would eventually eat up the middle class of a country and increase the rich-poor divide further. CXO's salaries in Indian companies are already on a steep rise, whereas the actual workers are paid much lesser. I tried to understand how and why this trend started. CXO's salaries are directly linked to company's performance which is direcly linked with the expenses. Everyone knows that employee wages is the biggest expense for a company and since CXO's and upper management salaries are linked with the financial performance of the company, it is quite logical that their compensation rise would directly mean decrease in percentage of average pay hike throughout the company. Another step taken by top management in order to keep wage cost in control is pruning the middle management. Do you remember that recently many IT companies distributed pink slips to manager level employees, giving lame reasons for doing so. The main reason why top management wanted this was - their own compensation hike by keeping wage costs low.

In comning days you would see this trend in all the companies, where there would be directors and very few senior managers. Team leads would be made to do tasks assigned to managers(while being paid less then half the salary of manager), while directors keep the major money in their own hands.

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