The underlying cause of inequality goes unrecognized in modern free-market capitalism, however its source is not regarding free markets, but the establishment of private property. The problem can be understood as follows: Imagine that you have an area of land that a group of people are occupying as a commons. Before the establishment of private property everyone has equal access to the land and therefore it can be said that they have equal equity in the land. Now imagine that the government intervenes and decides to privatize a part of that land. By virtue of doing so the government has given exclusive occupancy rights to a single holder, and taken away the occupancy rights of every other person without giving them fair compensation (commonly known as the enclosure of the commons). Inequality has therefore been created by government intervention and the disenfranchised masses should be compensated for their lost equity from the property that they were formerly able to occupy freely, but no longer can. A simple solution to this problem does, however, exist; if the value of the private parcel of land can be evaluated and the market rate of return is known, then the private parcel of land should be taxed annually or monthly at the market rate of return (the rental value of the property) and the proceeds of this tax should be divided amongst everyone else who can no longer use the land as compensation for lost accessibility. The implications of this model are far reaching. Surprisingly, even if it were used as a substitute for all other taxes, it would create a more equal distribution of income than most modern nation-states currently exhibit. The discovery of this underlying inequality is not entirely new, but was rather first recognized by the late economist Henry George who wrote a book in 1879 called Progress and Poverty.
One of the major implications of this model of taxation is that by virtue of offering a mechanism for redistributing income in the form of a residual income it offers the possibility of implementing a fully market-based approach for determining spending for items such as health care, education, and pensions in place of existing centralized government decisions. For example, if a person were sick, disabled, in need of funds for education, or retired and requiring additional income, they could simply choose to occupy land with a lower than average market value, and would receive a net residual income from the other property-owners as compensation for using less than their share of property. It should be noted at this time that such a tax would not be applied to all private property, but only those resources that occur naturally, and not the portion of the value of goods that have been appreciated due to labor activity or value-added processes. The rational being applied here is that since no person is responsible for creating natural resources, no person or group of people should have an exclusive claim to them, but rather equal equity should be assumed. Labor, on the other hand, is created at the discretion of individuals and is considered the produce of their efforts and therefore should not be taxed. It is recognized that for the purposes of utility and practicality private property does need to be allocated, but should only exist with proper resolution of the aforementioned problem, as described above. Given that the government is an organization that has a monopoly on the use of force, and that it enforces private property rights with the backing of physical force, the resulting inequality should be considered an externality of government intervention.
Contrasting this with the current policies of most developed economies, current fiscal policy unduly taxes labour (through income tax) while ignoring the inequalities created by the granting of private property entitlements. This results in the artificial depression of labour rates while keeping return on capital artificially higher than it otherwise would be. Seen from the perspective of demographics, it keeps the incomes of the relatively small portion of people who derive the majority of their income from the ownership of capital artificially higher, while keeping the wages of the majority of people who work for their income artificially lower- a scenario which is both inequitable and falls short of its meritocratic claims. To summarize, I am stating that governments are responsible for creating the single largest cause of inequality, and attempt to remedy the resulting otherwise unlivable income disparity by unduly taxing labour, which is little more than a cosmetic remedy for a deep underlying problem. Moreover, if left unchecked this otherwise hidden inequality will result in an ever-growing disparity between the rich and the poor, of which there is already great empirical evidence for.