I was discussing wealth taxation with some of my students yesterday: it is an issue on which they want to work. By chance I was working on finishing a chapter on the subject for a forthcoming World Bank book linked to an event I spoke at last year. What I did instead draw to their attention was something the Guardian noted this week, which was:
The gap between rich and poor in the UK is growing, as savings and home ownership decline among the poorest families but rise among the richest, a report by insurer Aviva shows.
In a sign of growing financial strain, low-income families had just £95 of savings and investments, excluding pensions, this winter, compared with £136 in the same period last year. That figure jumps to £62,885 among high-income families, up from £50,208 a year earlier.
They were staggered: the insecurity in this was all too obvious to them. So too was the fact that the top 10% of families had so little relative wealth (houses are excluded). My point in drawing attention to the article was to make clear how massively wealth is concentrated in the UK with most being excluded. I argue that this does make it an appropriate tax base. But what I also suggested to them was that they need to think about the idea in my book 'Dirty Secrets: How tax havens destroy the economy' where I suggest that this wealth concentration undermines the market economy. Models of market capitalism do, after all, require equal access to capital for all. If most have not got that capitalism is an option for the few, and not for most. What that means is that markets cannot work as economic models of them suggest. It also has real human cost: people with talent simply cannot realise their potential and that has cost to us all. This, I argued with my students, means that wealth taxation is not just about revenue raising, although there is no doubt it can do that and in the process create the tax equity that Adam Smith aspired to, but it's also about correcting market failure, which is another of the key reasons for taxation I outlined in The Joy of Tax.
It will be interesting to see what they come up with.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Models of market capitalism require continuous correction to prevent rent-seeking displacing production: otherwise it isn’t capitalism, it’s feudalism.
The core assumption of a successful market is that every trade results in an equitable distribution of value between participants: a rent, being the appropriation of value created by others, is antithetical to that. Further, a rent is a transaction with no incentive directing the participants towards the creation of value.
You are correct to point out that wealth concentration is damaging – and, indeed, it is correlated with a shift to rent-seeking – but the issue isn’t just inequality: it is that the economy, and the transactions comprise it, are inequitable.
If wealth taxes work at all, they can only do so indirectly: they act on the accumulated proceeds, after the fact. The attraction of a wealth tax – and, especially, a land tax – is that it is conceptually simple and easier to administer than almost any other tax.
‘Market failure’ – we’ve been up to our necks in it for years. And the cost of this is to the State nd the rest of us mortals.
I go back to the Wolfgang Streeck’s idea of the ‘consolidation state’ in his recent book.
Basically he highlights a situation where the State bails out the markets because of a major market failure. In doing so, this undermines faith in the State so that the very markets that they save then turn around and say ‘Oh – you’ve spent billions of pounds to save us but now we will have to lower our opinion of your financial capacity because you’ve spent so much money’.
So the State is then forced to cut expenditure elsewhere – usually on social programmes.
I mean – how absurd is that? Talk about biting the hand that feeds you – but I suppose in the financial sector anything goes?
Mind you it can be more complex than that – I believe that the UK’s credit rating was reduced under George Osbourne because tax receipts hit a new low as he destroyed the economy between 2010-2012- the worry being that there was not enough income to cover costs.
But taking s step back – considering the really interesting discussions we have had on this blog concerning the Government’s ability to print money and even pay off its own debt – you realise that the whole thing is totally artificial and can only be sustained by stupid politicians and an equally stupid MSM.
Thanks
Wealth taxation is also essential to save democracy. Interestingly, this was already clear in 1918 after WWI. The Great War was seen as a war of democracies against monarchies. And it was clear that in order to consolidate the victory and to make democracies work everywhere, capitalism needed to be reigned in by what we called in Germany the social market economy. The failure to implement this after WWI in Germany lead directly to WWII, after which the lesson was learned and the social market economy was implemented with great success (not only in West Germany), leading to every greater wealth for all in Western Europe.
Of course, the necessity to prove to the communist countries that the West was also better in social matters played a big role and after the Berlin Wall came down, the elites started to dismantle, in the name of globalisation, the social market economy and welfare state.
Only now it becomes clear again what we had known in 1918 already: Namely that there is an intrinsic contradiction between capitalism and democracy. We see in front of our eyes that capitalism is winning and democracy is loosing. And we see many similarities to what happened between the wars: populism, corrupt elites, fake news, politicians who attack media and judges, terrorism, etc.
My question is: How far should we go back to the lessons learned and successfully implemented in the New Deal and after WWII and how much society and technology changed so much that we need to look for new solutions.
The Green New Deal suggests a mix of both
As I do in my book The Courageous State and those that followed