As the Guardian has reported that:
The richest 0.1% of the world's population have increased their combined wealth by as much as the poorest 50% — or 3.8 billion people — since 1980, according to a report detailing the widening gap between the very rich and poor.
Piketty's report on which this is based is here. It suggests that ten per cent of the world's wealth - and a much larger part of the 27% held by the top 1% of wealth owners - is in tax havens.
Why does this matter? The Guardian notes:
Thomas Piketty [has] warned that inequality has ballooned to “extreme levels” in some countries and said the problem would only get worse unless governments took coordinated action to increase taxes and prevent tax avoidance.
Which does not answer the question, which answer I have to say also appears to be absent in the report itself. My review of it this morning offers no obvious, let alone headline, explanation as to why the issue should be tackled, which I think is a major deficit. Let me offer three headline reasons why this is the case then, before dealing with the counter arguments and then drawing conclusions.
Relative inequality matters
First, this matters because inequality is both absolute and relative, as is poverty. Those with literal minds say that so long as people have sufficient to live on the distribution of the remaining wealth in society is of no consequence, and at a literal level there is, I admit, a logic to this. But it's also literally wrong precisely because we are not literal beings. We are instead relative ones and we undertsand ourselves not just in isolation, as the literal approach implies, but in relation to others who we witness all around us, as the relative appraoch implies. And since the world is now designed to highlight relative difference, largely because we are daily bombarded by advertising messages that are premised on drawing attention to the inadequacies of our relative position to induce demand, relative difference matters enormously, and we are intensely aware of it. If then that relative difference is growing, as the data implies, social stress will result and be manifested in a great many ways, from political breakdown to increases in mental ill health.
Public wealth matters
Second, as the report highlights, at the same time that private wealth and disparities within its distribution are increasing, the value of public, commonly held, wealth is declining. In other words, the capacity of the state to both correct for wealth disparity and to tackle it is reducing. The capture of public wealth for private gain, which has been the objective of a great deal of economic policy for the last 35 or more years has succeeded in achieving this result: wealth appears entrenched.
Inequality is killing capitalism from within
Third, as I argue in my book Dirty Secrets, this is intensely bad news for the future of capitalism. The fact is that risk takers, on whom market capitalism is dependent for real innovation rather than for financial returns, work best when they have little to lose. As a result those on lower income and smaller businesses innovate more with less capital than larger businesses do. And, as importantly, those with wealth to preserve put higher value on that act of preservation than they do on innovation, because their every instinct is to avoid downside risk. The consequence is the rise of the professional wealth manager, as Brooke Harrington has documented, and their deeply risk averse offshore structures that look for rentier returns and not entrepreneurial profit. In addition, the existence of perpetual trusts in offshore jurisdictions means that capital no longer passes between generations: the result is that concentration is bound to increase in the future and the chance that the funds held will be used as risk capital is very low, meaning that capitalism is itself threatened by this increase in wealth concentration.
In other words, I think that what Piketty and his colleagues note is very serious.
The counter argument
But it should be said that there is a counter-argument. For this I am, perhaps surprisingly, turning to Tim Worstall of the Adam Smith Institute who has recently published an article on CapX where he suggested:
Inequality is beneficial to us all.
Or rather, as he adds:
If there's more output from an increasingly efficient use of resources, more consumption is made possible. And when we see the people over in the next field being able to consume more by whipping cows at the yoke, then we start to whip cows and we too get richer.
The economists reason it thus: firstly, greater productivity leads to inequality; secondly, the increased inequality pushes all to become more productive.
Hence his conclusion. But even Worstall has the sense to caveat the conclusion:
Or rather, understanding how and why inequality arises can lead to it being beneficial, just as it can be a disaster. If that inequality arises as a product of skimming the production of those proving to be more efficient, or even just the forced confiscation of production itself, then that's not a good idea. For that means that those producing, those more productive, will slow their output and won't be spurred to improve the techniques. This makes all poorer in general even as some wax fat off what is confiscated. Economists are well aware of this; they have called it “rent seeking.”
He then discusses what he thinks rent seeking might be, referring to trade unions, regulation preventing market entry and London cab drivers, which is a highly selective view of rent seeking, because none have driven the gross inequality we are now seeing.
However, I include Worstall's argument for a reason. It is true that some are more productive than others in an economy and it is true that this has always meant, and is likely now to mean, that those who are more productive do earn higher rewards than those who are less productive. In principle I have little argument with this idea: I have no difficulty with there being some differential in earnings within any society and think them inevitable subject to their being a safety net to ensure that all can have access to the resources they need to fully engage in the society in which they live (which means much more than having a basic material standard of living). Importantly though, what Worstall's suggestion implies is that there are very obvious limits to wealth differentials, because the fact is that however clever someone might be the differences in productivity we humans have to offer is not that big.
For example, who can be sure who is the more productive in a business: the person who can use the technology that a company owns or the person in the boardroom who decided to invest in it? There is no obvious answer for a very good reason and that is that their returns are mutually interdependent. Without the skill of the user of technology the person deciding to invest in it can make no return from doing so. So who is the most valuable? Both are, of course, but that suggests that all returns in such situations must tend towards a mean, and not towards diversity, but the latter is what we actually see and that must mean there are faults in the system.
The faults that exacerbate inequality
So why is it, when we look rather more broadly than the absurd list of examples that Worstall uses, that returns are so diverse and inequality is so great as a result? It is precisely because of the impact of the rents Worstall does not name, plus another key factor.
First, let's name the rents. These include limited liability, which enables some to make money at cost to others because debts do not always have to be paid. That's a state provided benefit that should be paid for by higher taxes on income recorded in this way, and on distributions from it.
Then there are the rents facilitated by copyrights and patents, which have more than anything else facilitated the rise of new wealth and the increasing divide in society resulting from the tech economy and the growth in intellectual property rights.
After that there's monopoly power that goes unchallenged by the state even though it is an abuse.
And there are economic externalities such as pollution and the exploitation of natural resources that create rents when not corrected.
This list also ignores rents resulting from the control of land, and its non-taxation in a great many situations.
That also hints at the rent return to lobbying to permit light regulation and low or no tax. This might be at its worst in tax havens but it is commonplace everywhere.
I could go on but the theme should be apparent by now and is that far from the state being the enemy of the rentier they have gone out of their way to capture it to permit perpetuation of their abuse.
Second then let me mention the ‘other factor'. This is that productivity is not fairly distributed. Whatever our natural predispositions, the access we have to education, capital and society's resources influence the extent to which we can reap a return on ability. In other words, productivity is heavily biased by the pre-distribution of wealth and so the two are not independent variables. And in this context, the incredibly generous treatment of wealth by the world's tax systems has clearly helped fuel inequality.
Some conclusions
After saying all of which I draw some obvious conclusions. The first is that we will always have an unequal society and to the extent that the inequality is due to genuine differences in personal productivity, it is not just tolerable, but will always be tolerated by society.
The second is that I suspect that society has some tolerance for inequality at above this level. Parents will always have aspirations for their children and will seek to provide for them. Some are going to be better able to do so than others. I suspect that society has reasonable tolerance for this because most understand it.
But that said society is not, I think, now under any illusions that all wealth disparity arises for these reasons. Vast amounts of both income and wealth inequality now arise for the reasons I have noted, and others like it (like the capture of companies by senior management for personal gain). In proportion tiny amounts arise for the reasons Worstall notes. But the difference is telling.
Few resent the London cab driver their return for learning ‘the knowledge'. Nor do they resent the professional person the excess return they earn for having passed professional exams that afford them an income premium for life (I admit). Come to that, when union membership is widely available to argue that the rent they extract is a bias is a little absurd. If this is inequality then it is within the bounds society can readily accept.
But what is apparent is that the rents I noted impose costs that society is increasingly unwilling to tolerate. And so Piketty et al are right to highlight that the resulting inequalities are excessive and action needs to be taken against them. The contribution of Worstall to this debate is to a) make clear there is a rational justification for some inequality that very few would argue with and b) to suggest that over and above that some levels of inequality may be tolerated as well, of which he provided examples. But his failure to note the real causes of rent induced inequality indicates to what extent the likes of the Adam Smith Institute and other right wing think tanks are part of the problem on this issue by ignoring and even seeking to exacerbate a problem that they know exists.
Action
In that case action is required. Tax is not the only such action, but it's fundamental to progress. I have suggested short term reforms that could increase the tax on income derived from wealth here and have discussed why we need a wealth tax here. I have a chapter on wealth tax in a book linked to the World Bank out soon.
But we also need to crack open wealth in tax havens soon, and that includes refusing to recognise their trusts that are only designed to concentrate wealth. This is possible in the UK, EU and other widely used legal systems where great equality is a national objective. Only then can the abuse of these places be stopped.
And stopped it must be. Some inequality we can live with. But I agree with Tim Worstall for once; that from rents is intolerable. And the vast majority of wealth inequality derives from the exploitation of economic rents.
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[…] is right in this: it is a theme I pick up in my blog on inequality today where I argue that the state has been captured to be an agent creating, rather than correcting, […]
I could live with great inequality of wealth (and especially vast numbers of ones and zeros sitting on a Jersey or Cayman ledger, as opposed to *real* resources being misused to create towers of empty luxury homes in the midst of a housing crisis), IF, and this is a big IF, the bloody rich would just let the government get on with spending what needs to be spent on ensuring that those who are not wealthy can at least lead a decent, healthy and secure life.
If that spending means that there is a large budget deficit, due to the wealthy hoarding their cash – so be it. Just let it be what it is. Until they are spent again, those offshore ones and zeros have been voluntarily withdrawn from the economy, so they’ve sort of taxed themselves for the time being, so just let the government deficit spend as a result, and keep your bloody greedy noses out of public fiscal policy making.
But no, they want it all.
Gore Vidal’s quote sums up the greedy, nasty, and vituperative attitude of the wealthy: It’s not enough to succeed; others must fail.
That’s what really sickens me.
Perhaps the most straightforward approach for the future could be to offer a pact to the wealthy; look, you can keep your cash, offshore if you like, and we won’t tax you till the pips squeak, but in return, you shut the f*** up about the deficit, balanced budgets, repaying the debt, crowding out, and all that bollocks.
You let the government build council houses, spend the money the NHS needs, pay decent benefits and so on.
There will be plenty of opportunities to profitably suck at the public teat supplying the goods and services that the expansion of the public sector will require – just be happy with that, and if it gives you a thrill to ogle over the amount of zeros on your offshore bank balance each month, well bully for (sad old) you.
I know it seems like sacrilege, but could that work to defuse the seemingly implacable neo-liberal opposition to progress?
No….
Because the inequality will still spill over
“No….
Because the inequality will still spill over”
I suspect you’re probably right : (
Like Aesop’s Scorpion, the rich just can’t help their nature.
“Without the skill of the user of technology the person deciding to invest in it can make no return from doing so. So who is the most valuable?” You give the example of directors as investors, but they should be categorised as workers, not investors. Most owners of capital do not make real investment decisions.
I was comparing two people deliberately
A wealth tax is often a tax on savings and punishes the responsible who have worked and saved all their life..is it better to spend and run up debts and increase the likelihood of becoming less self sufficient in later life?
The evidence in France is that wealth taxes significantly reduced the tax base and it would be the same here with the top 1% moving residency and the burden falling on the middle ground.
Finally a wealth tax on property will depress prices ( perhaps not a bad thing) but will clearly reduce consumption.
The evidence from France is weak
There is no economic use for savings in the UK and we have a glut of them
Despite that the reality is that right now savings are tax subsidised by more than £80 billion a year
How on earth can that be justified?
Your claims are dogmatic but have no evidence at all to support them
People do tend to reference the tax situation in France quite a lot – are there any reliable figures on the impact that higher taxes have had? I suppose it could be similar to what happened with the introduction of the 50p rate in the UK. There was a transient effect of people pulling forward income that would have dropped out of the system had it been persisted with.
There was no evidence 50p made people move, at all
There is evidence wealthy people left France but it is not clear why
There is no evidence Macron is making them return as yet
David –
“A wealth tax is often a tax on savings and punishes the responsible who have worked and saved all their life..is it better to spend and run up debts and increase the likelihood of becoming less self sufficient in later life?”
I would hope that the definition of “wealth” (if we’re talking about money and not ACTUAL wealth) would be such that the life savings of Joe & Jane Public wouldn’t be affected by any such tax. I don’t claim to know how much the average citizen has saved or in a pension, but any wealth tax worthy of the name should include a de minimis to exclude those average assets.
“The evidence in France is that wealth taxes significantly reduced the tax base and it would be the same here with the top 1% moving residency and the burden falling on the middle ground.”
Again, I would hope the “middle ground” wouldn’t be hit too hard (if at all) by a wealth tax. By my reckoning, the term “wealth” carries with it an implicit condition of being significantly better off than those around you. So what would be key would be the determination of that level of holdings.
In any case, if the 1% felt the need to relocate as a result of a tax policy, then good. Shut the door behind you. Trickle down was always a myth – I suspect any mass exodus from our shores of ultra well off types might just finally prove that. Moot in any case, as I believe people don’t tend to move for tax purposes.
“Finally a wealth tax on property will depress prices ( perhaps not a bad thing) but will clearly reduce consumption.”
Both of these are good things. £1m+ for a house in London? Over £1m for a roof over your head? That’s inhuman. To millennials it makes home ownership irrelevant as they’ll never be able to engage. Anything which reduces the price of property can only be a good thing (and is the only thing that will stop the whole property market from shuddering to a halt in one generation’s time… ever heard the phrase “priced out of the market”?).
And anything which reduces consumption in general is, IMHO, a good thing. We use up too much stuff and we worship at the altar of consumerism… “working s**t jobs we hate so we can buy crap we don’t need”. I didn’t agree with a lot Tyler Durden said, but that rang very, very true.
a) Savings are very undertaxed in the UK: they need to be taxed more. This is because of generous allowances and no NIC
b) I would suggest a wealth tax at maybe £1 million, perhaps a bit more
c) 12,000 millionaires supposedly left France but we do not know why
Hi Richard,
Great post – I really do enjoy reading your blog – keep up the good work!
If you have time I would love to hear your thoughts on an interview with Christine Lagarde
http://freakonomics.com/podcast/not-grandmothers-m-f/
Do you think her views in general will lead to a reduction in inequality?
If I get time
Hi Richard,
Thought-provoking as always.
I particularly like the discussion about poverty being relative. This can also be seen by observing the places in the world where people have almost nothing by our standards but also no exposure to a point of comparison (and manipulative marketing). It seems that people in these places can be surprisingly happy if their basic needs are met.
The acceptance of differential rewards in society for different levels of productivity is important. Unfortunately at the moment the differential between those that work and those that can’t is being brought about by forcing the latter into destitution rather than addressing the standard of living that accrues from work (any work). We should start at the bottom with a reasonable standard of living for the least fortunate and build up from there.
A comment was made above about being relaxed about people being very wealthy. I have no issue with this. If we make sure that:
1. The least fortunate are afforded a decent standard of living funded via progressive taxation.
2. Wages are at a satisfactory level, which would remove some of the excess profits that are derived from labour currently.
3. Artificial barriers to success/corruptions in the system like the public school system/cronyism are either removed or their impacts addressed.
4. Ensure that there is a tax mechanism that ensures that privilege is not built into the system for generation after generation
(and probably some other things that I can’t think of at the moment)
We would ideally be left with a situation where the rich were truly those that were one or all of: More industrious. More talented. Rewarded for doing socially useful things that few people want to do. I think we are far away from this situation at the moment.
A key fact when considering wealth is to assess what affect its acquisition has had on society/the environment. Has it been acquired by stunting the opportunities of others and paying poverty wages (Mike Ashley?), gaming the corporate system and asset stripping (Philip Green) or destroying the environment (any number of people that have made their money from oil or mineral extraction). On the other hand some wealth can be acquired in the process of bringing reward to others via enjoyable cultural experiences (JK Rowling) or inventing new and better ways to do things (Google founders, in their early years) and many other examples of innovation in industry and technology.
“No economic use for savings”.. how about working for 40 odd years and saving so you can enjoy your retirement
That does not negate the fact that a) we have a glut of savings b) you hope you can live off those savings but actually that is only if the next generation consent to buy them
Regarding France 60,000 multi millionaires uprooted and paid their taxes and spent on goods and services elsewhere..the evidence was strong enough to persuade Macron to reverse wealth tax.
Portugal & Italy as well as France will provide a residency for those looking to move… this is the shrinking tax base..obviously no one can provide hard evidence until it is too late
I am not sure where you found your data
The Global Wealth Review comes to nowhere near that number
It does not say why
And the Portuguese scheme is especially abusive
But so what? You know how many wealthy there are?
The from the FT in October gives most of the info re French Wealth Tax:
https://www.ft.com/content/3d907582-b893-11e7-9bfb-4a9c83ffa852
Pretty poor data ….
“Regarding France 60,000 multi millionaires uprooted….”
I note that Richard has cast doubt on these numbers anyway.
But if these people are really so selfish that all that matters to them is how little tax they pay, then good riddance. They can end up ultimately living out their days in a gated community somewhere in a hell-hole of a country with no state whatsoever, and hoping that they don’t ever suffer from a chronic illness.
Presumably on the other side of this equation there would be people (yes, even rich people) attracted to living in a country that has social cohesion and the lack of inherent tension that is present in very unequal societies.
It is also an illusion to suggest that the people that left were uniquely able to profit from the opportunities presented by their home country. The space they vacate will probably be filled by others that take up those opportunities.
Additionally, millionaires don’t actually consume very much. The numbers look impressive – expensive cars, consumer goods, expensive restaurants…
But here’s only so many shoes you can buy – Notwithstanding an heroic effort by Imelda Marcos – and a millionare eating in more restaurants, at higher prices, is far less economic activity than an equal income of the middle classes eating out.
And a Rolls-Royce is, in economic terms, an inefficiently-manufactured Ford Granada with a couple of gold bricks welded inaccessiblly into the chassis, and gradually wearing away to worthlessness.
The conspicuous consumption of millionaires is far less valuable to the economy than the affluent expenditures of a prosperous middle class.
Likewise – and as our host has pointed out – very few of these millionaires are genuinely wealth creators; neither by their labour, nor by the deployment of their wealth into productive enterprises.
The ones who do create wealth probably won’t be leaving – rents are easily found, and capital can move to find them; but a producive investment usually needs a fair degree of management, and generally ties you into a location and the host society. The host society can and usually does make a considerable effort to make them welcome, and facilitates the creation and recirculation of this wealth.
The ones who don’t create wealth exist by rent-seeking, and they have a net contractionary effect on the economy. They can and should go somewhere else.
In short: you are right, for more reasons than you have picked out in your reply.
Ford Granada? That dates you!
But you’re right
Of course the most valuable savings scheme in this low interest rate environment is a final salary pension scheme..many public sector workers will have a scheme effectively pushing £1m…are you planning to add those to your wealth calculation??
Given they cannot be attributed that would be hard
You also ignore how small most are
It is relatively straightforward to calculate a market value for a final salary pension scheme.. you certainly can’t have a defined return pension scheme taxed as wealth and a final salary scheme excluded..talk about inequitable!
A decent proportion of the public sector have very generous pension schemes – the mark to market value will surprise many
I am ambiguous about the inclusion of pension schemes in the wealth tax base
And have said so
Some great points here, including the vital observation that the greater the concentration of wealth grows (and I would argue, the older the average age of wealth owners becomes) the greater their tendency to become risk averse rent-seekers rather than risk taking entrepreneurial investors. This is a vital point on which real human behavior diverges from the idealised models that economists like to use.
I would only add a few points :
Yes some relative inequality is desirable for motivating individuals to better themselves and society. However there are important provisos :
1) There is a minimum standard of living which no individual should be allowed to fall below as to do so :
a) prevents them from lifting themselves and their families out of poverty in the future (resulting in a poverty trap that spans generations), and leads to massive waste of human potential
b) undermines a stable society by leaving the poorest with no options other than to turn to crime, vagrancy, violence or revolution, in order to survive.
This basic floor to the standard of living is best recognised through a universal basic income, for reasons which become more apparent in the points below.
2) To ensure a dynamic economy it is essential that the highest returns to those at the top come only from using their wealth to invest in society, either through entrepreneurial risk taking or social enterprise. However, as you have highlighted the risk-reward profile in most countries has become slanted by Global tax evasion, growth of monopolies, and capture of regulation that favors existing owners of wealth. All the incentives therefore lead to rent-seeking behavior because this creates higher returns with lower risks than genuine investment in the real economy. For an extreme example consider Russia where Putin and the oligarchs can make so much money through corruption and control of the fossil-fuel industry (money laundered through international tax havens). There is simply no incentive for them to develop a more open and diversified economy, which is of course what the greater Russian people actually need.
3) For the incentives of inequality to work there must be sufficient social mobility and economic opportunity for poor people to succeed through their own personal risk-taking and effort. However, all the evidence is that the rise in inequality we have seen both USA and UK, far from increasing this kind of entrepreneurial progress, has actually been accompanied by significant declines in social mobility. The reasons for this are not well understood as they spread across so many aspects, from access to education and finance, to the scale and monopoly powers of existing wealth owners over contracts, land, and exclusive social networks. The solutions to increase social mobility are equally complex but must include a tax system that favors local, small-scale, and circular businesses over large monopolies. Perhaps most important of all however is the change to a universal Basic Income which can provide a secure platform for young people in particular to switch from being job seekers ( working only to benefit the wealthy) into job creators, co-operating and creating new forms local enterprise within their own communities.
Thanks
I hope your point 1 was clear in what I wrote. If not, apologies
[…] Cross-posted from Tax Research UK […]
I agree with everything here but I also thought it notable how JWMason makes the point that “public wealth” (things such as tenants’ rights in housing, state provided childcare, education, public transport, PAYGO state pensions etc etc) can trump measured values for wealth inequality. JWMason sometimes argues that we shouldn’t care about private wealth and instead devote all political effort to ensuring increased “public wealth”. I worry that such an approach ignores the political consequences of excessive private wealth. In the comments here, Mr Shigemitsu wonders whether we should reach an accommodation with the wealthiest where they get to amass cash hordes whilst allowing government spending for public purpose. The very fact that it is thought of in those terms illustrates the issue. We would even consider needing to seek permission from any other equivalently small bunch of people. The only reason why we feel the need to is because of the political power that wealth has conferred. Otherwise they would just be ignored much as say UK Buddhists or vegans or whatever wouldn’t get any special hearing or nationwide issues. http://jwmason.org/slackwire/wealth-distribution-and-puzzle-of/
I look back at my opinions concerning the secular shift from productive investments to rent-seeking, and I wonder whether I should have paid more attention to cause and effect.
It is now clear to me – and to you, ratger sooner – that this shift was the final warning about inequality, and the end-stage of the increasing concentration of wealth.
Everywhere in London I see productive businesses bought out or driven out, replaced by little boxes with a bedroom, tokens for the rich to extract ever-higher rents from people who would otherwise consume, invest, recirculate the value they themselves create, and facilitate the creation of value by others.
I believe that we have now, or long ago, passed beyond an economic ‘event horizon’; and we cannot now reverse our descent into the cold abyss of rent-seekers owning more and more of everything, including all political and regulatory activity, and neither creating nor recirculating any of the wealth they are extracting.
I agree: where once there was the curious workshop now there is the ‘mews residence’
I do agree wholeheartedly, but I wonder why so little is made, here and elsewhere, of the moral arguments. In the 1960s we had Rachman, a landlord who was vilified to the extent of having an “ism” named after him. Now it seems that the appalling standards he exemplified, and worse, have become the norm and the landlords could be anyone who has invested in “buy to rent” not just the super rich and the soulless corporations that one might expect. The same applies to all aspects of the rentier society; we are constantly assured that they are doing nothing illegal, as though this meant the same as doing nothing wrong. Surely it is time that everyone with any moral sense started being open about the fact that the people involved are doing something that is very wrong. They should not be honoured, they should not even be allowed to play any role in society while they are involved in these affairs. they should in fact be treated with the contempt they deserve.