As was discussed in the introduction to this section on Tax and Society within the Tax After Coronavirus (TACs) project, tax has at least six roles to play in any society. Redistributing income and wealth is one of those roles. This section explores that issue.
Redistributing income and wealth
Although most economic theory suggests that markets should distribute both income and wealth fairly within a society, the reality is that the assumptions made to achieve that theoretical result do not always reflect what happens in the real economy. In particular, in most economies existing wealth or social opportunities provide unequal access to markets for some, and denial of access to others, whilst monopolies, opacity and corruption all distort the allocation of economic rewards. The result is that some earn more than their fair share, and others less, whilst wealth becomes unevenly distributed within a society. This would not matter greatly if there was no, overall, consequence for the well-being of a society if this happens, but that is not the case. As economic theory suggests, and as all the world's major international economic organisations, including the International Monetary Fund, the World Bank and the Organisation for Economic Cooperation and Development recognise, too great a level of income and wealth inequality within a jurisdiction can be significantly harmful to its economic well-being.
There are good economic reasons why this is the case. With regard to income it is because the spending patterns of those with different levels of income vary considerably. For example, those on very low incomes tend to spend all of any additional income that they might earn precisely because they have unmet needs and wants. They also, very commonly, spend that additional income on consumption. This means that if they earn additional income it circulates back into the economy very quickly. They have what is called a high marginal propensity to consume.
In contrast, if the wealthiest in a society receive additional income they very often save it because they have few or no additional consumer spending that they need to undertake. They have a low marginal propensity to consume. Alternatively, if they do spend, they might buy items with either a long-term benefit, such as property, or items that reflect their social status e.g. artwork, antiques and other such items, which very often add very little overall value to the level of current economic activity in a country.
The result is that if all the benefits of growth go to those with low incomes this tends to have a very immediate impact on overall well-being because their additional income is rapidly recirculated into the economy, having an immediate knock-on (or multiplier) effect for others, whereas if the benefits of that growth go to those with high incomes the impact might be quite hard to see. The multiplier effect of their additional income is low. The consequence is that countries with relatively low levels of income diversity tend to see overall higher levels of growth when compared to those with higher levels of income inequality.
This is also true of countries with relatively low levels of wealth inequality. In this case this is because those with high levels of wealth tend to be very risk averse and overall do not invest in new risk-based or entrepreneurial activity: they do, instead, tends to invest in existing businesses, land and buildings or other stores of value which may suit their purpose of preserving existing wealth but which do not stimulate new economic activity in the economy as a whole.
In contrast, those with lower levels of wealth tend to have greater risk appetites, and so are inclined to invest in new business activities that are more likely to encourage economic growth, new employment opportunities, and higher wages. Economies with lower levels of wealth diversity do, then, tend to have higher appetites for risk taking. As a result they also tend to have higher rates of growth.
If a government does, then, wish to stimulate economic growth within its jurisdiction it is likely that it will wish to limit the diversity of incomes and wealth within that country to help stimulate this outcome, and by far the best way to do this is to use progressive taxation systems. A progressive tax is one that overall charges higher rates of tax on a person as their income or wealth rises. This increase is not just in absolute terms but also as a proportion of that income or wealth. In many countries this is a significant objective of tax policy as a consequence.
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Richard
I think the argument here works better when you make the case just on Robin Hood grounds, i.e. tax takes something from the rich to help the poor.
If the economy’s at full employment, then the post-tax distribution of income will affect the pattern of what’s produced. As you say, a higher share of post-tax income for the less well-off means more consumption, but correspondingly less investment. It means more jam today but less jam tomorrow.
Similarly the evidence suggests that those without much wealth tend to be risk-averse in their investment choices – they keep most of their money in bank or building society accounts. It’s the wealthy who do almost all of the risky investment, in shares and new businesses. So again redistributive tax is likely to slow down growth rather than speed it up.
This doesn’t mean that we shouldn’t have a progressive tax system, of course. But the argument for it should be based on the idea of redistributing income, not on the grounds that it will make for faster growth.
I will be exploring this much more when the wealth series begins – next week, I hope
I’ve just started Danny Dorling’s new book, “Slowdown, The End of the Great Acceleration….” in which he seems to show that there has been a slowing of nearly everything, from fertility to economic growth, apart from some outliers like temperature. I think it’ll be an interesting read.
If he’s right, that the great god of Growth is diminishing, and capitalism may be on the last throw of the dice, so that the pie will either be of a fixed size or may be baked smaller, then it strikes me that those who currently have a disproportionate sized slice of the pie will try to grab an even bigger slice.
The only way to combat this greed it to create a political system that puts fairness and equity above all else. As you argue taxation has a part to play.
The rich may have a relatively low propensity to consume generally, but they have a relatively high propensity to consume luxury items with a high carbon footprint, like frequent air travel.
Progressive taxation doesn’t just redistribute income, it helps slow down global heating as well.
Agreed
Does it matter how the “rich” got there money?.. I’m probably “rich” in your identification of it but do so by running my own roofing business, started from scratch, now employing 8 people and regularly (until lockdown) working 60hr week. I work hard to build the business to get a better life for myself and my family. No silver spoon here, hard working class upbringing, no university education, just graft from age of 16..what’s the point if it’s taxed into oblivion?
I will be publishing more on this next week
The idea that wealth has been earned is i9n most cases a myth
Even at lower levels of wealth – and I have that
Let me be quite clear – I never paid the um my house is now ‘worth’
In that case it would be wrong for me to claim that I did
I suspect you’ve also enjoyed benefits you are ignoring
“I suspect you’ve also enjoyed benefits you are ignoring”
Well yes to a point. Law and order, the bins get cleared, health service.. doesn’t alter the fact my wealth has come from hard graft, nothing else. If I did t work I have no safety net. In fact that has always been the motivation to work for me and my family.. I hate inherited wealth and the toffs poncing around with their degrees etc but just to tax hard because people have done well through hard work isn’t right.,,
I think the point here is that it’s not just through “hard graft” because if it were, a cleaner working 60 hours a week would also be as wealthy as you.
It matters what you are working at, much more than how hard you work. In addition, if you run a business, you can continue to earn from your employees labour, and could potentially stop working entirely if you choose to. This is not something a poorly paid employee can do.
Why not just employ another roofer? They will continue doing the job, and you can just take a percentage of the profits. This is what most business owners eventually do, seeing as it makes little sense to work increasingly hard if you don’t have to.
Whilst I am sure you work very hard, it is questionable that you work that much harder than anyone else. After all, there are only 168 hours in one week, that’s the most anyone can work, even if they don’t sleep, eat or go to the toilet.
Did you spend any of those hours taking tea breaks, or commuting between jobs? Well that’s not really productive labour either, is it?
The things we tell ourselves to justify our own good luck are not necessarily true.
“It matters what you are working at”
Of course it matters what you’re working at. Skilled labour is more highly values than unskilled and surely that is right? It takes a long time to learn a trade and it involves sacrifice and commitment and workers should be rewarded accordingly.
“Why not just employ another roofer? ”
Have you ever ran a business? I doubt it judging by your comments. Work isn’t a continuous stream. There are peaks and troughs meaning when you have the work you go all out to complete it in a timeframe which suits the customers. And there isn’t a conveyer belt of good roofers to pull in for a couple of weeks then let go. Also a lot of my work is quoting on work and trying to pull in new business. This largely goes unseen but the hours soon rack up.
” is questionable that you work that much harder than anyone else. ”
Well i was brought up in a working class community and let me tell you there is a massive divergence in work ethic both in terms of real graft and desire to learn new skills. So where i am from yes i do work harder than most and probably have more ambition than most.
The majority of pen pushers who work in an office with a degree in sociology or something equally useless probably can sit around chatting drinking tea and looking at the internet…if i doss like that mate i don’t get paid!!!! as simple as…
If that comment was aimed at me
1) I inherited nothing (barring a small sum when my father died a year or so ago)
2) I worked for all I have
3) I did have a social sciences degree
4) I work a great many hours a day and always have
5) I do not think all I now have in wealth was generated by me – that’s utter nonsense. Mych of my house was paid for by house price inflation, subsidised by tax.
6) My businesses – and I have had a number – have all enjoyed state support in many ways – as dopes yours, day in and day out, whetehgr your recognise it or not. I never got a direct subsidy but I sure as hck got massive indirect ones
I disagree with you
Actually, I’ll, simply say that what you’re saying is untrue
And that your prejudice is unbecoming
Richard.. my comments were a reply to comments made by Chris Gilbert
“And that your prejudice is unbecoming”
Well try taking some of what I say on board and you might better understand the working classes
I have noted all you say
And I am not sure I don’t understand the working classes – your presumption that this is not where I have come from and that I know nothing of what it means to be working class is itself an issue
Why not appreciate that the understanding may exist?
And why presume that only the working class work?
You have your desired outcome “we should tax people more” and then you’ve simply worked backwards, making claim after claim not supported by data (or in many case common sense / evidence) to arrive at that chosen outcome, ignoring all the contradictions among the way.
A masterpiece by your own high standards!
I presumed you were a troll on the basis of your first comment
The second has not taken long to arrive
What is really quite bix=zarre about this one is that if you’d read anything I wrote you’d known I am not asking for overall tax increases now
You just assumed I was
But actually reading an argument may be beyond you, it seems
“The consequence is that countries with relatively low levels of income diversity tend to see overall higher levels of growth when compared to those with higher levels of income inequality.”
This is in no way self-evident (and China, with an eye-watering Gini Coefficient, immediately comes to mind).
Do you have any data to support this?
Try Scandinavia
The tax justice movement has evidenced this time and again
You are a thorough thinker so I am surprised to see you omit an important point. A fundamental feature of a tax system should be the equivalent of the monopolies and mergers commission for capital – an inherent mechanism to prevent its concentration, for the concentration of capital imperils democracy. Money is the root of all evil, in that with enough money you can buy off the key people to achieve any goal.
We need three related things:
– progressive wealth taxes, such that successful capitalists have to relearn their position every year battling against increasing headwinds of taxation. There should be a liberal wealth allowance for the man on the Clapham Omnibus – why shouldn’t we aspire to a middle class wealth distribution like Japan – but above that escalating wealth taxes on all for,s of wealth (possibly land excluded but only if land taxed separately, given its unique role)
– surtaxes on asset managers by assets under management, to force diversity and small scale investment houses in pension fund management etc. The FIRE sector needs to be broken up.
– vigorous competition law in the real economy, the natural rate of profit tends to zero!
Personally if wealth taxes were done right, I would abolish income tax. There is no need of it then. If the money has been spent in the year, it has become the income of many others. If it has been saved, it should be taxed. This would give the little man a head start in amassing capital (given a generous wealth allowance) and the rentiers would either pay wealth taxes or die of a surfeit of lampreys!
This is a series…
And I am tackling wealth taxes
But let me also add that tax cannot do everything: some issues require other measures. Some of these do.
I think your approach, of starting with the principles for a tax system under MMT, is the right one. I just think an anti-concentration principle is an important one that should be in the ten commandments of tax. After all, under MMT, all questions are distributional.
We should have the objective of a more equal society but we should have an absolute law against concentrations of capital. It would be better outcome if a country of a million people has average wealth of £250k +/- £100k than 999,000 people have £200k +/- £10k and 1000 people have £49,950,000 because they will form a plutonomy.
We need to truncate the wealth distribution – if tax cannot do it, the guillotine might. 🙂
Then I am definitely for tax…
‘In contrast, those with lower levels of wealth tend to have greater risk appetites, and so are inclined to invest in new business activities ‘
If Ive understood you correctly, Im not so sure about this point. Development and poverty studies suggest that very poor people tend to be highly risk averse as they cannot afford to take any risks. Its a reason for example, that its very hard to get subsistence farmers to adopt different methods (and no I dont mean planting lots of cash monocrops…). They have legitimate reasons for sticking with what they know
So does that mean that its down to the ‘middle classes’, who have accumulated enough to be able to save, to provide the funds for investment? At some point one then crosses into the territory of the very wealthy who are more obsessed with avoiding tax on their income and accumulated wealth. That may also be driving their ‘investment’ behaviour
I am not talking about very poor people
I am talking about the middle 70% of the U.K. excluding the top few %
Understood….
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