An unequal view of inequality: tackling wealth and income distribution

“There is no moral justification for extreme poverty side by side with great wealth.”

Alfred Marshall

Inequality was the hot topic in economics and political economy in 2014. Thomas Piketty’s magnum opus, ‘Capital’, hit the best-sellers list and brought an overdue and welcome look at the historical evolution of wealth distribution in the developed world. Politicians, business leaders and celebrities all weighed in with their analysis of Piketty’s research and brought inequality discussion firmly into the mainstream. I finally got round to reading it towards the end of 2014 and found myself in agreement with much of what was written, particularly with the compelling case Piketty makes for the historical evolution of inequality. The crux of the matter, says Piketty, is that over the long-run returns to capital (r) are larger than economic growth (g) and so there is a tendency for wealth to outgrow income, leading to increased levels of inequality. This central point of his analysis has made some waves in the economics community and there has been a predictable backlash from some quarters. Nonetheless, it makes for compelling reading up to, that is, the point where Piketty proposes measures to reduce inequality (more about this later).

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Although ‘Capital’ is already old news, it is been in my mind over the last couple of weeks due to a few interesting developments. Firstly, it was a shock to see President Obama move towards tackling inequality in his State of the Union address in January with a few Piketty-influenced measures. Raising capital gains tax to 28% for those with incomes over $500,000, closing a popular tax loophole for the rich, and imposing a new levy on firms with assets over $50 billion, were all interesting measures, and not ones we would normally expect from a US President. Although the sentiment is right, it is still hard to justify the wealthy paying less in capital gains than regular mortals pay in income tax.

Hot on the heels of this announcement was the annual celebration of wealth and luxury in Davos. Inequality was very much on the agenda in Davos, with ‘growing concern’ being expressed by many of those present. Doubtless many of the forum’s participants were reassured by Nobel Laureate, Christopher Pissarides’ statement that forcing the rich to pay higher tax rates was not the answer to inequality, citing the usual clichés of disincentives and risk to investment. Instead, his solution is that the existing tax base be used to create more jobs and better education. An inspired idea!! So in other words, according to Pissarides, tackling inequality and aiming for greater distribution of wealth is a waste of time because it might upset the wealthy, who we must, apparently, appease at all costs. Instead we should continue with our existing policies but without the potential to raise additional revenue through income tax in case it upsets anyone. No mention by Pissarides then of the recently published Oxfam report which shows that the world’s 80 richest people have seen their collective wealth rise by $600 billion in the last four years, while the rest of us struggle in the face of an economic depression. Even Christine Lagarde has agreed that a “severely skewed income distribution harms the pace and sustainability of growth over the longer term.”

Also present in Davos was Joe Stiglitz, another Nobel Laureate but a man who has done as much as anyone to put inequality on the public agenda in recent years. His “Price of Inequality” from 2012 is a surprisingly good read, and in many ways gets to the core of the problem with the assertion that “much of America’s inequality is the result of market distortions, with incentives directed not at creating new wealth but at taking it from others” and “the financial sector is supposed to serve the rest of the economy, not the other way around.”  For rational human beings there cannot be much doubt about either of these points. The contentious issue though is how much do we need to redress the balance and what is the best way to do this. On the first point, people like Piketty, Stiglitz and Richard Wilkinson have done excellent work in helping make this a quantative, rather than a qualitative debate, and the public now have their sights firmly set on reducing the obscene wealth and income gaps. On the second point, however, there is no clear consensus.

Stiglitz favours a two-prong approach to reducing inequality by implementing before-tax and after-tax measures. His ‘before-tax’ measures include higher minimum wages, increased union power, higher investment in education and stronger corporate governance laws. The latter approach focuses on income and capital gains taxes in order to boost redistribution from top to bottom. No complaints so far and it is good to see that he is vocal on the benefits of progressive taxation rather than joining Pissarides and others in fearing the blow to capitalist incentives. It is no surprise then that Stiglitz welcomed Obama’s new policies, despite expressing concerns over the limited increase in capital gains tax. However, there is not much new here, and we already know that the establishment will strongly resist any significant increases in income tax. It is worth then looking too at Piketty’s solution to see if we can be a little more creative.

Piketty’s work and theory is entered around the fact that the continual increase in wealth is largely responsible for growing inequality. It makes sense then that he advocates a tax on wealth of up to 2 %. This is certainly appealing in that it seems to go straight to the source and could certainly generate considerable revenue that could be used to boost pubic investment. However, what would actually happen if this came into effect? It strikes me that this is unworkable. Firstly, if we assume a positive level of economic growth in normal times, then it may be possible for the very wealthy to simply pay the wealth tax out of income (rather than savings), thereby having little effect on inequality reduction. Secondly, where the wealthy need to pay the tax out of savings or assets, they will need to liquidate assets annually to make the payment. Where one person sells an asset, another buys, so in fact this is essentially just a redistribution of wealth. And in today’s highly interconnected world, the job of following the trail of capital movement as the wealthy seek to evade the tax inspectors would likely be impossible. It would certainly require a coordinated, global policy.

A better solution may then require a two-step approach, beginning with a progressive tax on consumption. Analysis of income and savings would allow the difference between these to be taken as consumption. Low levels of consumption would of course not be subject to tax but those with very large levels would face an increasingly progressive tax rate. This is very different from the current VAT or sales tax, which is highly regressive in that people on lower incomes pay a higher proportion of their salary in taxation on the same purchase in comparison with those on higher incomes. This is not a new idea and would be a positive and immediate first step in redistributing income from rich to poor. This could also be paired with a new land value tax, designed to make sure that rising land prices do not exacerbate inequality. As a second stage, it is surely clear to anyone with an interest in social justice and balance that a much higher and comprehensive set of inheritance tax laws should be instituted to erode the negative and unjust impact of inherited wealth and entitlement once and for all.

So this then brings us to the final reason why inequality has been on my mind over recent days. A couple of days ago the Chartist Magazine announced that it will be publishing a manifesto in the run up to the General Election in the UK. Although there is likely to be much debate about the content, this offers an interesting opportunity to all supporters of the Left to try to articulate their vision of the future. A key issue will of course be inequality and it will be interesting to see if and how they expand on this issue from their previous manifesto: “Chartist supports the limitation of personal wealth and the operation of a progressive taxation system. The Government therefore should introduce higher rates of taxation for households on higher incomes and limit the accrual of personal and household wealth through both inheritance and the appreciation of land and property assets.” Although it is hard to disagree with this declaration, it is worth crunching the numbers and adding as much detail as possible in order to bolster credibility and support.  The left should always be on guard to rebut accusations that its policies and ideologies are too ‘utopian’ (an accusation that Piketty has also had to deal with due to his wealth tax). Nonetheless, initiatives like the one offered by the Chartist are valuable in trying to add clarity and focus to a left-wing that is too often factionalised and divided.

When the Chartist publishes its manifesto I will make a few comments here as well as contributing to the debate on their website. This does not mean that I am in agreement with the full spectrum of their concerns, but I am a strong advocate of any initiative that fosters debate on the left and aims to find a workable consensus. Under these terms, debating and discussing inequality is an ideal starting point. In many ways, inequality is representative of much that socialists oppose. So it is time to address the moral scar of inherited wealth, economic rent seeking, astronomical salaries, nepotism, corruption, and all else that unjustly inflates the fortunes of those at the top, while those at the bottom go hungry.

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