Tag: Wealth Tax

The Wealth Tax: silver bullet or left-wing fantasy?

The idea of a tax on individual wealth has been around for decades, and every so often it creeps into the mainstream. However, as the energy crisis has highlighted the excess profits of energy companies and the disastrous “Kami-Kwasi” budget has left the UK government scrambling to balance the books, the wealth tax has gained real momentum. I focus on two things: (1) how much support does a wealth tax have politically and publicly in the UK? And (2) could a wealth tax be a silver bullet for the fiscal “black hole”? 

Firstly, before answering these questions, it’s useful to know exactly what people mean by a wealth tax. A wealth tax is a broad base tax on all forms of financial wealth. Its proponents argue it could be levied as a one-off tax or at regular intervals, and apply to either individuals or household units. Policy makers can decide on the wealth thresholds to use. For example, supporters argue a wealth tax could apply to wealth greater than £500,000, or perhaps £1m, or even £10m. Some also argue that primary homes should be exempt. For instance, if someone owned (without any mortgages) two properties worth £1m, but lived in one of them, then a 1% wealth tax would leave that individual liable to pay £10,000 on the £1m of wealth held in a second-home (assuming that they don’t own any bonds, stocks, or other financial assets). The critical point is that a true wealth tax applies to all wealth, so for a good introduction to what is wealth, see this video from former city trader Gary Stevenson, who has recently been putting out some excellent stuff on the UK economy. 

Turning back to the question of political feasibility, Rishi Sunak was asked at PMQs (26th Oct) whether he would introduce a tax on wealth. As he has done on many occasions when asked about the topic, he dismissed the question and gave a generic answer about fairness.  Also, although the question came from a Labour MP, the top of both major parties are in agreement on this issue; Kier Starmer has rejected the idea of introducing a wealth tax if he came to power. For now, it seems senior politicians view a wealth tax as a non-starter. 

Disclaimer, I wouldn’t usually share anything from GB News but surprisingly this was the best tweet I could find about the PMQ question on wealth taxes.

But what about the public – what do they think of wealth taxes? After all, on some level, politicians should reflect the average view of the British population. The Wealth Tax Commission conducted the first UK empirical study on public support for wealth taxes in 2020. They found that 75% of respondents supported a new tax on wealth, with 41% putting it as their most preferred option. Surprisingly, they also found that people on incomes below £20,000 were less supportive of wealth taxes – perhaps pointing to a lack of understanding on who would actually have to pay. Nonetheless, the report concludes that wealth taxes do have broad based support in the UK.  However, YouGov polls appear to suggest that many view wealth taxes as a less fair way of taxing: 59% of people think income taxes are fairer than wealth taxes.  The wording of this question isn’t great, since wealth taxes can work alongside income taxes to deliver a fairer system overall – rather than being a substitute for each other. Yet, this does imply that people feel somewhat more attached to the wealth they have accumulated than the income they have earned. 

Source: If the government decides to raise taxes in order to fund public services, which of the following measures, if any, would you most strongly support? Evidence Paper 2, Wealth Tax Commission 2020, p.11

So, if the public in general are not opposed to wealth taxes, and they agree that the gap between the rich and poor is too wide, what accounts for the lack of political will to push wealth taxes? One explanation is the ideology of ownership at the top of British politics, and generally within the establishment as a whole. In a previous blog, I wrote about how Thomas Picketty, an academic economist who has proposed a global wealth tax, describes the current ideology of our time as “neo-proprietarian” – a belief that private property is sacrosanct. This ideology justifies inequality on the basis that wealth has been accumulated by individuals due to their own merits, thus ownership of that wealth shouldn’t be taxed. 

A secondary factor at play could be the intergenerational transfer of wealth implicit in a wealth tax. It’s a statistical fact, and also obvious in everyday life, that most wealth is held by older generations usually over the age of 50. Although not surprising, since older people have been here longer, and therefore have had more time to accumulate assets, it is not so obvious that this is fair. For instance, older generations were able to get on the housing ladder much easier, they also had access to free university education, as well as lived during a time of exceptional economic growth. Yet, since older generations are more represented in politics and more likely to vote this could greatly reduce the probability of any political will to impose taxes on wealth. 

How much would a wealth tax raise: silver bullet or not?

On the latter question of how effective a wealth tax could be, The Wealth Tax Commission assesses that a one-off wealth tax levied on wealth above £500,000 at a rate of 5% would raise £262bn. To put that in perspective it would fund the NHS for almost 2 years. If an annual wealth tax could raise that kind of revenue on a regular basis, the gains are potentially huge. However, the commission concludes that the administrative costs of an annual wealth tax would be too onerous, therefore they support a one-off wealth tax over a regular one. 

Nonetheless, despite the large revenue potential of even a one-off wealth tax, the Commission recommends that reforming the taxes already in place is a  1st best option over the introduction of any new ones. One potential reform is on share buybacks. Share buybacks are when a public company uses profits to buyback its own shares. This entails a significant cash transfer to wealthy shareholders who sell the shares back to the company. Recently, instead of investing profits in say green technology or new products, many companies have simply been shovelling cash back to their owners. Therefore, a tax on this behaviour is an easy way to target this wealth. 

The Biden administration has taken action on this already. They have just passed an exercise tax on share buyback schemes, which will come into effect at the beginning of 2023. The IPPR, a think-tank in the UK, has also recently published analysis which estimates a similar scheme in the UK could raise £225m a year, with a higher emergency rate on specific energy companies raising £4.8bn. Alongside a buyback tax, simply raising the tax on dividends to the same level as income taxes could raise £6bn a year. Both of these measures would go a long way to reducing wealth inequality in the UK. 

Overall, it looks like a new wealth tax is highly unlikely in the short to medium term, not least because it would require a dramatic change in the ideological principles of private property and wealth. However, the government has options aplenty to make meaningful changes to the current system. Following the US on a buyback tax is an obvious example. Yet, the UK government seems unwilling to implement these changes and the mainstream media doesn’t even present them as options. This is despite there being support from multi-millionaires to make the system fairer, and the evidence presented here on public support for re-distribution. Hopefully, a positive precedent develops from the current (ineffective) windfall taxes on energy companies, but the appetite for bigger leaps forward is clearly lacking. 

 

Capital and Ideology: the big lockdown read

Adolph Menzar – Dinner at the Ball 1878. The late 19th century was the height of ownership societies in Europe when 10% of the population owned 90% of the wealth and earned 50% of the national income.

This winter the third national lockdown presented itself as an ideal opportunity to tackle Thomas Picketty’s latest epic on inequality. Capital and Ideology is focused on the history of inequality regimes and the ideologies which justify them. And despite reaching nearly 1050 pages, it didn’t disappoint.

The main argument of the book is that inequality is neither an economic or technological phenomena, rather it is ideological and political. Picketty explains that in all societies, both past and present, there is an ideological schema which supports and maintains the existing inequality regime. In all cases, the proponents of the ideology argue that the inequality it pertains is justified – or at the very least should be maintained as to not release a “Pandora’s box” of social chaos. 

The book takes you on a journey, meandering around several different types of inequality regimes, their justifications, the switch-points which instigated their demise (and beginnings), and ultimately, Picketty’s own thoughts on what a just society might look like. 

We start the story in a world dominated by what Picketty calls “tri-functional societies”. These are societies which are severely inegalitarian. Members  belong to three loosely defined groups (four, in the case of India). Each group has a purpose. The clergy gives the society meaning, the nobleman give the society security, and the workers produce the goods and services the society needs to function (mainly food, shelter, and clothing). 

Picketty argues that tri-functional societies can be found in almost all corners of the planet at some time in history and were the main form of social organisation before the rise of  pre-modern capitalism and colonialism. They were maintained on the justification that if either components role was compromised the society would descend into anarchy. Each role was clearly defined and carefully incentivised to not step beyond their own function. There was very little movement between each group and extreme violence was a common outcome of any attempts to change the status quo. 

The transition away from tri-functional societies to what are called ownership societies is mostly explained by Picketty with reference to the events and repercussions of the French Revolution in 1789. The fall of the Ancien Regime in France resulted in a “great demarcation” between power and ownership. Power, which was previously held exclusively by the Monarch, was transferred to the centralised state which could guarantee private property rights.  What followed was a society based on the quasi-sacralisation of property rights which were open to all (if you were male and could access them). However, the question of the distribution of property rights was left unresolved. Thus, under the myth of egalitarianism, we see an increase in inequality in post-revolutionary France not a decrease. 

Figure 1 below shows the share of total private property for the top 1% fell in the decade leading up to the revolution and then increased by nearly 10 percentage points during the 19th century. The rate of growth of inequality was even more dramatic when you look exclusively at Paris. 

Figure 1: Inequality in France 1780-2000

The ideology underpinning ownership societies of the  19th century is termed by Picketty as proprietarian ideology. This is an ideology fundamentally based on the emancipation of property. Picketty argues that proprietarian ideology can encompass a spectrum of multiple pathways. He broadly defines two pathways as critical proprietarianism and exacerbated proprietarianism. The former is the basis of social democratic societies which depend on a mix of public, private, and social ownership and emphasize the instrumental function of private property. The latter is based on a worshiping of private property over and above other rights. 

The justification for such an unequal distribution is a similar one to the justification of the tri-functional schema. In essence, questioning private property rights is a can of worms that shouldn’t be opened; this is not only for the benefit of economic elites but also the average citizen with at least some wealth. 

A recurrent theme throughout the book is one of switch-points in history that shape the long-term outcome of events. The lesson to learn from these moments is that inequality regimes could have taken one of many paths and the route they actually took depended largely on the ability of the central protagonists to combine “the logic of events with short term mobilisations and longer-term ideological change”.  The French Revolution is a paradigmatic example of such a switch point. Hence, the failure of elites to implement progressive taxation at this point can be seen as failure to align ideology and events. However, looking to the future, it means that inequality regimes do not necessarily follow a deterministic route and can be configured to align with egalitarian principles – this is important for Picketty’s arguments for how we can move toward a more equal society today.

The second part of the book features a detailed analysis of the history of inequality in slave and colonial societies. This is an incredibly important part of the history of inequality at the global level- one which was missing from Picketty’s first book Capital and Inequality. Unsurprisingly, Picketty finds that slave and colonial societies are some of the most unequal in human history. For example, in 18th century Haiti  10% of the population had an income share of greater than 80% of total income. This is compared to the 50% income share going to the top 10% at the height of proprietarianism in 1910 France. 

Perhaps one of the most startling, shocking, and powerful examples of the proprietarianism grip on society are the debates surrounding the compensation of slave owners following the abolition of slavery in 1833. The UK government agreed compensation amounting to nearly 5% of national income, which was equivalent to roughly 10 years of educational spending at the time. The justification, for what seems today to be a grossly unjust policy, is again based on the sacralisation of private property which was so endemic of the 19th century (at least until the neo-proprietarian revolution of the 1990s).

The next stage of the journey concerns around the factors behind the fall of ownership societies following the Great War of 1914-1918. Picketty outlines three key challenges that began to threaten ownership societies during the period 1914-1945. Firstly, internal inequality began to reach a level which could not be justified by elites – especially in light of the sacrifices made by the population during WW1. Secondly, external colonialism faced challenge as its extractive institutions and moral superiority were questioned by the ruled populations. Thirdly, there was a nationalist challenge which resulted from inter-state competition buoyed by rising nationalism and inequality between nations.

Figure 2: the fall of ownership societies 1914-1945

Figure 2 shows the dramatic decrease in the top 10% share of total income beginning in 1914 in some countries such as Germany and rapidly falling in most industrialised countries from around 1940. In Germany the share reached as low as 28% in 1950. In the United States the share was greater at 37% in 1950 but still significantly below the 50% peak it reached just before the Wall Street Crash in 1929. In the United Kingdom and France the peak of income inequality was reached in 1910 at 52%. In the United Kingdom this reached a low of 28% in the late 1970s – an unbelievable redistribution of income which would of been unthinkable in 1910.  

The emergence of progressive income and inheritance taxation during this period is argued to be the pre-dominant factor driving the reduction in inequality. Picketty argues these fiscal transformations were made possible because of ideological change. The multiple crises of the period 1914-1945 catalyzed these changes but ultimately they were caused by the configuration of intellectual change and external events (not forgetting that the events themselves were endogenous determined by the inequality regime). 

The fall of ownership societies leads us to the emergence of the Social Democratic and Communist Societies of the 1950-1980 period. Picketty draws on some interesting examples of how social democratic societies loosened the grip of private property. For example, Germany introduced alternative kinds of ownership such as the co-management of firms between workers and capitalists. There was also a focus on education as form of pre-distribution policy- for instance, the US massively increased education spending during the 20th century. 

However, according to Picketty, the social democratic societies failed for four key reasons. (1) They didn’t implement social ownership far enough; (2) they didn’t offer equal access to education; (3) they weren’t able to transcend the political economy of the nation state; (4) and they didn’t implement a progressive tax on wealth. 

Thus, we end the story in March 2020, in the ideological epoch of neo-proprietarianism. The void left by the fall of communism and the failure of social democratic societies to deliver on their promises as been filled by the conservative revolution and the return of private property as the dominant form of ownership. Inequality is now reaching levels not seen since 1914. At this stage Picketty sets out his blue-print for the road ahead. Criticism has been thrown at Picketty for being too light touch in this area. I think this is partially justified, however, we can’t rely on Thomas to come up with all the answers and I believe his framework is nonetheless a useful addition to the discussion. Besides, by this point he was 800 words in and must have been pretty knackered!

Highlighted by Picketty as two essential elements in the effort to transcend capitalism are social ownership of capital and temporary ownership of capital. The former can be achieved through an expansion of systems similar to the Germanic and Nordic co-management of firms which rely on the “one person one vote” principle as opposed to the “one share one vote” seen in US, British, and other economies. The latter emphasizes the circulation of capital. This can be achieved through a trio of progressive taxes on income, wealth, and inheritance. 

In an interesting statistical experiment, Picketty shows that under certain assumptions,  a trio of progressive taxes could provide a universal capital endowment equal to 60% of average adult wealth when you turn 25, as well as provide public goods such as pensions, healthcare, and education. 

The final pages of Picketty were fascinating and genuinely inspiring to read. I went away with hope for the future and a better far better understanding of how we might get there. Moreover, this brief overview of the book only scratches the surface of what I learned. For instance, I have omitted the entirety of the discussion on the evolution of voting cleavages, the detailed historical analysis of colonial inequality regimes, and the whole chapter on Indian tri-functional society. Not forgetting the countless sub-chapters with titles such as “On the anti-colonialist legitimacy of the Shiite Clergy” and “Chinese Revolts and Missed Opportunities”.

The publication of the book in March 2020 sits on the faultline between  pre-pandemic and post-pandemic society. Without a doubt income and wealth inequality has played a central role in the spread and impact of the virus in the UK and throughout the world. A progressive wealth tax has also been raised as a way of dealing with the public debt – a proposition swiftly put down by Rishi Sunak but which has found increasing support among members of the new Biden administration. 

It remains to be seen whether Picketty’s ideas of a participatory federalist socialism will be implemented. However, just as the pandemic has shone a light on the depth of inequality in our society Picketty has shown us we have a way out –  and what’s more we have been here before.