Wealth tax – the way to end inequality?

THE Great Piketty Tour has been and gone, leaving in its wake a huge paper trail of articles and columns; the mainstream media is full of columnists and commentators acknowledging the existence of inequality but suggesting that the only answer is more stringent application of free market principles.

“The rich and the businesses they run need to prove that the free market does work,” wrote one Sunday Times columnist on October 4.

Snort. How much longer do you need to ‘prove that the free market does work’? You’ve had a quarter of a century. In 1989, the Cold War ended, and with it the idea that there were two (and only two) opposing economic systems. (Somehow for the Cold War decades we had managed to ignore mixed economies, and the possibility of any other way apart from the ‘free market’ and ‘communism’.)

Reagan and Thatcher went, like, “Yay!”, with their fists in the air, and it was promptly declared that ‘we’ had won. The unfettered free market would “lift all boats” and “the End of History” was at hand.

And now, 26 years on, there have been some achievements, sure (a significant reduction in extreme poverty); but inequality has inexorably risen. (And it is inequality that determines how people perceive their poverty – you may be living on $5 a day, twice what you were ten years ago, but if the person on the next hill is living on $15 a day, you will feel poor.)

Earlier this year, the Organisation for Economic Cooperation and Development (OECD) published a study – In It Together: Why Less Inequality Benefits All – which found that income inequality has reached record highs in its member states; the average income of the top 10% was 9.6 times higher than the bottom 10%, with the USA going more than one better – there it’s 19 times the average.

Tipping point reached

“We have reached a tipping point,” said OECD secretary general Ángel Gurría. “The evidence shows that high inequality is bad for growth. The case for policy action is as much economic as social. By not addressing inequality, governments are cutting into the social fabric of their countries and hurting their long-term economic growth.

“In recent decades, as much as 40% of the population at the lower end of the distribution has benefited little from economic growth in many countries,” the study found. “In some cases, low earners have even seen their incomes fall in real terms. When such a large group in the population gains so little from economic growth, the social fabric frays and trust in institutions is weakened.”

And, by the way, the way inequality is usually measured omits something important: “One key omission in the measurement of inequality (and poverty) is that they are income-based. […] Access to public services such as energy and water together with a specific measurement of the accumulation of private assets are excluded …,” notes Haroon Bhorat, Professor of Economics and director of the Development Policy Research Unit at the University of Cape Town.

Enter Piketty with his solution – progressive wealth tax.

The not-so-hidden response from South Africa’s ‘business-as-usual’ economists, commentators and asset holders? Oh yes, we agree that ‘something needs to be done’ about inequality, but “don’t touch me on my assets or income”. Taxing the wealthy is counter-productive. Growth will grind to a halt; jobs will stagnate and disappear.

Except, except: anyone who has read books like Bill Bryson’s The Life and Times of the Thunderbolt Kid will recall that the 1950s and 1960s were the real Golden Age in the quintessential ‘free market’, the USA. This was the era when the blue-collar worker could and did buy the white picket fence life, the car for the assembly-line clock-puncher and his missus, the Frigidaire, the television, the Good Life.

And “During the 1950s and early 1960s, the top bracket income tax rate was over 90%–and theeconomy, middle-class, and stock market boomed.” In fact, “… super-high tax rates on rich people do not appear to hurt the economy or make people lazy.”

Last year, Gale and Samwick presented evidence that “at the very least discredits the argument that higher growth cannot take place during a period of higher tax rates”. (Effects of Income Tax Changes on Economic Growth, William G Gale, Andrew A Samwick, the Brookings Institution, September 2014)

And early this year, Professor Mark Thoma (Macroeconomics at the University of Oregon) wrote: “It’s time to do away with the myth that taxing the wealthy always reduces our economic potential. [A tax system that reduces inequality] reclaims income that should have flowed to workers in the first place, and helps to move us toward the meritocracy that underlies our national identity and fuels our economic system is in our collective interest.”

Final thought: “There’s a good amount of research from all over the world that suggests that places with pronounced income inequality are more likely to have high rates of violent crime.”

So how about giving some real, meaningful attention to practical ways we could use some of the gains the wealthy make to reduce the imbalances and make our world a better place for all of us?