Ending inequality with a wealth tax and a basic income grant

Part 1 of a series.

Inequality is rendered stark where astonishing fortunes are made by individuals who then bend their lives, from that point on, to avoid paying tax. This is possible, not because of the nature of capitalism, but because governments have permitted it to happen.

I’m not going to waste your time. This is what we need to do about it.

1) Introduce a unilateral progressive wealth tax

Three years ago, Thomas Piketty, a French economist, released the most important book on inequality in the last hundred years. In it, he carefully laid out – through data spanning centuries – how wealth accumulates, and how inequality has come to be as high as it has.

“Without a global tax on capital or some similar policy,” he warned, “there is a substantial risk that the top centile’s share of global wealth will continue to grow indefinitely – and this should worry everyone.”

“If the tax system is not made more progressive, it should come as no surprise that those who derive the least benefit from free trade may well turn against it. The progressive tax is indispensable for making sure that everyone benefits from globalisation, and the increasingly glaring absence of progressive taxation may ultimately undermine support for a globalised economy.”

He recommended a global tax on wealth, which he estimated would raise about 2% of GDP. The exact nature of his recommendations I leave to his book, except to say that increasing government’s share of the economy by 2% must be set against the state’s existing share of 30-50% (i.e. it isn’t that much).

For three regions, that would be equivalent to:

United States European Union United Kingdom 2% of GDP $371 billion $369 billion $54 billion

When I first wrote about Piketty in a series of articles back in 2013 (and which the publishers have, sadly, removed from the web), I was impressed with his research and skeptical of his recommendations.

The main concern is simple: wealth is extremely mobile and so taxing it requires collaboration and agreement between all the world’s major economies to prevent wealth being hidden.

The fear against unilaterally raising a tax is that wealth will be lost to that economy. Wealth removed, the thinking goes, is investment foregone.

Until recently, I believed that too. I now believe it less. The reality is that most wealth is quite dead and lost to the economy anyway.

No matter how valuable something is, if it is not actively part of the economy – which includes paying tax on the value generated by that valuable thing – then it doesn’t exist to the average person.

To be fair, Piketty acknowledged this problem:

“The inescapable reality is this: wealth is so concentrated that a large segment of society is virtually unaware of its existence, so that some people imagine that it belongs to surreal or mysterious entities.”

According to Gabriel Zucman in his book, The Hidden Wealth of Nations, at least $7.6 trillion is hidden in tax havens, going a long way to explaining the trade deficit that planet Earth runs with itself (impossible, unless you believe we have a lucrative trade with Mars).

My view is that we should accept this and that a country should simply unilaterally introduce a progressive wealth tax, equivalent to 2% of GDP on wealth, with it left to politicians and economists to decide what the ideal form of that tax should be (although I have thrown in my idea for this further on).

Note also that this is a tax paid by wealth-possessing individuals, not companies or any other structure. The principle is simple to understand. Shareholders and trustees are not necessarily wealthy. If you have a small ETF, pension or insurance fund, taxing the company that you have invested in would penalise those of very limited wealth.

Companies and trusts are simply vehicles which permit collective action by individuals (similar to the way representative government should permit collective action by citizens). Ultimately, wealth is owned by individuals. No matter how complex the construct developed to own wealth, individuals are responsible for ownership and for paying tax.

2) Distribute the proceeds from that wealth tax as a basic income grant

The main reason to introduce a wealth tax is to ensure that everyone in an economy contributes the same proportion of their wealth and income (i.e. both together) to the benefit of society. As Piketty notes:

“The bottom 50 percent of the income distribution pay a rate of 40-50 percent; the next 40 percent pay 45-50 percent; but the top 5 percent and even more the top 1 percent pay lower rates, with the top 0.1 percent paying only 35 percent.”

The wealthier a person is, the less they pay. That is a recipe for increased inequality, and also leaving the many who lose out feeling disconnected and detached from their own communities.

The spoils of our modern technological economy have concentrated, with disruption to existing manufacturers and established businesses felt everywhere. The winners earn ever-greater returns, but pay an ever-smaller proportion of their ‘winnings’ back into the tax system.

Yes, we’re playing a game with winners and losers, but only in North Korea do the losers get sent to prison. This isn’t the 18th century with its debtors goals and hereditary penury. Progressive taxation is meant to compensate the losers and ensure a common standard of living that allows all to keep playing in the game.

Google, Facebook and Twitter have disrupted media companies in every country. The venture-capital-driven model of finance is to open a firehose of cash pointed at internet-based ventures and subsidise costs to drive incumbents out of the market. We’ve seen this with Uber for taxis and Airbnb for hotels.

And, while Twitter is still doing rather badly, Google and Facebook have adopted esoteric tax structures to shield their massive profits from taxation. Even as failing companies are shoved into the terminal ward, the wealthiest companies and individuals then deprive the fiscus of tax necessary to compensate workers who lost their jobs.

Not everyone recovers from disruption and tax is the way we compensate those otherwise left behind. It is taxation which is used to pay the losers to ensure that all feel as if they participate and have a role to play. Where the losers are punished for their loss, then resentment builds.

There has been growing enthusiasm for what is known as a basic income grant; that social benefits should be redistributed as cash grants to people to spend as they will. Studies have been done all over the world, but the central failing has been of how to implement such a system where existing grants would have to be ended to fund it.

There is no way to reconcile this. People would have to accept an end to pensions, disability grants, housing allowances or medical aid in order to receive the grant. That is politically impossible.

However, a wealth tax is a new tax. All the money so raised can go into direct cash transfers to all citizens, no matter their age or income status. And, yes, that does mean the super-rich receive the grant as well. Considering that the top 1%, who own 50% of wealth, are the ones who will pay this tax, it’s a tiny fraction of the 99% who will benefit.

For the three regions, this works out as follows:

United States European Union United Kingdom Total population 318 million 743 million 64 million Per capita annual BIG $1,167 $496 $836

No, it’s not a large amount of money, but look at it another way:

United States European Union United Kingdom Median annual household income (2 people) $52,000 $20,000 $30,000 % increase with BIG 4.5% 5.0% 5.6%

That’s a sizeable salary increase for the majority, and an immediate and tactile amount of cash that demonstrates that the wealthy are contributing to society.

The benefits do not end there. Each person under the age of 18 receives an account into which this income is paid. On their 18th birthday, they receive access to this account. That implies that, for someone receiving 18 years of payments in the US, they would receive about $21,000 with which to start their lives.

So that’s the policy proposal:

People and companies should be permitted to get as wealthy as they are able, and that wealth – so generated – should be put to work for everyone through a fair and progressive wealth tax.

Given that a slim minority of individuals will pay the wealth tax, and the vast majority of the population will be net recipients of a direct cash payment, it is difficult to see how voters will not get behind such a proposal.

Those of you who do not wish to read further can stop here. That’s it. If you want to know how we got here, and what the future holds, stay with me.

The end of the end of history

“With your ambition, incompetence, and pure greed. These are thousands of lives. It is absolutely unacceptable,” said Vladimir Putin, visiting a factory in the tiny town of Pikalevo, north of St. Petersburg.

During the mass privatisation period of the 1990s, where billions of dollars of assets were transferred for nothing from the state into the hands of Russia’s fledgling oligarchy, Oleg Deripaska began consolidating inefficient Soviet-era aluminium oxide and bauxite plants into Rusal, the world’s largest aluminium producer.

The company, formally established in 2007, was originally valued at some $40 billion. Since then, China has added massive capacity, and Russia’s aging infrastructure has reduced Rusal’s efficiency making many of these minor plants in tiny factory-towns costly to run.

By 2009, Rusal had shed so much value the company was said to be worth only $3 billion and losing over $50 million a year.

Deripaska began shutting plants and refusing to pay outstanding wages.

In the summer of 2009, with protests spreading all over the country and threatening the careful monopoly on power controlled by Vladimir Putin, he felt he had to act.

This looks decisive, doesn’t it? Real leadership. Right down to the cutting, “Give me back my pen.”

It’s not. It’s all theatre.

Oleg Deripaska is a loyal oligarch. In exchange for the humiliation, he received a company bailout and consolidated his hold on the industry. Deripaska is still in favour and you’ll often see him in the company of Putin and his inner circle. Rusal still loses money.

In 2016, off the back of his electoral victory, US President-elect Donald Trump paid a visit to Carrier, a company making air condition systems. With a mix of threats and incentives, he got them to keep 1,000 jobs in Indiana that were due to be moved to Mexico.

It’s all theatre.

Yet there are two conflicting narratives here. One is the heart-felt concern of workers that the current economic system does not favour them. The other is that same economic system presenting theatrical moments giving the illusion of responding to these concerns while consolidating the existing situation.

It is tempting – with fascists and Nazis gaining real power in Europe, with Donald Trump and Brexit tearing apart the notion of responsible representative governance of all people and for all people – to see in this the end of the Western liberal ideal.

Tempting and, in some ways, easy to write about. This is not that sort of series. There are real problems, and they are economic, and we should recognise and assess them, as well as the context of the popular response.

Continued in Part 2.