In 2014 Thomas Piketty, a little known French academic economist, published his global bestseller Capital in the Twenty First Century. This book, all of 900 pages long, captured the spirit of the age. Piketty’s book reflected a growing concern about the enormous inequality that has blighted western societies at the beginning of the 21st century.
Piketty famously stated that returns on capital grew faster than the incomes of the poor, leading to even greater inequality. Piketty’s arguments were welcomed by a world ever conscious of growing inequality.
The success of the so called ‘1%’ – bankers, financial speculators and entrepreneurs who control so much of modern wealth – is clearly visible. But what should the response of politicians be to growing inequality? How can we reconcile the obvious need to grow the economy while ensuring the weakest and most vulnerable in society do not get left behind?
A number of measures have been introduced to make sure that the rich pay their fair share in taxation. In Britain alone we have had increases in stamp duty and, in the last six years, increases in capital gains tax. Socialist France, under the leadership of Francois Hollande, introduced a 75% income tax for incomes over 1 million euros a year. Hollande’s government increased this tax before Piketty’s bestselling book was published. A “soak the rich” atmosphere has been prevalent in many developed countries since the financial collapse of 2008.
The danger with this increased taxation is that it discourages people from creative enterprise. Many natural entrepreneurs will think if they are going to be taxed at more than 50% why should they bother? The point at which someone works more for the government than he or she does for themselves can often be a point of no return, utterly demoralising wealth creators who, in turn, simply do not invest.
"The challenge for politicians is the same as it has always been. How can a society create wealth and ensure a sense of community?"
This creates a situation in which business contracts, there are no incentives, and the wealth generated by a society or a country simply diminishes. This whole process is self-defeating, leading to entrepreneurs being discouraged and unwilling to invest in their ideas. This has an adverse effect on jobs and the economy.
The challenge for politicians is the same as it has always been. How can a society create wealth, while at the same time ensuring a sense of community, and a “safety net” for the most vulnerable and the least privileged? More radical solutions, such as aggressive taxation of income, or wealth taxes, have been tried in the past.
Famously, during the 1970s, the United Kingdom had a top tax rate on earned income of 83%. Top taxation rates on unearned income were even higher. This high taxation regime did not lead to better economic outcomes for the community as a whole. On the contrary, people left the country as tax exiles and Britain, for a number of other reasons, was widely derided as the “sick man of Europe”.
More can be done to prevent corporations from giving exorbitant pay and bonuses to corporate leaders. Indeed, shareholder revolts, where institutional shareholders vote down large pay awards, have recently occurred.
What is often overlooked in the discussion of equality is that global inequality is being reduced all the time. Millions of people across the world are becoming more affluent and leaving behind the daily struggle for subsistence, which has dogged human beings for thousands of years.
It is not true to say that wealth creation in the past twenty years has not benefited many people in the developing world. Across the developed world however discontent is still rising. People do not generally begrudge entrepreneurs who have made a lot of money through their own skills. What is particularly frustrating is the enormous handouts given to corporate leaders who are essentially private sector bureaucrats. This is a legitimate anger which can be addressed by greater publicity and more energised shareholders.
On Sunday 5th June, Kwasi Kwarteng is debating on the subject of Wealth, Justice and Prosperity as part of HowTheLightGetsIn, the philosophy and music festival at Hay.
Join the conversation