Tax the Rich, Feed the Poor…

….till there are no more rich? At least Alvin Lee and his Ten Years After put a question mark to the statement whose first part often is subjected to morally sound but economically uneducated. It is a long-standing argument that inequality of income and wealth is on the rise, and over the last few years a lot of efforts have been made to support the argument by empirical data. Success feeds success, and high income and wealth feeds high income and wealth. After all those ones who are sitting at the bottom of the wealth and income pyramid rarely have the means to accumulate and to save. They spend most of their income, and sometimes even more. The ones at the top may sometimes suffer from financial market hiccups but on average, it seems, they don’t have to do a lot in order to come out better and better. In a perfect world where everyone starts with the same resources and income and wealth are equally distributed it may be that talent, non -economic circumstances or an exogenous event that provides opportunities for a few to come out better then others. In any case, an unequal distribution of income and wealth is not automatically the outcome of meritocratic processes. As a matter of fact, capitalism is not a genuinely meritocratic system. This mode of production and accumulation comes to live as a politically driven project whose institutional features are based on inequality and actually reproduce inequality from the very start. The history of capitalism is a history of dynamic changes, not least of changes of its institutional features. There are extended periods where capitalism is being domesticated, as far as it is possible. And there are periods where capitalism is getting unleashed. Former periods come usually with a  less unequal distribution of income and wealth. Latter come with a strong rise in inequality.



This simple back-of-the-envelope formula is sufficient to paint a rough but still valid picture of current capitalisms. The emerging capitalisms in Asia ride on a variety of unfettered capitalism where political ties and uncontrolled greed are the main ingredients to a enormous rise of inequality. The capitalisms of the OECD-world got rid of many institutional hindrances and moved towards their own forms of unfettered capitalisms that undermined social contracts and made inequality to a proof of dynamism rather then to a signal of a rentier economy.

Taxing the rich is tempting, and there are good arguments for such a policy. And yet, it is true that in a world of highly mobile capital such a policy will not succeed at all. Despite all the publicity over the last few months it is undeniable that tax competition between nation-states is deeply entrenched into current forms of capitalism. This holds even for block like the EU where we can hear a lot of rhetoric but no serious action – mainly because national tax authority is seen by politicians as one of the last prerogatives of the nation-state, and also as a way to build special ties with businesses.

I don’t want to say that there is no upward room for tax hikes for the rich – there is. Historical episodes show that higher tax rates for the rich is not only not undermining economic growth but actually high tax rates and high economic growth can go hand in hand. What I want to say, though, is that times are not friendly for tax hikes. The reason is that across the OECD the social contract is broken, or at least seriously undermined. For such a contract it needs at least two contracting partners, and both are missing. A common theme for both sides is ‘individualization’. At the time it sounded crazy in my ears when Margaret Thatcher stated that ‘there is no such thing as a society’. Thirty years and a whole bunch of neoliberal episodes late it seems she has been proven right. Private enrichment has become the attitude of the day; ‘The rich’ love to present themselves, at least some of them, as philanthropists who control the beneficiaries rather then sending their money to a anonymous tax collector. This also has the advantage to get donation receipts that reduce their legal tax burden. Rather then opting for a social contract they opt for a self-controlled private-private partnership that excludes the state. ‘The poor’ on the other hand are internationally largely immobile, lack in resources and are becoming less and less politically organized. De-unionisation and moving away from traditional party politics is becoming the defining trait. In other words, social contracts become a institution of the past.

That brings me back to Alvin Lee. Taxing ‘the rich’ was a  good thing in the 1960s and 1970s, also because ‘the rich’ were willing to accept the extra burden. This acceptance is gone, and it will need much more then economic policy to get it back.