Once in a generation or so, an idea emerges out of the political left field that seems outrageous. Unthinkable. Credibility-destroying for anyone who utters it. But then it gathers momentum to the point where it is irresistible. Sometimes these ideas are quite bad ones. But sometimes they have a lot to recommend them.
Such as the radical idea that we should – trigger-warning: socialism! – tax the rich. Alexandria Ocasio-Cortez, the Democratic congresswoman from New York, floated the idea on an episode of CBS’s 60 Minutes in January and it’s all almost anyone in the US has been able to talk about ever since.
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When asked how she intended to fund her Green New Deal, she noted that tax wouldn’t be such a crazy idea; the top marginal tax rate for much of America’s history had been around the 60-70% mark and perhaps the “tippy-top” earners on “$10,000,000 or more” ought to pay that much again. Income inequality in the US now exceeds what it was in the 1920s; only the top 1% have seen any real wage growth in the last 30 years, and it’s among the 0.1% that the increase is most pronounced. If you are in that micro-percentile, you can expect to earn 198 times what someone in the bottom 10% earns.
Not to be outdone, Elizabeth Warren, the presidential candidate and Democratic senator from Massachusetts, proposed a wealth tax on “ultra-millionaires” – 2% on accumulated wealth greater than $50,000,000, and 3% on wealth greater than $1,000,000,000. (I find writing out the actual numbers much more expressive than the near-euphemistic “million” and “billion”; more comparable to what each of us see when we check our online bank accounts).
This would be a wealth tax as opposed to an income tax, more in line with the measures urged by Thomas Piketty in Capital. Wealth inequality is even more pronounced than income inequality in the US; only the richest 10% having increased their net worth since 1989.
Understandably, those fragile upper percentiles have been retreating to their safe spaces, sporadically tweeting their outrage ever since (and quite often revealing they have little understanding of how marginal tax rates work).
At the World Economic Forum, tax was off the agenda, despite the widespread consternation about global inequality. Rutger Bregman, the Dutch political writer, likened it to a firefighters’ conference where everyone was worried about fires, but no one was allowed to say the word “Water”.
Meanwhile, Michael Bloomberg, possible 2020 Republican presidential candidate, described the proposals as “punitive”. But he’s a billionaire. Polls, however, have shown that a majority of Americans kind of like Ocasio-Cortez’s idea. In a world where Amazon’s Jeff Bezos has managed to accrue a personal fortune of $150 billion dollars – that’s somewhere around the GDP of New Zealand, Kuwait and Hungary and two million times the wealth of the average American family – it seems eminently sensible.
Could it catch on over here? In Britain, we have toyed with this madness too. “It’s one for you, nineteen for me,” lamented George Harrison in ‘Taxman’ when the Beatles’ earnings pushed him into Harold Wilson’s 96% tax rate.
Ever since, the trend has been for top rate of income tax to fall – and for inequality to widen. When Margaret Thatcher came to power, she dropped the top rate from 83% to 60%. It fell further to 40%, which was then maintained by Labour until, after the financial crash, they increased it to 50%, before George Osborne cut it back to 45% (with no concomitant easing of his austerity agenda). Osborne later boasted that the measure had recouped £8 billion – apparently because so many top-earners had decided to keep their money in the country. Closer analysis suggest this was more likely the result of clever accounting on the part of the rich (deferring payment from one year to the next) and the actual effect was minimal.
Clever accounting, as Warren Buffet has observed, usually enables the rich to pay tax at lower rates than the poorest.
Of course, it’s hard to find the sweet spot of taxation; tax havens will always undercut you. (And American states like Delaware, South Dakota and Wyoming are often far more permissive than more recognised tax havens like the Cayman Islands). Simply setting your tax rate high doesn’t necessarily recoup a larger amount of money, it’s true; France found the returns from wealth taxes disappointing.
But it’s also true that setting your tax rate low can be utterly disastrous. The infamous Kansas Experiment saw Republican governor Sam Brownback eliminate state income tax and slash taxes for the highest earners in an attempt to boost investment. It resulted in a complete collapse in state revenues, school closures, prison riots, and subsequent shamefaced capitulation. It turns out that sometimes, asking people for less money means that you receive less money.
Economist can argue about the figures; but it’s not simply a question of cash. Ocasio-Cortez’s proposals would raise a relatively modest amount of money in themselves (and $10,000,000 is a high bar to clear); but her Green New Deal – living wage jobs for all who want them, universal healthcare, sustainable investments – could release millions of people from precarity and enable them to participate in the productive economy again. The positive effects of that would be far greater than any amount of ‘trickle down’.
By now, we’re used to the chorus of weepy-woo. ‘It’s the politics of envy!’, people cry, ‘these people are “wealth creators”. Where would be the incentive for anyone to build anything?’ But no true entrepreneur is ever motivated solely by financial gain. And while entrepreneurship is to be encouraged, in many cases we’re talking about unearned wealth and the idle rich. America and Britain will not suddenly become bereft of talent.
Besides, the most pressing case for taxing the rich – and aiming specifically at accumulated wealth, with as much international cooperation as possible – is not financial, but political. Moral, even. It is in part about sending the message that Governments are willing to stand up for the people against the elites; that capitalism can be made to work for everyone as opposed to merely the capitalists.
It is over a decade since the financial crash. Back then the Left were caught sleeping; movements such as Occupy failed to do much beyond start a conversation. Men like Osborne and Bloomberg prevailed in their wisdom that what was good for the attendees of Davos was good for the world. We can see the results today and it’s not pretty.
It’s time to be radical. It’s time to tax the rich.