Putting an end to the wealth gap with the global wealth tax

The 2011 Occupy protests focused on wealth inequality created by capitalism. A new book Capital in the Twenty-First Century by French economist, Thomas Piketty, suggests that maybe they were right. Piketty wouldn’t be the first author to tackle financial inequality but if he can succeed in getting a 700-page heavy book about economics, chock-a-block with footnotes, graphs and mathematical formulae to the top of the Amazon sales charts, then he must have hit upon something that everyone preceding him missed.

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Capital in the Twenty-First Century has been on the lips of every banker, economist and investor the world over it appears. Praise hasn’t been in short supply either, it was described as an “epic” and “sweeping vision” by American Nobel laureate Paul Krugman whilst The Economist went so far as to say that the work fundamentally rewrote 200 years of economic thinking on inequality.
Piketty himself has also been lavished with praise and was crowned with the lofty moniker of “the most important thinker of his generation” by The Guardian. No shortcomings for a fan base then, but what is it all about?

Piketty’s thesis is quite simple, that capital, and the money it produces, accumulates faster than the national income grows, thus creating an unsustainable gulf of wealth inequality. A definition needs to be drawn here between capital and income. According to Piketty, capital is any asset that generates a monetary return encompassing: the physical, such as real estate, the intangible, such as brands and the financial, such as stocks.

Income, on the other hand, is a flow that grows or diminishes according to output. To distinguish, imagine income as a bank account balance that varies dependent on earnings and capital as a property, if you never get on the housing ladder you’ll never have any capital and always be poor. What he is saying is that those who have capital that generate wealth will always be richer than businessman and entrepreneurs seeking to create it. This capitalism model, over time, concentrates more and more wealth into the hands of fewer and fewer people.

For example, anyone in the lucrative position of being able to amass vast quantities of wealth without actually doing anything, such as an oil-rich Saudi baron, is always going to generate more money at a rate that far outstrips what the wider public are able to accumulate through a lifetime of earnings going through the university system and entering the working world.

According to Piketty, this trend has been in effect since the 19th century where inequality created huge social unrest but was disrupted the following century by two World Wars and the Depression. Now, inequality is alive and kicking again and has been back on the march since the 1980s when a conservative counter-revolution led by Margaret Thatcher and Ronald Regan witnessed the dismantling of workers unions, large cuts in tax rates for the rich and the asphyxiation of growth on government expenditure.

Piketty falls back on two decades of extensive research at the Paris School of Economics to support his thesis “this is the first time we have accumulated the data which proves that we will all be poorer in the future”, and that “capitalism simply cannot work.”

This flies in the face of the findings of Simon Kuznets, the Nobel Prize-winning Belarussian émigré who pioneered the ‘Kuznets Curve’ which implies that as an economy develops, a natural cycle of economic equality occurs. This has been the generally accepted model governing capitalism in the economic profession since the 1950s and why Capital in the Twenty-First Century is causing such a ruckus. Piketty’s book proposes that far from capitalism closing the gap on wealth inequality, it is, in fact, widening it and an alarming rate.

What is particularly worrying is that it also puts to bed the idea that being born blessed with talent and drive or working excruciatingly hard can elevate us to being wealthy. It can’t. It can only elevate us towards being rich and that’s only if we’re equally blessed with luck. Again, a distinction needs to be drawn here between the rich and the wealthy, to aptly demonstrate this Chris Rock once quipped “Shaquille O’Neal is rich, the man that signs his cheque is wealthy”.

Shaquille O’Neal has spent a lifetime earning big bucks as a successful basketball player and film star as well as all the sponsorship dollars that come with it, but it’s the sort of accumulated money that he could blow over a bad weekend in Vegas, true wealth or ‘bottomless pockets’ wealth is a different ball of wax entirely.

You don’t have to look very far for evidence of this supposed wealth gulf. In the 1950s, the average chief executive in the United States was paid about twenty times as much as the typical employee of his firm. Compare that to today’s standards where the average Walmart employee earns less than twenty-five thousand US dollars a year yet in 2012 the retailer paid their chief executive, Michael Duke, more than twenty-three million US dollars. Elsewhere a recent report by Oxfam suggested that the richest 85 people in the world own more wealth than the poorest 3.5 billion of the world’s population.

If, as Piketty proposes, inherited wealth dominates wealth amassed from a lifetime of income by such a considerable margin, then this exposes the lie of capitalism – that wealth is generated by hard graft, smart savings and shrewd investments. Worse, it is unsustainable and will create division giving rise to massive social injustice. Looking at it from this perspective, you can almost sense the French farmers sharpening their pitchforks alongside political students waving banners with Billy Bragg lyrics.

So how do we avoid this hurricane of social unrest and financial oppression that threatens to suck us all up and dump us back into a mid-19th century Dickensian dystopia? Piketty’s solution is a global wealth tax that would force individuals, who ordinarily pay their accountants lots of money to avoid other forms of tax, to pay tax by making them obliged to declare their net worth rather than their income, which is where the working and middle classes tend to get clobbered.

“What I argue for is a progressive tax, a global tax, based on the taxation of private property. This is the only civilised solution”, Piketty says and he points towards successful economies like Germany’s, where higher wealth taxes promote equality without undermining the economy to support his proposal. A fair and just idea in theory, but in practice, who on earth would advocate such a radical notion?

According to The Guardian “inequality is approaching levels not seen in 100 years”, and the difficulty, when inequality has reached these kinds of levels, is that the level of taxation needed to redress the balance is almost impossible to implement. Even more so today given globalisation and the sort of technological advancements that support it.

Any attempt by governments in Western countries to raise the tax threshold above 50% for top earners, as Francois Hollande will testify, only witnesses those individuals running for the hills, or in the case of Gerard Depardieu, making a beeline for Russia. Either that or they dodge tax with ever more inventive and intricate ways to discover loopholes.

One of the biggest arguments is that top earners do not actually ‘earn’ their wealth, it simply accrues from their capital whilst they live a life of luxury. The problem with an income tax, therefore, is that it fails to distinguish between earnings and wealth received through claims on land, patents or bonds.

Here, an alternative could be for governments to introduce a living wage opposed to the minimum wage and force some of the top one percent to put some extra coin into the pocket of their workforce. An idea which has been gathering international momentum even though questions of enforcement and the impact it would have on small businesses loom large.

Recently, the Swiss rejected what would have been the highest minimum wage anywhere in the world (CHF 4,000 per month) and even though it failed, it sends out a big statement of intent that fat cats need to start paying their workforce a wage that they can live on in the face of massive inflation hikes.

Only days afterwards, the Seattle city council unanimously voted to introduce the highest minimum wage in the United States at USD 15 per hour. A move that is largely thought to be a historic victory for lifting workers out of poverty that will no doubt reverberate around the remaining 50 states and send ripples lapping at the shores of countries worldwide.

As it exists today, the global wealth tax is merely an idea which invites debate on whether it would reduce incentives to invest and innovate or whether it would be sufficiently punitive to have a genuine and lasting impact on inequality. Whatever the obstacles or doubts of a global wealth tax, the important thing is that it is out there and exists as a genuine alternative solution.

Even though world governments accepting a proposal to tax their richest and most powerful citizens through the nose is unrealistic, it is important to change the intellectual climate, fire up debate and conceive of new methods of analysis. In this respect, Capital in the Twenty-First Century is a resounding success.

Noted American economist, Paul Krugman, has said of Capital in the Twenty-First Century “the right [wing] seems unable to mount any kind of substantive counterattack to Mr. Piketty’s thesis”, which isn’t strictly true. A book that encourages the working and middle classes to raise a call to arms for far-reaching economic reform isn’t going to slip by quietly without its critics.

Forbes recently ran an article suggesting that further than merely countering the arguments Piketty raises, they’re being “shredded”. Perhaps the most prominent of the many points raised was the uncertainty shrouded by attacking plutocrats and whether this would be counterproductive insomuch that is harms the overall economy. Without sufficient capital to invest, wealthy businessmen cannot build new businesses, economic growth is stifled and jobs lost.

Allister Heath in The Daily Telegraph writes, “eating capital is the best way to impoverish a nation, reduce productivity growth and keep wages down…societies, where the most successful entrepreneurs are rewarded by the state seizing their assets, don’t prosper”. In other quarters, Piketty’s observations have been merely dismissed as neo-Marxist fluff.

Whatever the criticisms, whatever the scepticism, there is no doubting that Capital in the Twenty-First Century has tapped into the zeitgeist and helped put inequality at the centre of economic debate. That can only be a good thing for social harmony the world over.

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