Why the World Wants to Tax the Rich

Gareth MorganTax and Welfare

The Economist magazine leads its latest issue with its prescription of how to increase tax of the rich. At last we have arrived at the point where the most conservative proponents of market economics admit that the past 30 years, since Reaganomics and Thatcherism were unleashed, has resulted in a serious distortion of our tax regime. The only opposition to significant reform is now the ugly Hard Right rump, which favours jungle economics and taxes only to pay for their security forces and lazy or paralysed politicians.

It is indeed a revolution that has swept the world’s financial press as, finally, there’s recognition of the damage wrought from policies that have allowed greater and greater wealth disparity in most developed economies. The damage from financial deregulation and the enthusiasm of central banks to distort wealth distribution by essentially directing banks to lend on property in preference to all other forms of credit, plus their utter negligence in controlling the activities of shadow banking, spawned an orgy of property speculation and deterioration in commercial bank balance sheets. Taken together with so-called taxation reform that in effect has exempted the rich from tax on the credit-fuelled capital gains, we have ended up with a grotesque polarisation of wealth.

That the conservative financial press – staring down the barrel of rolling recessions as the consumer-led economy stutters to a standstill – is acknowledging negligent central banking and distortionary taxation “reforms” as the cause – is the start of the fight back.

It’s been six weeks since we published The Big Kahuna and during the past month we have contributed to the New Zealand Herald articles about inequality, redistribution, tax and welfare. The responses to our suggested policy reforms have in general been favourable, albeit there have been reservations about the radical nature of the changes recommended. Be aware, we are not talking here about minor tweaks, this is substantial reform of the decrepit tax and transfer regime we have ended up with. Sure, the response from some critics has been to attach labels – communists, naive do-gooders, public enemy number one – resisting vehemently the concept of extending the tax base beyond just cash income to all income that accrues from wealth. How they will respond to this latest out-pouring from the Economist magazine, the bastion of conservative economics and dependable source of moral and economic guidance for the well-heeled, will be fascinating. Let’s hope their education is enhanced.

“There are three good reasons why the wealthy should pay more tax,” hails the Economist.

“Raising more money from the rich … can be done not by increasing marginal tax rates, but by making the tax code more efficient.” Starting to sound familiar? That means filling in the loopholes, like trusts and tax free income from capital.

“Since the main beneficiaries of the deductions are the wealthy, richer folk would pay most of that. And since marginal rates would be untouched [or reduced], such a reform would do less to discourage them from creating wealth.”

The Economist even goes so far as to support the “mansion tax”, proposed by Britain’s Liberal Democrats. There it is, unfudged straight shooting as always – the rich should pay more tax and they should not have access to gaping tax loopholes.

It’s not just the Economist that is awake to the damage wrought by tax systems that leak. In the United States – a country traditionally anti-tax and all for unfettered markets – the mood is the same. Calls from high net-worth individuals, like Warren Buffett, to tax the wealthy more have struck a chord. A September Gallup poll found 2-to-1 support for higher taxes on those making more than US$200,000 a year.

Lest you’re still festering in your increasingly lonely resistance to this emerging consensus to taxing the rich and redistributing the proceeds, economists at the IMF have joined the call, finding causal links from inequality to poor economic performance:

“Higher income inequality in developed countries is associated with higher domestic and foreign indebtedness”.

“Equality appears to be an important ingredient in promoting and sustaining growth. The difference between countries that can sustain rapid growth for many years or even decades and the many others that see growth spurts fade quickly may be the level of inequality. Countries may find that improving equality may also improve efficiency, understood as more sustainable long-run growth.”

No surprise, then, to hear from the IMF that “the view that income inequality harms growth – or that improved equality can help sustain growth – has become more widely held in recent years”.

New Zealand stands out a mile from other countries in the ambivalence it displays towards taxing wealth – particularly the wealth locked up in land and property. Even the US – not known for its aggressive tax stance – has a capital gains tax for goodness sake.

In The Big Kahuna we identify the sieve that is our tax system and show how to tighten it up. We also need to overhaul our welfare system to restore the rewards from paid work for those who choose to undertake it and provide the means for all to find a balance between paid and unpaid work.

The Big Kahuna policy combination provides a lower marginal tax rate on wages earned above $70,000 (from 33 per cent to 30 per cent) thereby achieving the outcome of most concern to the Economist – maintaining incentives for those with high skills to work, innovate and take risks.

While the Economist confined its enthusiasm to reforms which close tax loopholes, its logic equally applies to the tax/welfare reform we propose.

“Imagine a tax system which made the top rates on wages and capital more equal, and which eliminated virtually all deductions. It would also allow for a much lower top rate of income tax. The result? A larger overall tax take from the rich, without hurting the dynamism of the economy. Now that would be worth blowing your horn about.”

Cheers to the Economist, our policy prescription – and it is a revolution – is becoming more orthodox by the day.

Why the World Wants to Tax the Rich was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.