This post is part two in a series about how to counter modern populism’s big ideas (or lack thereof). This series will discuss populism’s three big topics: wealth inequality, immigration and nationalism. These posts are longer than normal, but these are deep dives into big topics – and real solutions don’t fit in a tweet.
This essay is about wealth inequality: What is it, what ideas have been introduced to address it, why none of them will work, and how to actually deal with it.
To hear Bernie Sanders talk about wealth inequality, you would think members of the financial sector were running around robbing 99% of American citizens at gunpoint. However, underneath the political rhetoric, it is worth noting the Senator’s diagnosis of numerous elements of today’s problems are valid. The 2018 World Inequality Index highlighted that from 1980 to 2016, the top 1% of the planet captured 27% of all total profits from growth in the world economy, while the bottom 50% captured only 12%. Corporations are capturing higher returns than ever before while the incomes they pay people have actually decreased in value over time due to the fact that they aren’t increasing at the rate of inflation. This is especially noticeable because people are working longer hours than ever before, feeling increasingly pressured by the rise of technology and contract work to put in all the hours they can – or be replaced. Sanders, like many populists, has proven himself a capable diagnostician of economic ills. Where he may not quite have stuck his landing is in the explanation as to what is causing these things in the first place or how they can actually be solved to the betterment of the majority.
Wealth inequality (the total value of everything you currently own versus what other people own) is essentially a combination of a few different kinds of economic inequality rolled into one: income inequality, labour inequality, and a few major shifts in ownership of capital. The first issue is income inequality, which measures the money you earn versus the money others earn. The growing divide in incomes between rich and poor is important because corporations are making higher profits than ever before and the percentage of revenues that is shared with the employees is decreasing. That shows that while more money is being made, it is not being given back proportionally to those who actually helped generate it.
Lower incomes matter for another reason: they show that there has been a major shift in the type of jobs people have today. Independent work, or the ‘gig’ economy, has increased the number of freelancers, contract workers and crowdsourced workers involved in the economy today. More people working is undeniably a good thing: the problem is that because it’s contract to contract, they generally have less leverage in negotiating their salary and therefore on average get paid less. Another problem is that the majority of these workers often don’t have the benefits, like health insurance, that come with a full-time job. The current social security system has yet to catch up with the gig economy model, meaning right now, governments have done little to help workers who work multiple jobs in order to pay their bills – which is now sitting around 8% of all American workers.
The final issue is who owns what. In the last 30 years, the revenues held by corporations and private companies have almost tripled while those held by countries and governments have been reduced from 65% of national wealth to less than 30%. That means that big corporations own more while the rest of society owns less, minimizing government’s ability to regulate the economy and address inequality. As previously mentioned, this share of profits isn’t trickling down to most workers. That’s a problem because money saved away isn’t re-invested into the economy to help it grow or help create more jobs, which feeds into a cycle of those corporations keeping more excess profits and workers getting a smaller overall percentage of the money they help make.
When it comes to reducing wealth inequality, politicians each have their own ideas about how to solve it. Amongst populists, there are two camps: stop the forces putting downward pressure on wages and taking jobs, or raise taxes to collect more of the money and give it to everyone else. On other words, blame immigrants and free-trade or take more money from the top 1%. Both sound great in theory, but neither deals with the roots of the problem. While some jobs are being lost to immigrants or overseas workers, the majority are lost to technology – cancelling free trade deals and locking out immigrants doesn’t stop companies from investing in robots and automated cars that will replace factory workers and Uber drivers, nor does it stop those companies from collecting all the profits and keeping them for themselves. After all, when workers are replaced and there aren’t staff left to pay, the corporations get to keep an even higher percentage of overall profits.
Raising taxes on the rich is in the ballpark of a good idea, but doesn’t really help if the areas where the surplus profits actually end up aren’t targeted. Raising taxes on the rich and increasing corporate tax rates can mean a lot of work and some genuinely negative economic impacts on things like growth for what doesn’t end up being very much money. Raising the marginal income tax rate on incomes above $10 million to 70% would only raise about 0.3% more than tax revenues today and could cost a great deal more than that in administration costs according to some estimates. The reason that doesn’t add up because no billionaire has ever earned their money by taking home over $1B in actual income – it’s the value of their financial portfolio or their companies that have increased to those levels over time. Tax loopholes in different countries also make it all too easy for corporations and the wealthy to avoid paying their fair share – so an alternative approach to “let’s just raise income taxes on the rich” is needed as well to deal with this problem.
To tangibly make a dent on addressing wealth inequality, politicians need to look beyond getting a larger share of revenue and focus on everyone getting a larger overall share of profits that are right now only going to a select few. Solutions need to focus not on directly taking wealth from individuals and redistributing it, but on creating programs that support those who need it and ensuring funding for those programs is taken from areas of the economy that can afford to pay it. That means changing the way taxes are administered by taking a hard look at where these huge concentrated profits actually end up. One idea is to target wealth where it actually grows. Taxes on incomes and property work great until you realize that the value of land in cities, money stored in investments and money that is inherited, three areas where huge unearned sums are passed down, aren’t covered by that system. The other piece to note is that the aim of an economy isn’t necessarily to grow; it’s to become more productive and provide higher returns to more people. Keeping corporate taxes low ensures companies can make investments into equipment that increase their productivity and output. But if companies could make investments into equipment or people tax-free, than taxing the rest of those profits actually shouldn’t hurt productivity at all.
The first solution needed to counter populist ideas is tax reform – these are dull but hugely important details. The first is a change to how we tax property. Land in the world’s 50 largest cities holds only 7% of the populations but makes up 40% of a cities economic value. That divide means that people can’t afford to buy homes unless they already own one, and gives property owners the ability to charge more and more for rent from those with no alternative. Stagnant wages also mean that it is getting more expensive to live near where you work. Instead of taxing the value of the property, governments should tax the value of the land owned – that switch would boost the tax take by 9% in major US cities annually without substantial economic damage – primarily because the money would only be raised from those who could already afford to pay it.
The second part of this solution is to change the way we tax money that is inherited, an easily avoided but enormously simple way of raising revenues from people who did not earn them. If done correctly, taxing inherited money can have little negative economic impacts and results in huge reductions in wealth inequality.
The third solution is to take a look at how we tax increases in wealth. Importantly, that does not mean a ‘wealth tax’ – these can be costly to administer and generally don’t yield the kind of returns that merit the work involved. There are also lots of grey areas between how things are valued: sending a bureaucrat to measure the value of an art collection involves a lot of guesswork. Even if people were taxed based on the value of their art insurance, there are loopholes on loopholes that can be jumped through to avoid paying. Eight countries have scrapped their wealth taxes since 1990 because they were just too costly to administer and yielded small amounts on return. Politicians could increase income tax to 95% if we’d like, but no one has become a billionaire because they earned over $1B in income. Targeting wealth at the source means increasing the capital gains tax (the tax earned from the income people receive from their financial investments) and closing the loopholes that let people avoid paying it.
The fourth solution is to fix the way we tax businesses. Technology companies aren’t factories – their value isn’t tied to tangible equipment and things they make, but to algorithms and data. That means taxing them in the same way as we tax everyone else results in Google paying only about 6% of their profits back annually when the corporate tax rate in America is 25%. That needs to change. Slashing corporate tax loopholes is step one. The other change is two-fold: first, corporate tax rates should be higher than the 25% seen in the United States today. But there should be tax exemptions given to companies who invest in assets or equipment. That way, a higher corporate tax rate doesn’t drag on productivity or job creation. Instead, it targets the swollen profit margins of big firms. An additional idea is to change the way corporate profits are taxed from a flat system (25% on all profits) to a more progressive one based on profits (10% on the first $500,000, then 15% on the next $1.5 million, etc.). This, if designed to target profits and cleverly put together, would create more flexibility for small businesses while targeting the profit margins of larger firms who were not actively supplying and creating jobs within local communities.
The fifth element needed to redress wealth inequality is a rethinking of the way we support workers who don’t have stable jobs or don’t get benefits from their employers. Populists from Italy to Canada have a habit of declaring war on ‘free-riding companies’ who hire contract workers. But if the gig economy creates jobs, consumers like it and workers seem generally happy, then the aim of an approach should be to make the system better instead of destroying it. Any government who bans Uber eats is no friend of the people. Government-backed health insurance schemes tied to workers instead of jobs would be a good start. Another would be to change labour laws and give ‘gig’ workers clearer rights to ensure no one working is being taken advantage of and cases can be taken to court when abuses occur.
There are other structural problems facing global economies that exacerbate inequality in the big picture – too much money being concentrated in too few sectors and firms being one of them, and the lack of citizen ownership of personal data being another. But when it comes to redressing wealth inequality, it helps to remember: populists who speak of driving away worker competition and raising taxes on the incomes of the rich aren’t helping to solve the real problems. Politicians who can speak to protecting contract workers against abuses, and are for making corporations and the rich pay their fair share without hurting the economy, can offer real economic solutions for the future that solve real problems. But solving real problems is not as much of an objective when it comes to discussing the politics of immigration.
Next up, Immigration: why it is so contentious, why people are actually mad and how to create an immigration system that works for everyone.