Many people assume that tax increases are the only realistic response to excessive income inequality. They are wrong. There is a better way.
The International Monetary Fund first came out in favour of greater “redistribution,” a code word for higher taxes, in February. It joins the Organisation for Economic Co-operation and Development, which issued a big document decrying the privileged position of the richest residents of rich countries in 2011. The OECD has just called for “policies to restore equal opportunities,” another code for higher taxes.
The IMF and OECD certainly are not alone. This year, Thomas Piketty’s “Capital in the 21st Century” has been at the top of best-seller lists. The French economist has helped popularise the idea that an overly privileged “1 percent” needs to be restrained. His main proposal? The elite should pay more in taxes.
Income inequality is worth worrying about. Ethically, pay levels should bear some relation to the worker’s actual economic contribution. Of course, the value of work cannot be measured precisely. But success in the modern economy is too much of a group effort for bosses to be paid massively more than other employees. The rapidly increasing rewards for top executives, identified by Piketty as the main source of increasing inequality in the United States and other rich countries, are unjust.
More pragmatically, greater wage equality is good for the economy. Additional funds collected by the less well-off are more likely to generate spending and jobs than the same money placed in the bank accounts of the rich. And when incomes are more equal, the relatively poor are less tempted to borrow from the rich - a financial tie which often ends in disaster.
These convincing arguments have had little political impact in any country. After a blip following the 2008 financial crisis, the rich have continued to get richer faster than the rest of the population. The Occupy movement and other protesters against the trend have been less successful than campaigners against big government, such as the Tea Party in the United States.
It’s not clear why inequality has struggled to gain political traction. Some people see a conspiracy of deception by the powerful; others an epidemic of ignorance among the weak. Both of those may play a role. In addition, the official income distribution statistics vastly exaggerate the pain of the non-elite. I also think that many people readily accept economic elitism.
There is yet another possibility. Perhaps many of the people who want more equality do not like the main solution on offer: higher taxes. They may think that overly generous pay for some is a lesser evil than an expropriating government.
After all, the widespread reduction of top tax rates, from an average of 66 percent in 1981 in OECD countries to the current 43 percent, was broadly popular. But the support for making the income elite put more into the governments’ coffers is weak. Even after the financial crisis created huge fiscal deficits and spawned widespread resentment of rich bankers, the average top tax rate increased by only 2 percentage points in OECD countries.
The popular reluctance to increase tax rates is not a rejection of the welfare state’s fundamental goals of helping the poor and providing basic services for all. Nor is it a repudiation of the secondary tenet that those who have more should contribute more. Even in a flat tax regime, 20 percent of a $1 million income is a lot more than 20 percent of $50,000.
Rather, the desire for flatter tax rates looks like a rejection of a particularly ambitious claim of the left. People seem to be saying that they do not trust governments to determine what levels of after-tax pay are really fair. If this explanation is right, anti-inequality campaigners should move to a different battleground.
Rather than demand higher taxes as a way of redistributing high incomes, they should follow the advice of the American political scientist Jacob Hacker and argue for a more just “pre-distribution” of incomes through wage cuts for top corporate executives. The loss at the very top could feed into somewhat higher real incomes for everyone else.
There have already been stirrings of this sort of rebellion, for example the sharp criticism of Coca-Cola’s egregious share award scheme. But much more is needed to change the social mood enough for a broader rollback.
Evangelists for greater social equality have three action points. First, take advantage of the mandatory disclosure of the pay packages of top executives at quoted companies. Name and shame campaigns can work. Second, base your arguments on justice or growth, not on anything that sounds like envy. Finally, don’t talk about taxes – people aren’t listening.