The rich only get richer

By 22.03.13BlogSeptember 2nd, 2020No Comments

Cutting tax for the rich does not lead to wealth reaching the rest of us. Deborah Hargreaves in the New Statesman

The social contract is unravelling,” said Angel Gurria, secre- tary-general of the OECD. Speaking at the end of 2011, he was commenting on the think-tank’s report Divided We Stand, highlighting the rise in income inequality across the developed world. We know the rich are getting richer and the poor are suffering. The question is why?

The Financial Times called the report the last rites for the trickle-down theory of eco- nomics. Trickle-down was at the heart of Reaganomics in the 1980s with Margaret Thatcher a close follower.

The idea was that if the rich got richer, their wealth would circulate throughout the income scale in the form of additional investment and job creation. A rising tide lifts all boats, ran the argument.
Policymakers could conveniently ignore calls for redistribution and instead concen- trate on cutting taxes and reducing govern- ment spending. This allows the market to allocate resources efficiently, according to proponents. Trickle-down – or supply side economics – has been the overriding eco- nomic theory of the past 30 years and suc- cessive governments have ignored the sub- sequent rise in income inequality.

However, this is a real-life experiment that has failed. In the UK, the gap between top pay and average wages has been rising sharply since 1979, yet there has not been any corresponding boom in investment. In fact, rising inequality has instead weakened the economy.

A report by the UN Conference on Trade and Development (UNCTAD) calls the theory of saving and investment that underlies trickle-down “highly questionable”. The UK has much lower levels of investment in research and development than France, Germany and Japan, for example.

The OECD report showed that the most striking effect of inequality over the past 30 years is not just that the top 10 per cent of the income scale moved further away from the bottom 10 per cent, but that the top 1 per cent and even the top 0.1 per cent has accel- erated away from the rest. This has been driven by top pay for “stars” in sport, enter- tainment and business as well as banker and executive bonuses.

High earners at the top of the income scale have not invested their capital as pre- dicted. Instead, their profits have been channelled into financial assets and per- sonal portfolios.

Far from helping those further down the income scale by creating jobs, this has actually driven up house prices in places such as London and New York, and fuelled investment in products such as commodity funds, which speculate on rising grain and commodity prices. This has, in turn, exacerbated a rise in food prices, making
things worse for those on lower incomes who spend a higher portion of their income on staples.

The figures are stark. In Britain, pay for those running our biggest companies – FTSE 100 – has trebled in the past 10 years to £4.8m or 185 times average pay. Wages for those on middle and low incomes have barely kept up with rising prices during that period. The share of GDP going to wages has shrunk by 12 per cent since the mid-1970s.

One in five workers in the UK is paid be- low two-thirds of the median wage (£13,600 a year for full-time work). This is expensive for the rest of the workforce: UK taxpayers transfer £4bn a year in the form of in-work benefits to subsidise low pay.

In thrall to the idea of trickle-down, successive governments have cut taxes for the wealthiest in society. The average tax paid by the top 1 per cent of taxpayers in the UK was above 60 per cent until 1988, today it is 45 per cent. Tax rates on top pay are currently at their lowest levels since the end of the Second World War. The reduction in top tax rates appears to be uncorrelated with saving, investment and productivity growth.

The rich have also become a self-reinforcing group since wealth has given them power and access to those in power. They have the ear of government to skew policy in their favour, which serves to perpetuate their entitlement.

At the same time, those at the bottom of the income scale in insecure and poorly paid employment, not to speak of those who are out of work, are castigated in public rhetoric as the skivers. They have lost out in the great redistribution of the past 30 years with many falling into debt in order to support their lifestyles.

The coalition government is going further by removing the link between social security increases and prices. The TUC points out, if the minimum wage had risen at the same rate as executive pay since its introduction in 1999, it would now be £19 an hour rather than £6.19.

In 2011, 14 million people were at risk of poverty or social exclusion according to the Office for National Statistics (ONS). The ONS also reports that the number of people who say they would be unable to cope with unexpected bills has increased considerably since the start of the financial crisis – up from 26.6 per cent in 2007 to 36.6 per cent. The proportion of people unable to afford one week’s annual holiday has also risen from 21.4 per cent to 29.7 per cent.

Stewart Lansley, well-known economist and author of The Cost of Inequality, has long declared the failure of trickle-down. In a pamphlet for the TUC, he says this market model has led to: “a slump in productive investment, while productivity growth has been lower than in the 1950s and 1960s. Finance and banking created almost no net jobs in the 15 years to 2007.”

Lansley calls it the livelihood crisis which he says is locked together with economic instability via soaring inequality “in a dangerous economic vicious spiral”.
“This is because the rising concentration of wealth, driven by the collapsing wage and rising profit share, has not only led to the declining opportunities that underlie the livelihood crisis, but has also contributed to economic fragility.”

However, despite this failure, govern- ments domestically and globally cling to the orthodox thinking that says cut taxes for the rich and everyone will be better off.
There needs to be a much stronger argument in favour of making the wealthy pay a higher share of the tax take. This could in- clude taxes on income and on wealth, such as a land tax or higher council tax bands.

Even Christine Lagarde, arch free-marke-teer who runs the IMF, has warned governments not to ignore the rise of inequality. “I believe the economics profession and the policy community have downplayed inequality for too long,” she said at this year’s World Economic Forum in Davos. “Now all of us have a better understanding that a more equal distribution of income allows for more economic stability, more sustained economic growth and healthier societies with stronger bonds of cohesion and trust.”

For the UK, the longer term challenge is to create a better-paid structure of work so the government does not spend billions of pounds subsidising low-paying employers.

The recent findings of the Commission on Living Standards, hosted by the Resolution Foundation, called for the establishment of new sectoral skills institutions to boost the supply of skilled workers. It also recommended the evolution of the minimum wage into a genuine low pay strategy. Subsidies for childcare could help those at the bottom end of the income scale back into work.

Gavin Kelly, chief executive of the Resolution Foundation, believes Britain could develop career structures out of existing low-paid sectors such as the care industry where investment in skills, learning and career progression could lift thousands of women out of low-paid insecurity.

However, it is going to take a huge exer- cise in political will to debunk one of the overriding myths of the past 30 years – that wealth will trickle down. Instead the government seems happier to castigate those who are out-of-work or in insecure employment rather than admitting that tackling inequality will benefit us all.