An explosion of inequality [is] holding back the fight against poverty. Do we really want to live in a world where 1% own more than the rest of us combined?
The mainstream debate over this issue fails to understand the true nature of the problem (although, interestingly, The Guardian article referred to above is unusually far sighted in recognising some of the causes of inequality).
The pro-free market side is wont to point out that such inequality “doesn’t matter” and that governments should not do anything to interfere with the progress of business. The likely call from the opposite side, however, is for increased taxation and redistribution and, indeed, Oxfam itself stressed the need for a greater crackdown on tax avoidance by large, multinational corporations. However, the reality is much more nuanced than the false dichotomy between “pro-business” and “pro-government/anti-poverty”.
On the one hand, we can agree that wealth inequality does not, on its own, create any problems for the generation of wealth and the reduction of poverty. The common attitude towards the rich appears to assume that someone like Warren Buffett or Bill Gates has tens of billions of dollars lying around in a bank account for them to spend and enjoy.
The reality is that these figures represent the value of capital goods – machines, tools, factories and so on – that are invested in producing goods and services that everyone wants to buy. If these resources are in the hands of just a few people – say, “the 1%” – who most accurately devote them to the most urgently desired needs of consumers, then there is nothing economically deleterious with wealth inequality. Indeed, wealth inequality, in this scenario, is exceedingly good as any attempt to reduce it would divert resources into the hands of those less capable of directing them to the ends that people desire, or into the hands of those who would consume them. It is capital investment – more capital invested in more production processes to churn out more products that people need – not taxes and redistribution that solves the plight of poverty.
However, this scenario is conditional upon the crucial aspect that resources must be in the hands of those who are best suited to serving the needs of consumers. In other words, those who are rich must have become so by meeting those needs. Unfortunately, it is patently obvious that the current ownership structure does not reflect the voluntary choices of consumers. Rather, it is the product of crony capitalism, of cheap printed money that is ploughed into malinvestments, and of taxpayer funded bail outs when it all collapses. The growth in wealth inequality is due not to the fact that consumers are voluntarily choosing to place that wealth in the hands of a few select people; it is because the government is throwing cheap money at this tiny elite so they can steal all of the world’s assets.
What, then, is the solution to this problem? Taxation and redistribution would clearly compound the economic evils rather than solve them. And, in any case, in spite of the hullaballoo about tax avoidance, the rich will always be able to influence tax policy to their benefit and to arrange their affairs so as to avoid it as much as possible.
Instead, what is needed is a wholesale withdrawal of the state from either supporting or hindering anyone in the pursuit of gaining wealth. All wealth should be obtained through the voluntary nexus of serving the needs of consumers and everyone should gain their riches through their abilities and not through their political connections.
One interesting question is what might such a world look like? Would it encourage wealth inequality or would such inequality be unlikely?
On the one hand, it is arguable that wealth would still be highly concentrated. Genuine entrepreneurship is a rare talent and is likely to always remain so. On the other hand, however, if that is the case it is also likely that those particular individuals who own the world’s resources will rotate relatively quickly, with the top dogs remaining on the pedestal for only a short time. Indeed one aspect of the current wealth divide that is ignored is whether the same people remain stuck within their wealth/income group or whether there is relatively fluid movement between the different groups.
Successful entrepreneurs make their biggest successes when they are small, nimble and contrarian. Once they have achieved their wealth, however, and their enterprises have morphed into large, multinational companies, they become large, unwieldy, inefficient and complacent. A former rebel becomes a part of the establishment who then becomes vulnerable to the insights of later entrepreneurs.
This can perhaps be illustrated with the technology industry where no, single player has managed to dominate each successive era. Microsoft put a PC into everyone’s home in the 1980s-90s; Google was the number one in internet search; Facebook was on top with social networking; and we are now, seemingly, in a fourth phase where Apple dominates smartphone technology and other hand-held devices. No single outfit has been able to carry through its dominance from one era to the next. Corporate dynasties and everlasting companies controlling everything will certainly not be a feature of a genuinely free market.
Even a stock investor such as Warren Buffett, who has profited from a great many businesses in numerous decades, would be unlikely to achieve the wealth that he has done. Buffett’s mantra of value investing relies upon the price of a stock to fall below the underlying value of the business, and for the price to then reach parity with, or exceed, that value. But the large distortions in stock prices – both up and down – have occurred precisely because of central banks flooding the markets with cheap, freshly printed money that results in excessive booms and busts. It is unlikely that Buffett, in a genuine free market, would have been able to buy and sell at such favourable prices as he was able to do in recent decades.
The same phenomenon also accounts for the wealth of Amazon CEO Jeff Bezos, who currently [2018] occupies the top spot on the list of the world’s richest individuals. As successful as Amazon has been, Bezos is unlikely to have achieved his level of wealth without Amazon having been one of the seemingly over-hyped and over-privileged “FAANG” (Facebook, Amazon, Apple, Netflix, Google) stocks, which have been the main beneficiaries of the artificial, stock market gains since 2008.
Moreover, it is also possible that a free market would serve to make capital ownership more diffuse. As wealth creation ensues and the standard of living rises, ordinary people will find themselves with increasing amounts of disposable income that they may decide to divert into saving rather than increased consumption. Such funds, through savings accounts and the bond market, may form the backbone of investment funds that are ploughed into productive use. Thus, ownership of the claims on the proceeds of production may be more diverse than it is at present.
Either way, however, we can be sure that the resulting structure of production and ownership will be one that best serves the desires of consumers, changing and adapting as the tastes of consumers change. Ultimately, it will always be the everyday folk, through their purchasing habits, who decide on the level of wealth inequality – not the state and central banks handing out favours to their political cronies.
Whenever there is the appearance of some headline berating large corporations for arranging their affairs so as to pay as little tax as possible on profits earned in the UK, the indignation from the general public seems to centre on the belief that the “lost” state revenue was somehow a “lost” benefit to the average citizen. After all, won’t lower tax revenues result in fewer hospitals and worse schools? Such was the fury greeting the news, on August 3rd of this year [2018], that Amazon UK’s tax bill fell from its 2017 figure of £7.4m to just £1.7m in spite of pre-tax profits having almost trebled.
Unfortunately for libertarians, tax avoidance (together with the deliberate blurring of the legal and moral distinction between that concept and that of tax evasion) has become a favourite topic of heavily indebted governments as they attempt to balance their books without reducing their profligate spending.
For anyone who has ever heard of him, Danny Alexander (now “Sir Danny”, for some reason) is something of a political has-been, having been ousted from his parliamentary seat and, consequently, his ministerial role of Chief Secretary to the Treasury in the 2015 General Election. Nevertheless, the following excerpt from a speech he made to the Liberal Democrat party conference in the autumn of 2014 remains one of the most chilling utterances of the state’s sense of entitlement with regards to taxation:
Liberal Democrats have led the crackdown on tax avoidance. The investment I announced at this conference in 2010 is now bringing in an extra £7bn. We are now insisting that tax dodgers pay the right tax up front – they will only get any money if their scheme is later proved in the courts to work. And we are using psychologists and behavioural economists in HMRC to get the money quickly. Tax dodgers beware – we know where you live, we know how much you owe, and now we know how you think. Your behaviour is unacceptable, and we are coming for our money.
Part of the vitriol of the general public is explained by the fact that people desire some kind of tax equality and don’t want to be shouldering the burden of public expenditure themselves when others appear to be shirking their alleged responsibility to “society”. Indeed many of the cries for reform all appear to be in the direction of making people their “fair share” of taxes – an amount that is, conveniently, never defined or quantified but always means more, in spite of the fact that the highest earners already pay the vast majority of income tax revenue. Yet the core focus appears to be that life will somehow be worse off without Amazon and Google paying tax in the UK.
This is, of course, nonsense. Profits that are retained by private shareholders (many of whom, incidentally, are ordinary people’s pension funds rather than wealthy fat cats) do not magically “vanish” from the economy. Rather, they are reinvested in productive enterprises that create capital goods in order to churn out more products that people want to buy at lower prices. Fewer profits retained by investors means fewer capital goods and fewer products on the shelves. So if that money disappears into the hands of the state it is not invested prudently in productive business. Instead, most of it disappears into the pockets of favoured state contractors to spend on wasteful projects – with very little resulting in marked improvements for the average citizen.
According to the 2014 Bumper Book of Government Waste, while Alexander was busy demanding more money from those who earned it, his was the same government that, in 2012-13, wasted the extraordinary sum of £120 billion on delights such as the following:
£1.2bn on subsidising foreign farmers through the Common Agricultural Policy;
£20.6bn on public sector fraud;
£406m on EU fraud and error (the UK’s share of a total amount of £5.5bn across the continent);
£3.0bn on benefits to people who don’t need them;
£145m on “ghost patients” on the books of GP surgeries;
£300m on unused medicine;
£113m in subsidies to trade unions;
And somewhat famously:
£4m funding by the Department for International Development to create an Ethiopian version of the Spice Girls.
Unfortunately, it gets worse. For these amounts are only the headline figures of a long schedule of smaller sums such as the following, the spending of which leaves one wondering whether to either laugh or cry:
A £200K grant from the Cabinet Office to multi-millionaire supermodel Lilly Cole to set up a website where people make wishes;
£76K was spent by Bournemouth Borough Council on a piece of 3D artwork intended to give visitors a “sense of arrival” (in hell perhaps?);
Bromyard and Winslow Town Council paid £32K to compensate a man who slipped on a berry in a churchyard;
£20K compensation was paid by Kirklees Council to a teacher who was bitten by a flea;
£4K was spent by Angus council on a whisky tasting event for international golfers;
£1K was spent on a council officer to investigate a picture taken of the mayor looking at her phone during an Armed Forces Day ceremony;
Preston Council spent £500 on an art performance consisting of a man walking up and down a flight of stairs;
£70 was spent by the Forestry Commission on a bunny outfit.
Every pound that is taken by the state to be spent on these wasteful ends is one pound less that can be invested in genuine, private enterprise that must produce products that people wish to buy. Which category of spending – public or private – are we really worse off without?
Some of the more extreme rhetoric with regards to tax avoidance – that the likes of Amazon and Starbucks have “blood on their hands” because hospitals have to deny treatment to patients owing to the lost tax revenue – is akin to a sick joke. Apart from the fact that those public officials who wasted all of the sums above are far guiltier, what about the lives that are saved because the state was not able to use Amazon’s tax revenue to throw bombs at civilians in the Middle East?
Yet even if we ignore this, the disapproving attitude of corporate tax affairs owes itself to the belief that companies are like vampires, sucking the blood out of Britain before fleeing into the night – and that they should be punished accordingly. There is no mention of the fact that, in contrast to the state, these companies are creating jobs and producing stuff that people want to buy – and right at the time when we are barely out of a deep, state-induced economic malaise and so should be celebrating what little success there is. It is true, of course, that most large corporations are in bed with the state and benefit from state largesse. However, this should be dealt with directly by removing state regulatory privilege and making businesses wholly dependent upon their ability to serve consumers. It is not an argument in favour of increased taxation.
In any case, every company has to pay tax somewhere even if it is at a lower rate in an alternative jurisdiction. If Google pays tax in Ireland then what is wrong with that? To the rejoinder that this means a foreign government and foreign public services are benefiting from profits earned in the UK, well doesn’t the £13bn or so foreign aid budget do the same thing?
Increased taxes on the people who take risks to provide us with jobs and produce goods and services that improve our lives do not make things better for “us”. It only benefits the state and those recipients of its bloated, wasteful spending. Fewer taxes and vastly reduced spending, with more of the state’s legitimate functions being wholly privatised, would be far better for all of “us”.
In response to the state-induced cost of living crisis, there have been prominent calls to cut the rate of various taxes that the state imposes upon its working citizenry. One such area where this has been most pronounced in the UK is the rising cost of petrol, in which fuel duty and VAT can amount to up to 40% of the price paid at the pumps.
Prominent in this regard has been Conservative MP John Redwood, whose Twitter account pretty much reiterates the same, daily message like a long playing record:
However, while cutting taxes is always welcome, it will be next to useless in improving economic conditions unless it is accompanied – or even led by – another, very critical step: making drastic cuts to government spending.
Economic prosperity is dependent upon a system of private property, free exchange, market prices and profit and loss. Through these mechanisms, individual people direct scarce resources to where they can produce the most value. Over time, this leads to the production of more goods and services at increasingly lower prices. The more that the government interferes with this system – and the greater the number of resources it siphons off to its own favoured projects and boondoggles – then the less there is left over to devote to what we actually value the most.
Taxes are only one method of funding the state’s profligate waste. Governments can also resort to borrowing and inflation, and usually have little difficulty in doing so as long as they are prepared to put up with widening budget deficits. Indeed, in the past, it has been quite possible for “conservative” governments to cut taxes while also increasing the size of the state’s stranglehold over the economy. Thus the fact that tax cuts will mean that people get to keep more of their paper money will do little good if the state will simply borrow and print more to make up for their shortfall. The loss will just be felt elsewhere in the form of higher prices for fewer goods and services.
As a follower of the “Austrian” School of Economics, I believe statistical measurements such as GDP are highly flawed. Nevertheless, they can, at least, convey a general message over time.
The correlation is therefore clear: increases in government spending are retarding our economic prosperity. If we really want to solve the cost of living crisis, we need to shrink government’s slice of the economic pie as much as possible. Cutting taxes will do nothing unless and until this is addressed.
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