Sunday, 20 July 2008

The rich are getting richer. So what?

The point I wish to discuss today is whether a growing gap between the richest and poorest in the UK is a problem.

There are two measures of wealth, first by reference to the value of assets and secondly by reference to annual income. Obviously the two overlap considerably because those with very high annual incomes often turn some of their income into permanent assets such as houses, fine furniture, works of art and financial investments. Successful entrepreneurs have substantial capital assets as a result of having substantial incomes, they enjoy both types of wealth. But the source of substantial assets is not always substantial income (something seen most clearly in the case of those who have inherited the family castle but cannot afford to maintain it) and some with large incomes do not have much capital because they invest their income at the roulette table or on the pleasures of the flesh.

What difference does it make to Fred Poor that his next door neighbour and good friend, Mr Jack Impecunious, wins a million pounds on the national lottery and changes his name to Mr Jack Rich? The answer, of course, is that it makes no difference at all. Fred still has the same income he had before, Jack's new wealth does not take anything from him nor does it prevent him receiving wealth he would otherwise have received. I must, of course, qualify these comments by saying that Jack's win might well benefit Fred through his desire to share his good fortune with his friends, but that is not guaranteed.

The position is the same if it is not Fred's neighbour but Sir Richard Branson who wins £1million. Overall the gap between rich and poor has increased because there is an extra million quid at the top end, but it makes absolutely no difference at all to anyone other than the recipient.

What difference does it make to Fred Poor if his neighbour (or Sir Richard) earns an extra £1million rather than winning it on the lottery? The answer, again, is: absolutely none.

Let us test the hypothesis by approaching it from the other end. What difference does it make to Fred Poor if his neighbour or Sir Richard Branson does not win or earn £1million? The answer is the same. Fred's capital and income are entirely unaffected by someone else becoming richer or not becoming richer.

We can then look at it from a different angle and ask what difference reducing the wealth-gap makes to Fred Poor. There are, fairly obviously, two ways of decreasing the gap, either you increase wealth at the bottom or you decrease it at the top, in practice the latter is necessary in order to find the funds to allow the former to happen. To test this we can take a simple example and ask what difference would result from Sir Richard Branson facing a one-off tax of £1billion. It does not take a genius to work out that it would reduce Sir Richard's wealth by £1billion and that the amount in the Treasury's coffers would increase by £1billion. If that were to be distributed evenly among all the people in the UK it is less than £20 each. If distributed among the poorest 10% it is less than £200 each. And it can happen only once for that sum of £1billion. Once it has been extracted from Sir Richard it cannot be extracted again.

Of course there could be such a one-off tax levied against a lot of rich people to make a dramatic difference to the total amount of wealth at the top, but it would still result in just a one-off payment to the poor. Or would it? The more that is taken off the top the more people below them will expect to share in the bounty. If the lump sum for the poorest 10% reaches £500 those in the 11-15% bracket will say "where's my bit?" and if £1,000 the next 5% might demand a share and then the 21%-25% bracket feels excluded and kicks-up a fuss. Then those on average salaries will complain that they are paying more tax than the poor but are not receiving any benefit from the windfall. The bigger the pot the thinner it will have to be spread to prevent a sense of unfairness developing. One thing that is an absolute certainty is that no one will become rich by hammering the rich with a one-off tax. It is certainly the case that the very poorest could receive a much needed small one-off payment but I fail to see how that will make any real difference to anything.

There is a further dimension to this argument which is what is likely to happen after the one-off redistribution has occurred. Receiving a lump-sum of, say, £5,000 will not increase Fred Poor's wages. He could invest it at 6% and receive £300 a year which will make him marginally less poor but marginally less poor is all he would be. Sir Richard Branson would be down £1billion but would still be earning a lot of money (subject, of course, to the continued success of his businesses) and in all likelihood will build his wealth back up to the same level as before in a few years. And then the complaints about the wealth-gap will be exactly as they were before the one-off tax was levied.

At this stage it is worth taking one step back in the argument. In the illustration I have used the starting point of redressing the balance is to take £1billion from Sir Richard Branson by way of tax. In a developed society it can only be taken by tax not by any other method. I have assumed that the money will then be paid to the poor in the UK because that is necessary to maximise the reduction in the gap between rich and poor. Both the collection and payment of the money will not happen by magic, they will be administered by the government. The whole scheme would require the government to be trusted not to use the windfall of £1billion for any other purpose. Maybe they can be trusted, maybe they cannot, but governments of both parties have long and ignoble histories of using windfalls to fill gaps in the Treasury's books. At very least we could expect them to deduct a percentage for the costs of administration which would result in the poor receiving less in total than was extracted from the rich.

I am not ignoring the argument that the rich could face high levels of income tax but I discount that as a solution because history shows rates of income tax above about 40% to result in reduced receipts.

Complaints about the gap between rich and poor increasing are just empty bleatings because the increased wealth of the richest does not cost the poorest a single penny. They complain that the gap is getting bigger, I respond with the most valuable question in history: "so what"?

1 comment:

Anonymous said...

We've got a long way to go before the UK has the same gap between rich and poor that they have in India! The sky has not fallen in on them yet.