Reality-mongering about inequality will get you nowhere

Oxfam is a “thinly disguised left-wing lobby group” tweeted a Conservative Parliamentary candidate earlier this week after the British branch of the development charity reported that the five richest families in the UK boast more wealth than the poorest fifth of the population put together.

It’s an interesting definition of left-wing where your deep red political stripes are inadvertently displayed by the mere fact of relating what is actually happening in the world.

Charities can now so easily slip into the crime of “reality-mongering”. Last December, Christian food bank charity, the Trussel Trust was damned as “political” by Tory minister, Iain Duncan Smith, for daring to suggest that the government’s benefits sanctioning regime and the soaring price of food might have something to do with the fact half a million people are regularly forced to call on its services.

But there is, despite the brickbats, an unmistakable thirst for more reality, unencumbered by ideological blinkers. Manchester University’s “Post-Crash Economics Society”, for example, was formed by students last October, because they say orthodox economics “cannot explain the world we live in”.

“Neoclassical economics in the era of neoliberal triumph, beginning in the late 1970s,” say two Marxian economists, John Kennedy Foster and Robert McChesney, “promoted versions of economics that eschewed reality for pure market conceptions.” In their obsession with the fantasy battle of state versus market, conservatives simply cannot see inequality or the growing trend towards monopoly in contemporary capitalist society.

 The world won’t listen

Oxfam’s problem does not lie in its ability to discern the existence of huge inequality, but in its plaintive appeal for the British political system to do something about it. For long ago British politics forgot how to listen.

“The only effective design for diminishing the income inequality inherent in capitalism is the progressive income tax,” noted famed 20^th century economist John Kenneth Galbraith, in 1992.

“That taxes should now be used to reduce inequality is, however, clearly outside the realm of comfortable thought,” he went on.

To appeal to conservatives to raise taxes on the wealthy, is rather like imploring Michael Bay to embrace slow cinema. The tragedy of British politics is that the centre-left is almost equally resistant to causing the wealthy even mild discomfort. In this sense, as one economist has noted, Britain has an effective one party state.

The last Labour government, for example, slashed capital gains tax (the tax you pay, if you make money from selling shares) from 40 to 18%, a cut that was, ironically, partially reversed by the coalition. Labour did raise the top rate of income tax (on income above £150,000 affecting 1% of taxpayers) to 50% and has pledged to reverse the coalition’s cut back to 45%. But, in order not to appear “anti-business”, the party says a renewed 50% rate would only be temporary.

 Robin Hood in reverse

Corporate income tax was reduced by the 1997-2010 Labour government from 33% to 28% (it was 53% in the 1970s) and has been scythed down to 20% by the current government (at the same time as raising VAT which affects everyone). Labour has said – exposing an indelible stain of Bolshevism - that they will increase it back up to 21%!

By way of international comparison, Barack Obama, who has raised the top rate of tax in the US slightly, wants to cut the headline rate of American corporate income tax from 35% to 28% (the effective rate, taking into account all the exemptions that can be got, is 19%).

Corporate income tax is a tax on company profits and is frequently presented by politicians, who want to reduce or better abolish it, as a tax on economic growth. But these profits pay for all the dividends to large institutional shareholders, like hedge funds, and astronomical executive salaries and stock options – thus making a massive contribution to inequality.

Moreover, many wealthy people have, for tax purposes, transformed themselves into corporations to take advantage of the fact that the rate of corporation tax is so much lower than the top rate of income tax. Half as much, in fact, in the UK.

“The more corporation taxes are cut,” says the Tax Justice Network, “the more wealthy folk will shift their income out of personal tax category and into corporate forms, so as to pay the lower corporate tax rate. The more they do this, the more governments feel they must cut personal tax on wealthy people to stop it.”

It is worth recalling that when the profits tax (the precursor to corporation tax) stood at 50% in 1960s Britain, economic growth - at 3.27% - was more than double its current rate.

There is no appetite among the political class in Britain, for raising taxes on the wealthy in other ways either. While EU, led by Germany and France, is determined to introduce a financial transactions tax (a tax of 0.1% on the sale of shares and bonds, AKA the Robin Hood tax), a measure highlighted by Oxfam as a way to reduce inequality, the British government is opposed and the Labour opposition deafening in its silence on the issue.

Britain’s one party state on tax is so entrenched, it will survive even its dissolution. Scottish First Minister, Alex Salmond, is pressing for independence from Britain in September’s referendum, but is also in favour, should the yes vote win, of an even lower corporate tax rate than the UK – three percentage points lower, in point of fact.  In addition, Salmond parrots the UK government line that, while a financial transactions tax is eminently desirable, it can only be introduced if the whole world agrees, because unilateral implementation would damage the Scottish financial services sector. Isn’t consensus lovely?

 Don’t redistribute, distribute

But besides the futility of petitioning a deaf political culture, Oxfam’s inequality campaign is doomed for a more integral reason. For it rehashes the time-honoured method of reducing inequality through tax redistribution. At the risk of sounding simple-minded, if you don’t want the outcome of gaping inequality, perhaps you ought to alter how wealth is distributed in the first instance.

“If change is ever to occur,” writes Gar Aperovitz in his book, America Beyond Capitalism, “an assault must ultimately be made on the underlying relationships that have produced the inequality in the first place – especially those involving ownership and control of the nation’s wealth.”

There was acclaim across the political spectrum, including from Conservative MPs, for the 2009 book, The Spirit Level. Authors Richard Wilkinson and Kate Pickett showed how problems such as obesity, mental illness and violence were made worse by greater economic inequality. But what seemed to escape understanding was that Wilkinson and Pickett did not place all their faith in the traditional method of combatting inequality, tax redistribution. They placed greater importance in changing the “underlying relationships” through democratic employee-ownership of companies, as a way of addressing inequality at its root.

Capitalism produces inequality as surely as breathing produces carbon dioxide. And unsuccessful capitalism – the kind we have now – generates extreme inequality. According to French economist Thomas Picketty, if the rate of economic growth is below the after-tax rate of return on capital, inequality will spiral.  Those are precisely the conditions – insipid growth and capitalists demanding a high rate of return - that we have experienced in the West for the past 30 years.

To return to Alperovitz, he argues that the future of efforts to reduce inequality do not reside in tax redistribution but in worker and municipally controlled economic enterprises. “There is no way to achieve movement towards greater equality,” he writes, “without developing new institutions to hold wealth on behalf of small and large publics.”