For all the FT’s attempted hatchet job, the left is right to fawn over Capital in the 21st Century.
For all the FT’s attempted hatchet job, the left is right to fawn over Capital in the 21st Century
Thomas Piketty has recently published one of the most thought provoking books of the past thirty years: Capital in the 21st Century. He was in town to promote it yesterday, and received much fanfare.
For all the FT’s attempted hatchet job, the British left is right to fawn over it. Piketty has taken a phenomenon that everyone understands and rigorously quantified it. His argument is that, with the returns on capital (r) exceeding those of per capita income (g), it is divergence, not equality, that is the logical outcome of twenty-first century capitalism.
If Piketty’s driving and often repeated equation of r>g does not trip off the tongue as quickly as the ‘haves’ and the ‘have nots’ it gets to the same fundamental dilemma. However much ‘alarm clock Britain’ produces ‘hardworking people’ who may or may not love their bingo, capital will continue to enjoy excess profit whilst the majority toil.
The fact that those workers now sit in air conditioned offices rather than the pit is no doubt progress but not, as Piketty shows, necessarily towards equality. In one of Capital’s first graphs, he documents how Britain is currently as unequal a society as it was in 1914, and that it is only going to get worse. In modern Britain, assets (be they land, property or stock), inheritance and, basically, the luck of one’s birth matter more than they did in the age of Asquith and Bonar Law. It is stunning stuff.
Given we are bombarded with stories of house prices, stocks and even the return on gilts outpacing real wages on the one hand and UK GDP on the other, the central contention of Piketty’s book slaps us in the face each day. And yet we must use it in a cold, rational way.
Put simply, we must be clear about what Piketty does and does not say. There are lessons here for One Nation Labour, and yet they are not necessarily of a default ‘big state’ or ‘tax-and-spend’ type.
Piketty’s up-front solution is two-fold: firstly a confiscatory rate on high incomes, and secondly a global wealth tax (to be fair, he recognises the latter as a utopian vision, but also contends that this should not stop individual G8 or G20 nations moving unilaterally in this direction). But the book is more nuanced than that.
Point number one is that Piketty’s proposed 80 per cent top rate of income tax is explicitly not predicated on raising huge sums of money, but instead on avoiding excessive remuneration in the first place. In the 1950s and 1960s Anglo-American executives had to face such punitive marginal rates of taxation that they weren’t too fussed about arguing for excessive increases since they’d lose most of the gains anyway. Since the 1980s such types have been incentivised to be greedy, and the result has been the removal of what Paul Krugman calls the ‘outrage constraint’.
Under the Etonian toff Harold Macmillan, the top rate of income tax in the UK was 90 per cent and Labour’s Tony Crosland could declare capitalism to be more or less over. Under New Labour the top rate was 40 per cent and the government was “intensely relaxed about people growing filthy rich”. Go figure.
But the key practical point here is not to use 75 per cent or 80 per cent top rates as a means to plug the deficit because, whilst helping at the margins, they probably won’t deliver on that end to any meaningful degree (since Piketty’s threshold would always be high, say €1m).
And he’s right. If you’re going to tax at that level the better argument is over equality, not revenue. Whatever the rights and wrongs of the rate, the deficit should be irrelevant to discussions over 50p in the pound.
In linking their 50p rate to the broader economic picture, Labour have doubly boxed themselves in: firstly in terms of basically ruling out a Piketty style levy on truly huge incomes, and secondly in getting involved in a nit-picky argument over whether the Laffer curve kicks in at 45p or 50p in the pound.
They might glad hand Piketty, but it’s all a bit false. Of course he won’t do it, but the politics of Osborne introducing a token mini-Piketty 60 per cent rate on incomes over, say, £5m in his final budget would be huge. It would be financially meaningless, but symbolically key.
Given the propensity of Conservatives like Tim Montgomerie and Ferdinand Mount to sensibly engage with the notion, wealth is arguably the better short term bet anyway. In my new book One Nation BritainI take the line that inheritance tax should be pegged to the value of the average UK home plus 5 per cent, and that the rate itself should be increased to 49 per cent. In 2010-11 only 3 per cent of estates paid inheritance tax, and yet the tax still yielded £3bn worth of revenue. It is an idea.
‘Death tax’ or not, there does seem some thread to pull at here. Particularly if the increased revenues could be used to cost cutting other taxes. VAT would be a start.
The redistributive function of tax is important, for Piketty is not talking about raising funds for a centralised utopia. As he puts it, “the state’s great leap forward has already taken place: there will be no second leap – not like the first one, in any event”. Taxes as a share of national income in Western Europe will bob around the 40-50 per cent mark, but it is not likely to leap up anytime soon. This book is about re-capitalising the poor, not remaking the state.
Though Piketty suggests nations should go it alone in these endeavours, he is canny enough to note the need for multi-national co-operation where possible. If Ed Miliband wants a practical take home that costs nothing, he should pledge to bring forward new transnational proposals on a broad-based Financial Transaction Tax, reform to taxation reporting regimes, and areas of harmonisation between countries’ income and wealth taxes.
These are all matters the UK should be advancing unilaterally but with an Obama not having to fight another election and a new young prime minister in No. 10, there will be a short-lived window to be bold. Piketty’s book suggests action is needed.
That said, I’m not sure I totally buy his line on the trente glorieuses: the thirty years after the Second World War when, Piketty argues, high growth was merely catch-up from the dislocation of the conflict. Doubtless pent-up demand played its role, but thirty years worth of administrations of all political persuasions also delivered that end. Decisions were made. Priorities were drawn. Certainly in Britain policies towards the welfare state, house construction, and, indeed, taxation had their effects.
If Simon Kuznets and others over did the case for the democratic state in the 1950s (essentially as an instrument of Cold War propapaganda), let us not do down its achievements in its most glorious era to date.
There does also seem to be an intermediary position he could make more of. If the problem is indeed individuals ownership of high yielding capital, then as well as taxing these individuals, the state could attempt to ride that bubble. If it’s not making enough g for the collective good then governments might as well look to gain some r.
The most obvious area is housing. As I’ve said before on these pages, by lowering the rate of the PWLB on the one hand or just extending the borrowing cap for local authorities on the other, any government could socialise some of the uptick in r without piling billions onto the deficit. If house prices depressed as a result, that would again correct some of the excesses of r>g.
In any event, Capital forms a huge work. It deserves the praise it is getting, and it has started a conversation that politicians of all parties should engage in. And yet it cannot be just that. For One Nation Labour in particular, it offers both the language (equality, re-distribution) and the means (targeted taxation that differs from tinkering with New Labour or Coalition rates) for a better society.
Tax to fund big government is not the goal here. It is tax to deliver a more equal society. And that is an appealing message.
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