Should the Rich Be Taxed More? The Fiscal Inequality Coefficient

Reproducimos a continuación la referencia al artículo ‘Should the rich be taxed more? The fiscal inequality coefficient’, de John Hatgioannides, Marika Karanassou y Hector Sala, publicada el 27 de agosto de 2017 por el rotativo The Guardian : https://www.theguardian.com/business/2017/aug/27/should-the-rich-be-taxed-more-a-new-paper-shows-unequivocally-yes

 

Should the rich be taxed more? A new paper shows unequivocally yes

Larry Elliot

Denis Healey never actually said he intended to squeeze the rich until the pips squeaked. The man who would soon be Labour chancellor was referring solely to property speculators when he made the remark during the February 1974 election campaign.

But the rich knew full well that Healey was coming for them, too. At the previous year’s Labour party conference, he said: “We shall increase income tax on the better off so that we can help the hundreds of thousands of families now tangled helplessly in the poverty trap, by raising the tax threshold and introducing reduced rates of tax for those at the bottom of the ladder. I warn you, there are going to be howls of anguish from the rich. But before you cheer too loudly, let me warn you that a lot of you will pay extra taxes, too.”

Healey was as good as his word, with the top rate of income tax set at 83%. By contrast, the manifesto pledges outlined by John McDonnell, the current shadow chancellor, were modest. Under a Jeremy Corbyn government, someone earning around £125,000 or more would have been eligible for a new 50% income tax bracket and there would have been a 45% rate for people on more than £80,000.

Still, this is a different age. The abiding principle is that we should cut the rich some slack because the tax system needs them. Reducing tax rates for the better off is supposed to lead to a higher tax take by stimulating entrepreneurship and making the super-rich work harder. For those who don’t believe this neoliberal fairytale, there is a fall-back position: the top 1% pay a lot more than 1% of tax receipts – and the proportion has been rising. The top 1% of earners in the UK accounts for 27% of income tax receipts, more than double the percentage when Healey was at the Treasury. So, stop grumbling, we’re told. Without the sacrifices being made by those at the top, the cuts would be even deeper.

This, though, is not the watertight case for the defence of the rich that it appears at first sight, as is demonstrated by a new paper from John Hatgioannides of the Cass business school, Marika Karanassou of Queen Mary University and Hector Sala of the Universitat Autònoma de Barcelona and IZA in Bonn.

The trio accept that in “an absolute, dry, sense” the rich are supporting the tax system more than any other group, but say this tells only half the story. The past four decades have been extremely kind to those at the top. They have seen their incomes grow faster than the rest of the population and hold a far bigger share of wealth in the form of property and financial investments than the rest of the population. Over the years a bigger slice of national income has gone to capital at the expense of labour, and the rich have been the beneficiaries of that, because they are more likely to own shares and expensive houses.

The trend has been particularly strong in the US, where labour’s share of income has fallen from a recent peak of 57% at the end of Bill Clinton’s presidency to 53% by 2015. The Gini coefficient – a measure of inequality – has been steadily rising since 1970 and is now at levels normally seen in developing rather than advanced economies.

Hatgioannides, Karanassou and Sala seek to take account of these profound changes in the distribution of income and wealth. They do so by dividing the average income tax rate of a particular slice of the US population by the percentage of national income commanded by that same group and by their share of wealth.

They then look at whether by this measure – the fiscal inequality coefficient – the US tax system has become more or less progressive over time. The findings show quite clearly that it has become less progressive.

In terms of income, the poorest 99% of the US population paid nine times as much income tax as the richest 1%, both when John F Kennedy was president in the early 1960s and when Ronald Reagan beat Jimmy Carter in the 1980 race for the White House. By 2014, they paid 21 times as much.

Similarly, the bottom 99.9% in the US paid 28 times as much tax as the elite 0.1% in the early 1960s and the early 1980s, but by 2014 they were paying 76 times as much.

The same trend applies – although it is not pronounced – when income tax is divided by the share of wealth. The bottom 99% paid 22 times as much income tax as the wealthiest 1% in 1980 but were paying 47 times as much in 2014. The bottom 99.9% paid 58 times as much income tax as the top 0.1% before the onset of Reaganomics; by 2014 they were paying 175 times as much. The paper’s research does not extend to Britain, although given that the distribution of income and wealth has also been tilted in favour of the rich and the very rich, a similar picture would almost certainly emerge.

As the authors note, since 1980, economic policy making has been dominated by the idea that deregulation, less generous welfare and tax cuts will stimulate higher investment, higher productivity, higher growth and higher living standards for all. None of this has occurred and, what’s more, the social mobility in the decades after the second world war has been thrown into reverse. The great American dream – the notion that anybody can strike it rich – is dead.

Even so, the main beneficiaries of Donald Trump’s tax plan – assuming he is able to get it through Congress – will be big corporations and the highest earners. 

Any suggestion that this is entirely the wrong approach is met by three arguments. The first is that the call for the rich to pay more is simply the politics of envy. The second is that it would be a return to the bad old days. The third is that the rich would find ways of avoiding paying any more. Yet Hatgioannides, Karanassou and Sala show there is a reason for the bulk of taxpayers to be unhappy about the way the system is loaded against them. What’s more, for the average US worker, the bad old days weren’t really so bad. Finally, saying that the rich would never pay up is defeatist; tax loopholes could be closed, tax havens shut down, wealth – especially in the form of immovable land – could be taxed rather than income.

The argument that we should all be grateful to the ultra-rich is bunkum. As the paper concludes: “The overarching policy question is the following: in the current era of fiscal consolidation, should the rich be taxed more? Our evidence suggests unequivocally yes.”