1% Global Wealth Tax
A solution to the financial crisis, global poverty, and climate change
Richard Parncutt, June 2012, revised August 2013
Imagine the following scenario, if you can. This is the year 2050. You are living in a retirement home and talking to an old friend. On the table is a newspaper. The headlines are dominated by a disaster on another continent. It is claiming the lives of hundreds of millions of people. Hundreds of millions are starving to death. Or perhaps hundreds of millions are dying from preventable diseases, because there is not enough water for drinking and sanitation. Or hundreds of millions of climate refugees are being prevented from entering richer countries, because those countries can no longer provide their own people with adequate food and water, let alone hundreds of millions of refugees. The refugees are being left to die, or worse: the rich countries are killing them, because they see no other alternative. Whatever the scenario, the main causes of this problem are clear: global population growth combined with global warming caused by human activity (mainly CO2), which is causing changed weather patterns, species extinction, ocean acidification, rising sea levels.
Remember the 2004 Indian Ocean tsunami? It killed about 230 000 people (165 000 in Indonesia alone). Remember being shocked by those figures? Did you find them impossible to comprehend? I certainly did, and I still do. Multiply them by one thousand, and we are talking about the consequences of global warming.
You tell your friend: We have known for decades (since the late 20th century, in fact) that global warming is happening as a result of human activities (Nature climate change; research by Stefan Rahmstorf) and is a major threat to ecosystems (unisci.com). We have known that climate change will increase hunger, reducing the total area of arable land and increasing food prices (World Food Program). At the same time as populations rise (wikipedia), crop yields will fall (wikipedia, climate.org). Global warming will also threaten fresh water supplies (climate.org), which will increase the incidence of disease. Rising sea levels and flooding will displace hundreds of millions. Different countries and regions will have different problems (e.g. Bangladesh). We also know about self-reinforcing circular processes that further accelerate global warming. Here are two examples. (i) Global warming will reduce the global area of forest, which has already been seriously reduced by human activities - and that reduction itself will further increase global warming. (ii) Oil companies now want to exploit oil reserves that have been made available by the receding artic ice.
According to World Food Program, "The biggest impact is expected to be in sub-Saharan Africa, with a projected 10 million (26 percent) increase in the number of malnourished children in 2050 compared with a no-climate-change scenario. Globally, climate change is projected to increase the number of malnourished children by 24 million (21 percent) in 2050 compared with the no-climate-change case." Please note: Such estimates consider only the direct affect of climate change on crops. They do not consider the indirect and largely unpredictable combined effects of climate change and species extinction (wikipedia). If just one species in a food production cycle is threatened, the whole cycle if threated (e.g. bees). Changing pests and pest populations pose additional and largely unpredictable threats (J Experimental Botany). For further relevant sources, check out the links from worldhunger.org.
We have known for decades how to prevent such catastrophes, or at least to drastically reduce their impact. Looking back in the year 2040, we will ask ourselves what we did to prevent this catastrophe. We will see that we did just enough to feel a bit less guilty about it - and not nearly enough to solve the problem. It was always a matter of too little, too late - too much talk and too little action. We will realised that we ignored thousands of warnings such as this text, pretending that they were exaggerated or "too emotional". We will see that we made ourselves feel better by inventing sophisticated excuses for doing nothing. It will be increasingly clear that we exploited the beautiful world that we inherited from our parents, and expected our children to clean up after us.
Please note that I am not talking about the effects of heat, wind, storms, floods, and fires (climate central), which will be catastropic enough. I am talking about lack of food and clean water. Current knowledge suggests that food and water shortages will lead to catastrophes of unprecedented dimensions.
Perhaps these predictions are exaggerated. But even if there was no threat to human beings at all, it would still be irresponsible and callous in the extreme to fail to take urgent action to slow and eventually stop global warming, because global warming is also threatening thousands of species with extinction (examples: bgci, wwf, biologicaldiversity). When these plants and animals are gone, they are gone forever. Whatever benefit we have from them - future generations will have to do without it.
Dealing with the skeptics
Global warming skeptics think that climate scientists are biased toward exaggerating the effects of CO2 production. In fact, the reverse is the case. The real problem is that scientists must specialise within a specific subdiscipline in order to have their research published in the best international journals. That makes it difficult for them to investigate complex, unexpected interactions between species and their environments, let alone develop global remedies. They tend to consider a part of a problem in great detail (the part that is relevant to their specific discipline) but ignore the broader context. For that reason there is little reliable research on interactions between different consequences of climate change and the effects of those interactions on future food supplies. But we can make reasonable extrapolations by combining sources of evidence from different disciplines.
So what can we do about those many people out there who are constantly claiming that the problem is exaggerated? It seems that some people are incapable of imagining disasters of this magnitude. They see stuff like that on TV and think it belongs entirely to the world of fiction. More generally, they cannot imagine relationships between cause and effect without having experienced both the cause and the effect directly. For that reason, they don't trust scientific research. In short, they think emotionally rather than logically. If something doesn't feel right, it must be wrong. Often, that is a good strategy in life, and that is basically how we are as human beings. Evolution has made us like this. But to deal with global warming we must go beyond evolution, which has not prepared us for problems of global dimensions. We must first turn our emotions off and look at the scientific evidence. The inevitable conclusion from that evidence is that disasters of the kind that I described are not only possible - they are also quite likely. Having realised that, we must turn our emotions on again, get a feel for the enormity of the problem, and do something about it.
Solving the problem - instead of just talking about it
Switch back to the year 2012. In fact, we can solve these problems, but we must make big changes and big progress in the next few years. It is a challenge, but we can do it. That is what this page is about.
To solve problems of this magnitude it is important to isolate the main problems and the main possible solutions and not to be sidetracked by subsidiary problems and incomplete solutions. I will try to do that in the next few paragraphs.
National governments are steeped in debt, a billion people live in poverty worldwide, and urgent warnings about climate change are being ignored. In all three cases, the main reason is lack of money. But the money is available - in abundance. The rich and mega-rich are growing steadily richer, but their wealth is not being directly taxed.
It is obvious where the money is, and it is obvious where it is most urgently needed. It is obvious that these are two different places, and it is also obvious what is needed to enable a transfer from the place where the money is available (in ever greater abundance) to the place where it is needed (with ever increasing urgency). This solution is called global wealth tax.
I will show below that the most serious problems associated with global warming could be solved by a global wealth tax of 1% per year. According to this proposal, one percent of the net assets of all companies and trusts, and 1% of individual fortunes above one million US dollars, would be paid every year to national governments, in addition to other kinds of tax.
A global wealth tax could be created by negotiation within existing global organisations such as UN, IMF, WTO, OECD, World Bank, G8 and G20. The people working in such organisations have the means to solve this problem at their disposal, and as a rule they would also like to make big progress on this issue. But they are also confined by inflexible bureacracies and career paths. To break out, they need pressure from outside.
Many rich people have themselves proposed that the rich should pay more tax. They include Bill Gates (ex Microsoft), Warren Buffet (Berkshire Hathaway), Michael Otto (Otto mail orders), Marius Müller-Westernhagen (rock singer), Luca di Montezemolo (Ferrari), Dieter Lehmkuhl (Appel für eine Vermögensabgabe), Liliane Bettencourt and Jean-Paul Agon (L'Oréal), Antoine Frérot (Veolia Environment), Denis Hennequin (Accor), Marc Ladreit de Lacharrière (FIMALAC), Maurice Lévy (Publicis), Christophe de Margerie (Total), Frédéric Oudéa (Société Générale), Claude Perdriel (SETMA, SFA, Aquasistance), Jean Peyrelevade (Leonardo), Franck Riboud (Danone), Stéphane Richard, Louis Schweitzer, Marc Simoncini, Jean-Cyril Spinetta, Philippe Varin.. A survey by the Spectrem Group in 2011 found that 68% of (US) millionaires support raising taxes for the rich. The question is, how? A global wealth tax is a fair and realistic solution.
So why has there been so little progress? If the rich really want this, why are they not pushing it through? Unfortunately a lot of what rich people have said about this is little more than hot air. If we are to see real progress, national governments will have to put global organisations under pressure to create new global taxes.
For individuals like you and me, that means voting for the politicians who favor new global taxes and are prepared to keep on pushing until real progress is made. We have to convince our local green party members to stop being populist. They must stop thinking that their voters only care about themselves and their immediate environment (in time and space: the next few years, the next few hundred kilometers). Instead it is time to realise that their voters also care about the long-term future of the planet. Green politicians, to maintain credibility, must aim for an appropriate balance between the short and the long term, and between the local and the global. They must also talk to the electorate about this balance, and encourage school teachers to teach children about it (independent of politics). They should be using this long-term approach to stabilise and steadily increase the green vote in the long-term.
How would a global wealth tax work?
The procedure might work like this. All millionaires would declare their total assets to the taxation office in their (principal) country, who would investigate statements in the usual way but would also set up new mechanisms to evaluate wealth in uncertain cases (e.g. the value of a business or piece of land in the event that it was sold). All businesses, corporations and institutions would declare their total assets and completely assign those assets to individuals. The total value of a company on the stock exchange is simply the share price times the number of shares. Declarations would be published in the internet and taxation offices would check the details, starting with the richest individuals and groups and working down the list. If there was a serious conflict in the case of a multinational company or individual, the national taxation offices might be supported by the International Criminal Court.
The system would be introduced globally to stop people avoiding tax by shifting funds from one country to another (capital flight). Multinational corporations would assign their wealth proportionally to different countries according to activity; the wealth tax would be distributed accordingly. Funds would be collected by existing national mechanisms in conjunction with a new global revenue service established and monitored by UN, IMF, World Bank and/or G8.
All tax havens would be opened up - bank secrecy would be ended on a global basis. Bank secrecy, whether in Switzerland, the Virgin Islands or any other tax haven, is profoundly unfair, contradicts international law and causes poverty - on a massive global scale (more). See below for further information.
Non-profit organisations would be subject to strict guidelines, and adherence would be internationally monitored. Donors to non-profit organisations (including charities) must legally relinquish all control over donated funds. All NPOs including churches and religious organisations must demonstrate their non-profit status on request.
Most of these funds would initially flow to national economies and would be subject to existing democratic controls in those countries. There should also be an global agreement to use the new money for specific purposes, especially alleviating poverty locally and globally, and achieving environmental targets. At least ten percent of global wealth taxes should be paid into a global fund that is independent of national interests. Its exclusive goal would be to address the most pressing current global problems by the most efficient available means, as determined by globally representative committees that balance democracy with expertise.
The wealth gap between rich and poor, which is currently far too wide, would be slightly reduced, but that is not the main point. The main point is that poverty would be drastically reduced, along with projected negative effects of climate change. For every dollar flowing from the rich to the poor, the amount gained by the poor (from their viewpoint) would be far greater than the amount lost by the rich (from their viewpoint). One million rich people would lose 1% of their wealth per year - money that they do not need, in fact. With that money, one billion people would gain basic needs - albeit gradually, over a period of 10-20 years. For every single rich person who lost a little, a thousand poor people would gain a lot.
This idea is simple, realistic, and politically moderate. It is also long overdue, and the problem becomes more urgent with each passing year. In the long term, we may be talking about the survival of the human race. Global organisations must now work together to make global wealth tax a reality. They are challenged to demonstrate their strength and benevolence by promoting global public interests over powerful private interests.
The French revolution - then and now
The rich are getting richer, while the poor remain poor. The media inform us regularly about the steadily rising number of US$ billionaires. There are now over a thousand of them worldwide.
It is interesting to contemplate how much money that is. If you had a billion one-dollar bills and counted them at a rate of one per second, it would take you 30 years. The giant in "Jack and the Beanstalk" and Scrooge in "A Christmas Carol" would spend their lives doing nothing but count, day and night.
One is tempted to remark that this is happening in spite of the financial crisis, but that would be misleading. In fact, this trend is one of the main causes of the financial crisis (more).
The situation seems unprecedented, but it is not. There were many episodes in history where the wealth gap got out of control. Solutions fall into two main categories. One is violence. The French revolution was one of the most important positive developments in human history, and it involved chopping off lots of heads. The other solution is taxation. Taxation is the way democratic governments finance their activities for the good of everyone. Clearly, taxation is the best way to manage and optimise the wealth gap. It is time for the mega-rich to choose between these two alternatives. The 99% have had enough.
The situation is unprecedented in one important way. Many more lives are at stake now than way back then in France. Today, one billion people are at risk of dying from hunger. If things don't change radically, that number will increase as global temperatures rise in coming decades.
Some basic economics
In media discussions of the "financial crisis", the rich, and the politicians and economists who look after their interests, often distort the truth (more). To penetrate the jungle of distortions that surround the economic theory of taxation, it is necessary to clarify some basic issues. What is taxation, and how exactly does it work?
Taxation is how governments finance their activities. If they try to finance them by borrowing money, the loans will have to be paid back sometime, and that will be generally done by means of taxation. If they try to finance them by increasing the amount of money in circulation, the value of the currency falls (inflation), which effectively reduces the assets of the rich - equivalent to wealth tax. Whichever way you look at it, governments finance their activities through taxation. It follows that if you support the idea of government, you also support the idea of taxation. Without governments we would have anarchy, so people who are fundamentally opposed to taxation are anarchists.
Who should pay how much? This is a simple but important question, and the general answer is equally simple but important. The more you have, the more you pay. Or put another way: the tax collector takes taxes from places where there is most money. Where it is going to hurt the least. Where else is it going to come from?
Large amounts of money can be generally be found in two different places. The first place is anywhere money changes hands. People are taxed when they earn money, and they also can be taxed when they buy something. That thing could be a loaf of bread, a multinational company, or anything in between. The second place to find money is wealth. Wealth is money that is staying put. I guess that wealth has three main functions. Its first function is to guarantee the standard of living of its owner, which is essentially ok. Why not? People who work hard or have good ideas that ultimately benefit others deserve a high standard of living. Its second function is to enable big projects and businesses to be founded. That is also a good thing, without which many things that we take for granted (such as the computer I am using to write this text) would not be possible. Its third function is to increase the owner's power. That is not a good thing, because it undermines democracy.
A good economic system encourages economic activity. It should therefore encourage people to work for money and to exchange money for goods. It should discourage people from sitting on their wealth. Whether you read about it in the Bible (parable of the talents) or in Karl Marx (das Kapital), you will find general agreement on this point. The funny thing is that modern economic systems do exactly the opposite. Most government income is from income tax, which tends to discourage or penalise work, and wealth is hardly taxed at all.
Most income tax comes from the middle classes. Progressive income tax scales ensure that the poor pay no tax (but they do pay consumption taxes, a problem to which I will return shortly). Taxation systems are generally so complex and corrupt that the rich can avoid tax altogether with the help of clever accountants, tax havens, hedge funds and the like. I am not about to suggest that income tax should be reduced. National governments rely on it too heavily. But it is surely an interesting point that most people believe income taxes are too high (or at least the taxes that they have to pay are too high).
The progressivity of income tax scales means that the rich pay (or are supposed to pay) a higher proportion of their income than the poor. That is supposed to reduce the wealth gap between rich and poor. Obviously, income tax progressivity is not working. One reason is simply that it is not applied; Warren Buffet famously complained that he was paying a lower rate of income tax than his secretary. Second, even if it is applied, the rich have all kinds of tricks up their sleeves to evade or avoid tax. That problem could be addressed by simplifying the system and making it more transparent (more). A third problem is consumption or value-added tax, which is generally regressive: the poor pay a higher proportion of their income in consumption taxes than the rich. In many countries (such as Austria, where I live), the progressive effect of income tax is roughly canceled by the regressive effect of consumption tax. The same result could be achieved much more simply by abolishing consumption taxes and introducing a flat rate of income tax. A rational response to the enormous and increasing wealth gap might therefore be to abolish consumption taxes and to make the income tax system more progressive by increasing tax rates for higher earners. But that is not the main point of this essay. I prefer a different strategy.
It follows from these arguments that a good economic system should discourage people from sitting on their wealth. They should know that if they do nothing with their wealth, it will gradually (very gradually, in the current proposal) disappear. And even if they are doing lots of things with their wealth, some of it will be constantly flowing out to national governments - to people who really need it. In other words, we should be taxing wealth. Surprisingly, modern taxation systems do not do that. Wealth taxes are generally small or non-existent. There is even a movement to get rid of income tax as well, and tax only consumption ("FairTax"), which would enable the rich to get even richer and is the exact opposite of "fair".
How is that possible, if the arguments in favor of wealth tax (and against consumption tax) are so clear? The answer is surely that the system is deeply and inherently corrupt. Politicians are constantly under pressure from the rich to keep wealth taxes low or non-existent and to reduce income and capital gains taxes. In public, politicians pretend to act in the interest of the voters, but in private they look after the rich. The rich reward the politicians in indirect ways. Any politician who denies this, and is not publicly advocating wealth taxes or increased wealth taxes, is either lying or half asleep.
To solve these problems, we must introduce or increase wealth taxes, and we should do so by democratic means. That means voting for politicians who agree with these arguments, and are clearly prepared to push them through - despite the well-organised resistance and corruption with which they are surrounded on a daily basis.
A reasonable rate of wealth tax would be 1% per year of all private wealth above one million US dollars. Existing wealth tax schemes in France, Switzerland, Netherlands, Norway and India (more) collect approximately 1% and apply a similar threshold. The German group "Vermögende für eine Vermögensabgabe" ("wealthy for a capital levy") even proposed a rate of 5% for two years (to address the financial crisis).
The total private wealth of Austria (where I live) is apparently 1.3 trillion Euros (not sure if the Catholic church is included in that, but their massive wealth should also be taxed). The wealth tax I am advocating would add somewhat less than 1% of that - some 10 billion Euros - to the national annual federal budget, which is currently about 70 billion Euros. With that money, we could do great things. Poverty within Austria could be significantly alleviated, the international aid budget could be increased to Scandinavian levels (tripled to approach 1% GNP), and environmental goals could be achieved (for a change).
For comparison, the Gulf war cost US$ 3 trillion. The total annual budget of the United Nations is only 1% of that: US$ 30 billion.
How much would individuals pay? If you had exactly a million Euros (e.g. if you owned a nice house in the city, or a small farm in the country) you would pay nothing. If you had exactly a billion Euros, you would pay almost ten million Euros per year. That is much less that you would normally earn in interest if you put your money into a bank account, even if inflation is taken into account.
From this example we see that a wealth tax of 1% per year would not reduce the effective assets of the rich. It would still allow them to get richer without working. If you deposit a large amount of money in a regular bank account for a fixed term, you can generally get interest that is greater than 1% in real terms, i.e. accounting for inflation. If you invest wisely, of course, you can make much more than that.
To make this idea work, all non-governmental for-profit organisations, regardless of assets (including all publicly listed companies and all trusts), would publish an annual statement of net assets. Millionaires would submit a declaration of their net assets (i.e. total assets minus total liabilities) to their national taxation department, just as they now submit a declaration of income. Millionaires would subtract US$1m from their net assets and pay one percent of the remainder. Organisations would pay 1% of their net assets. The declarations of net assets would be published, just as all taxation declarations in Scandinavia are published, and just as estimates of the total wealth of the mega-rich already appear in the media. Nothing new there. People would try all kinds of tricks to fake declarations, but that is not a big problem - tax departments are used to that. Taxation offices would develop new guidelines and procedures for estimating assets. They would begin their investigations with the richest of the rich, and gradually move down the list. Penalties for faking wealth declarations or hiding wealth should be adjusted to cover the entire cost of all such detective work.
What about inheritance tax? That is a good way to break down class distinctions by limiting the extent to which they can be passed from one generation to the next, which is surely a good thing. A wealth tax of the kind that I am describing may be even more effective because it is paid more often, so when people get used to it the total proceeds over a long period would be greater. One might argue that farmers should not be burdened with an inheritance tax that could mean slicing up their land after they die; instead, they should be under pressure to make their land profitable enough to pay wealth taxes while they are alive.
What about multinational corporations? An international procedure would be necessary to estimate their total wealth, and after that to assign that wealth to national economies in proportion to their involvement in those economies. For example a multinational concern could be 50% in the USA, 30% in the Eurozone and 20% in China, and its wealth tax would be distributed accordingly. It is beyond my scope and expertise to go into the details of such a procedure. We already have international organisations that could be extended to enforce such procedures, such as the United Nations and the International Monetary Fund.
Eliminating tax havens
Everyone is talking about eliminating tax havens, and
it is now urgent that this happens. James S. Henry (Sag Harbor Group;
Tax Justice Network) emailed me on 18 August 2012 and wrote the
following: "Tax collection might be facilitated by the fact that at
least $12.3 trillion (as of yearend 2010) of cross-border financial
wealth was under management or custody of the top 50 banks engaged in
international private banking. It would be relatively simple for them
to implement a modest .5% - 1% per annum withholding tax "on
anonymity." Such a tax would barely be missed by the beneficial owners,
quite a few of whom are engaged in tax dodging, kleptocracy, or other
What exactly does it mean to eliminate tax havens? First, Switzerland is not necessarily the main culprit. In recent years, under pressure, Swiss banks have been opening up more readily than for example the Cayman Islands. Moreover, US banks have been hiding funds from other national goverments just as much as Swiss banks have. Second, eliminating tax havens would mean developing new international laws, or revising existing laws. I am no expert on this, but I imagine things need to move in the following direction.
The OECD is developing procedures for the automatic exchange of information between countries and banks, that will ultimately solve the tax haven problem (more). But things are moving slowly and they need more public awareness and support.
Beyond that, we need a new global banking watchdog that is democratically controlled by elected representatives of many countries (balancing rich and poor, and regions) and by international experts selected for their relevant expertise, independence and reputation for altruism. This body might be part of the UN. It would have careful procedures to ensure long-term independence from individual countries, individual banks and powerful private interests. Its stated aims would include not only banking regulation to prevent international crises and recessions but also enabling the global community to solve major problems such as climate change and global poverty.
All banks in the world would have to be registered with this global body and provide existence of current registration to customers. All account holders in all banks would have to identify themselves with a valid national passport (the bank keeps a copy of the first page).
At regular intervals (say once per year), on a date determined by each country, each bank would inform the taxation department of each country of the identity of all nationals from that country with accounts in their bank, the current balance in those accounts, and possibly a summary of changes to that balance over the past 12 months. National taxation departments would agree that this information is confidential and should not be available to other government departments, let alone the general public.
The proposed global wealth tax would then be applied. National governments would calculate the wealth tax to be paid by each company, trust, institution etc. on the basis of information about their wealth from different sources. The total wealth of each individual or group and the corresponding tax paid would be made publicly available (compare the principle of open access applied in Scandinavian countries), all other information would remain confidential.
Two interdependent myths: Economic growth and full employment
The world's resources are being used at a rate considerably faster than they can be replaced. From this observation alone it is clear that we can no longer be dependent on economic growth in the long term. Growth is still possible and desirable in limited areas, e.g. the growth of the sustainable energy industry and, in developing countries, growth to enable essential development. But in the big scheme of things we have to move to a new economic model based on sustainability rather than growth.
Since the second world war, steady growth in Western economies has facilitated tax collection. Since the wealth of most members of the middle class was increasing relative to their fixed costs, that gave them the means to easily pay tax. As growth slows, governments need new sources of revenue. The middle classes are finding it increasingly difficult to finance governments. Given the growing wealth gap, it is obvious where the additional revenue has to come from. Of all the money in the world that could conceivably be taxed, by far the most is owned by the rich.
An additional factor that has been clear for decades is the relationship between technology and (un)employment. Technological advances are reducing the need to work by reducing the useful amount of work that needs to be done. If we are to avoid pseudowork (digging holes just to fill them in again), if incomes are to continue to depend on work, and incomes are to be fairly distributed, then it is clear that paid working hours must be reduced.
Our system of free enterprise seems to be incapable of addressing this problem. People are free to work as long as they like, and the rising incidence of burnout is evidence that they are doing just that. The result is that there is not enough work (and hence income) to go around. Enormous numbers of people are unemployed and living in poverty, and especially young people are finding it difficult building a career or just finding and keeping a job or any kind. If capitalism is left to continue on its merry way, things can only get worse.
There is an obvious way to solve this problem, and that is to reduce retirement age. Strangely, the current trend is going in the opposite direction. Retirement age is being increased in response to increasing life expectancies. But that will just increase the amount of useless work being done. If there is no work left to do, why do it?
Wealth tax offers a solution. Constant or falling retirement ages are possible if pensions are financed by wealth taxes. And why should they not be financed by wealth taxes? The rich have stupendous amounts of money - thousands or sometimes even millions more than they need to live comfortably. There is nothing wrong with sharing a bit of it around.
Why is the wealth gap growing?
There is widespread agreement that the gap between rich and poor has been growing steadily in the last few decades. The trend can be observed within both rich and poor countries. When countries are compared with each other, the situation is less clear. Newly industrialised countries such as China, India and Brazil are getting richer, while many developing countries are stagnating. But within each of these countries, the wealth gap is increasing.
The increasing wealth gap is problematic for two separate reasons. The first is an ethical reason. It is obviously outrageously unfair when some people have a thousand or a million times more money (and consequently resources) than others. The rich could easily finance programs to eliminate poverty, so they should do that. The second reason concerns democracy. Ideally, in a democracy every person has the same opportunity to contribute to decisions or to bring about change. If there is a large wealth gap, this is clearly not the case, even if there is just one vote for each person at election time. In the USA, for example, federal policy is determined more by large corporations than by democratic procedures. Moreover, most members of congress are rich - the poor are simply not represented. The country that once prided itself as leading the world to a more democratic future has become a global centre of democratic hypocrisy. This problem is obviously related to the enormous wealth gap in the USA. It is similarly obvious that a return to the democratic foundations of the USA will only happen if the wealth gap is sustainably reduced.
The argument about democracy makes it clear that reducing poverty is not enough. We must also reduce the wealth gap in order to maintain a reasonable level of democracy. That is why existing proposals to reform taxation by increasing consumption taxes (value-added tax) (see "FairTax") must be rejected. Such proposals would not reduce poverty and they would certainly not reduce the wealth gap.
There are two main reasons for the gradual increase in the wealth gap in recent decades: globalisation and techologisation. Although they are related, it is important to understand them separately.
Globalisation means that the effective size of markets is increasing. Just imagine you are a successful entrepreneur. By some combination of background, talent, work and luck (for that is normally how it happens), you manage to develop an important product that dominates a local market. You then have a chance of dominating the global market. If you manage to do that, you can make enormous amounts of money. A well-known example is Microsoft and its effective global monopoly of certain kinds of software.
In parallel with globalisation, technologisation is reducing the amount of work that needs to be done by human beings. A familiar example is the washing machine. It means that you can throw your washing in the machine and then do something else. If someone was being paid to do the washing by hand previously (which of course is often not the case - but often it is: consider factory production lines), the task can now be achieved much more cheaply, since the technology costs much less than the wages of those who previously did the job. So if you are an employer and you buy machines to replace employees, you can increase your profits. This has been happening, slowly but surely, in all kinds of businesses and industries for decades.
These explanations for the growing wealth gap make it clear that the rich do not by any stretch of the imagination "deserve" to be as rich as they are. Of course people who have better ideas and work harder should have more money than others. I am not questioning the fundamental importance of financial incentives for capitalism. But that idea can only go so far. With that idea we can justify differences in income and wealth up to a certain point. For the purpose of argument let's say that point is 10:1 (it would be interesting to try to determine this point in a democratic procedure, but that is another question). So it's ok if the rich have ten times more wealth or income than the poor. From this example it is clear that we cannot possibly justify ratios of 100:1 and up, and certainly not 1 000 000:1. It is therefore legitimate to try to reduce these ratios, and the obvious way to do so is by means of wealth taxes.
Another possibility is for governments to increase the amount of money in circulation (we used to say "just print more money", but today the money is more likely to be electronic). The extra money can be used to pay debts, improve social services and so on. This strategy reduces the value of all money in a given currency. It causes inflation, and thereby reduces the wealth of the rich. That is a destabilising policy and of course no-one would recommend it. But in the end has the same redistributive effect as wealth taxes.
This comparison suggests that wealth tax is the best and possibly the only reasonable way to reduce the wealth gap. In this document, I am proposing a level of wealth tax that would not reduce wealth in real terms, since the tax rate would be less than the difference between interest rates and inflation, as explained above. If, however, the proceeds were invested in alleviating poverty, the wealth gap would be reduced. (If anyone knows of another reliable way to reduce the wealth gap, please email the author.)
Arguments for and against
You may be already convinced by the idea of taxing all wealth at a constant rate of about 1%, and I certainly am. The authors of the wiki page on wealth tax also seem to be convinced of the virtues of wealth tax. There (on 30 June 2012), the arguments for wealth tax clearly outweigh arguments against it. The only clear argument against it is capital flight: wealth taxes can be avoided by shifting assets from one country to another. The current proposal would solve that problem.
But if you tell others about this proposal, they are bound to come up with new arguments against it. Let's consider a few of them quickly.
Some conservatives like to call wealth tax "dispossession". This is of course nonsense, but you will have to be patient and explain one thing at a time. The first point is that any form of tax is dispossession. If I buy a loaf of bread for one euro and pay 10 cents in value-added tax, those 10 cents are my money that is being taken away from me. That is dispossession, too. Any form of tax is dispossession, so if you are against dispossession, you are against tax in general. In that case how are governments going to finance their activities? Or would anarchy be preferable? The second point is that wealth tax at a relatively low rate is, in fact, the only form of tax that is not dispossession! If you tax the rich at a rate that is lower than the difference between interest rates and inflation, their wealth is not reduced in real terms. They can still get richer without lifting a finger! Wealth tax at this level does not get rid of the unfairness, but it does make the system a little less unfair, and it would lay the basis for future progress toward an even more fair system.
Some people claim that wealth tax will have a negative effect on the economy. They also claim that when the economy is in good shape, everyone is happy. The first statement is misleading, and the second is simply not true. Look at those periods in the past 10-20 years when the economy was supposed to be in good shape. There were still masses of poor people, and it was still the case that every 5 seconds a child died of hunger, somewhere in the world. You can't call that a "good economy". Who exactly is benefiting from what, when the economy is "good"? Here's another example: when Ronald Reagan famously and drastically reduced income taxes in the higher brackets and the US economy boomed, there was a price to pay. National debt increased, and the next president (Bill Clinton) had to find a way of paying it back. Increasing the national debt is a more serious crime than "slowing the economy", because it has long-term consequences. The best thing we can do for the economy in the long term is to reduce the wealth gap.
People who are opposed to wealth tax are very creative in inventing arguments against it. You have to hand it to them. One of their favorite stories is the one about the poor innocent grandmother whose husband died and left her a villa worth 10 million dollars. Tears welling up in their eyes, they ask why should this poor widow (rich, actually, but let's call her "poor", it makes for a good story), why should this poor widow pay wealth tax? The first point about this kind of story is that it is ageist and sexist. Elderly women are no less able than anyone else to manage their money. The second point is that a person in this situation is much better off than another person whose spouse has died and left no house and no money. The wealth tax that I am talking about would be much less than the rent that that second person would have to pay. Moreover, that second person is likely to have less money for any purpose, whether it be rent of wealth tax.
What about those farmers who own enormous tracts of land worth enormous amounts of money? And who cannot do their work without the land? Should not they be exempt from wealth tax? After all they are providing an important service. What would we eat otherwise? The answer to this question is first that farmers should compete fairly on the open like everyone else, and second that they should be able to finance the wealth tax from their everyday work just like any other wealthy person. If they cannot, they should sell part of their land to someone else who can do just that. If they do not get much money for the land that they sell, it is not worth much, so they will not not have to pay much wealth tax on it anyway. In any case, a farmer who owns a lot of land is much better off than someone else who owns nothing. As long as poverty exists in the world (and right now it is all around us), farmers with a lot of land belong to the lucky ones. Anyone with wealth of any kind is in a better position to make money than a person without wealth, or with less wealth.
Obama's health reforms caused a legal battle that ended up in the supreme court. The question was: Can people be required to have health insurance, according to the US constitution? Wealth tax should be less problematic, because there are clearcut laws about the rights of governments to demand taxes. There is also another relevant law: the duty to rescue.
In the USA, the duty to rescue works like this. You are guilty if you do the following four things: you create a hazardous situation, another person's life is endangered by that hazard, you are in a position to rescue them, and you do not do so. That is remarkably similar to the current global financial situation, with the exception the the guilt is spread over a large number of people. Global investors and banks collectively caused the financial crisis, which now means that there is less money available to address poverty and climate change, which is risking millions of human lives. Those same people could rescue the endangered people by paying more tax. Those who are not doing so, or are opposed to doing so, could be guilty of the failure to rescue.
Europeans have a greater "duty to rescue" than Americans. In most European countries, if you find someone who needs medical help, you must take all reasonable steps to get that help. One could argue that if you are informed about the millions of people whose lives are currently in danger for lack of money to finance medical help, and you could help them (like Bill Gates is doing with his AIDS foundation), and you do not do that, you are guilty. more
Getting people to act in their own interest
There are countless millions of caring, educated people in the world who are in a good position to contribute to attempts to reduce global poverty and atmospheric warming. And many of them are doing so. But it is very difficult to get such people to sign a petition of the kind I have written (see link at top of page) or similar petitions in change.org or avaaz. For a person who is lucky enough to have a good high school education and time to read normal newspapers regularly, it takes about five minutes to understand and sign such a petition. I am genuinely curious to understand why many such people ignore such opportunities and keep surfing. There are good pages in wikipedia about relevant research in areas such as moral development, victim mentality and learned helplessness. That research seems to explain the passivity of many people who are in a good position to do something. If they seem to hide their heads in the sand, we have some theories that seem to explain why. What I would like to know is: How can we overcome this tendency on a massive international scale? If that doesn't happen, the future of the human race is not bright. That is surely an inevitable conclusion on the basis of the current consensus of scientific opinion on global warming. Perhaps those who think I am being overly pessimistic have their heads in the clouds, not the sand.
The opinions expressed on this page are the authors' personal opinions. I
am grateful to my academic colleagues Emilios Cambouropoulos, John
Sloboda, and Barbara Tillmann, and to John Christensen and James Henry
of TJN, for suggestions. I also received useful ideas and feedback from
my brothers Bruce, Graeme and John Parncutt (Australia) and Russell
Parncutt (Thailand).Suggestions for improving or extending the content are welcome at email@example.com. Back to Richard Parncutt's homepage