Stop worshipping at the altar of economic growth

The growing political instability in the world has been heightened by the increasing wealth gap between the upper 10 percent of society and the remainder of the population, especially the bottom 50 percent. It is no wonder that the masses are beginning to turn more and more to far-right governments that are essentially populist in nature.

Populism refers to a political movement that is basically non-ideological but simply relays the message that the basic root cause of the income inequality is elitism or the rule of the elite.

The problem with the argument of the populists is that they do not offer any specific solution except the message of anti-elitism. Unfortunately, traditional economists continue to insist that the measure of a nation’s wealth is the Gross Domestic Product (GDP).

They wrongfully assume that any growth in GDP will result in better distribution of wealth. Clearly, this has not happened as the gap between the upper one percent and the rest of the population has become wider in spite of the increase in GDP on a global scale.

This has brought about the recognition that capitalism cannot be relied on as a mechanism for reducing income inequality. The intervention of governments is necessary.

Several measures have been advanced by progressive economists and politicians to address this problem of income inequality. Among these proposals is the concept of a minimum income for everyone that will allow a family to have a life of human dignity. Another proposal is to have a fairer taxation system that will shift the burden of taxes to the upper class by instituting a wealth tax.

A wealth tax is a tax on an entity or person’s holdings of assets which include the total value of personal assets including cash, bank deposits, real estate, assets in insurance and pension plans, ownership of unincorporated businesses, financial securities and personal trusts. This can reduce income inequality by reducing the accumulation of large amount of wealth by individuals.

There are several countries that are already implementing wealth tax in one form or the other.

One country is Colombia, which in 2019 passed a tax reform bill that lowered corporate tax rate and introduced a new wealth tax. This wealth tax was set at one percent for Colombian-resident individuals’ worldwide net worth, and one percent for non-resident individuals on Colombian properties only such as real estate, yachts, artwork, vessels and ships and other assets with a net equity of at least $1.5 million. The richest Colombians will face higher taxes on wages, dividends and properties.

It should be noted that the concept of a wealth tax is not new. Ancient Athens had a wealth tax called eisphora and a wealth registry consisting of self-assessments limited to the wealthiest. The religion of Islam has a concept sometimes described as a wealth tax called zakat.

In 2014, the French economist Thomas Piketty published a widely discussed book entitled “Capital in the Twenty-First Century” that starts with the observation that economic inequality is increasing and proposes wealth tax as a countermeasure. The central thesis of the book is that inequality is not an accident but rather a feature of capitalism and can only be reversed through state interventionism. The book thus argues that unless capitalism is reformed, the very democratic order will be threatened.

At the core of this thesis is the notion that when the rate of return on capital is greater than the rate of economic growth over the long-term, the result is the concentration of wealth and this unequal distribution of wealth causes social and economic stability.

Piketty proposes a global system of progressive wealth taxes to help reduce inequality and avoid the trend towards a vast majority of wealth coming under the control of a tiny minority.

The political economist John Rapley has proposed an international tax treaty to clamp down on tax avoidance in offshore havens, estimated now to be sheltering over $7 trillion of oligarch wealth and to reduce tax arbitrage whereby multinational corporations and the rich create elaborate structures or go looking for low-tax countries in which to shelter their wealth and income, making it difficult for their home countries to fine and tax them.

The other benefit of a wealth tax is not just targeting those most able to pay but it also reenergizes the economy. It rewards those who invest their wealth to create new income and penalizes those who try only to accumulate more wealth, whether in land speculation or super yachts. Wealth taxes can steer money towards more productive use.

According to University of Pennsylvania professor David Shakow, “… a wealth tax also taxes capital that is not productively employed… Net wealth taxes can complement rather than replace gift taxes, capital gains tax and inheritance taxes to increase administrability and the effectiveness of enforcement efforts.”

There are those who insist that any move to reduce income inequality will be opposed by the very wealthy who have a lot of influence within any political system.

I still want to believe that even the wealthiest one percent will realize that continued resistance to reducing income inequality will only lead to resentment by the masses and increase the influence of populism. It is also time for traditional economists to stop worshipping at the altar of economic growth and accept that the greater economic goal is reducing income inequality.

*      *      *

Email: [email protected]