Government Intervention
Nineteenth Century Britain provides one of the few examples of non-violent reallocation of wealth from the elite to the rest of society. The first part of the equation was obtaining wealth from the elite. Given that the majority of them were land owners, and that these lands were transferred from generation to generation through inheritance, the government choose to introduce a tax on the transfer of estates. The generation of owners at the time accepted it because firstly it was not going to affect them personally, and secondly a tax rate of 10% was manageable. Over time this tax rate was increased until just before the Second World War, when it was at 60%. The impact of this tax was that within three generations the ‘great estates’ of Britain were no more. The second and important part of the equation was how the money was spent. The introduction of this and other wealth taxes coincided with widespread government spending on projects that would directly benefit everyone, but particularly the underprivileged. These included infrastructure projects that addressed sanitation, things such as sewerage systems, clean running water and public hospitals. They also included the introduction of public libraries and compulsory education – which also directly impacted on the use of child labour.
Taking from the rich
Of course it is one thing to tax the inheritance of large estates, quite another to tax the owners of multi-national companies. Large estates and death are difficult to hide. In Britain many of the estate entitlements were predefined inheritance dating back many generations. Ownership of today’s multinational organisations is not as straight forward. Even some of the world’s richest and most powerful individuals would struggle to explain their own ownership structures without assistance from their accounting and legal advisors. The use of trusts, voting and non-voting shares, and various other mechanisms that allocate and separate control and ownership, make the task more difficult. However the allocation of inheritance remains one of the key personal interests of the wealthy, and where there is a ‘Will’[1] there is a way.
An interesting trend in this regard is that the extremely wealthy are actually concerned about the negative impact their wealth may have on their children. They think that it may de-motivate them or lead them to make poor life choices. There are certainly enough examples from the sports and entertainment industry where fame and wealth at a young age have resulted in very poor life choices and unhappy lives.
Further to this, two famous extremely wealthy individuals, Bill Gates and Warren Buffett, have pledged to give the majority of their wealth to charity upon their death. There are a number of things that are interesting about this. Firstly both men have been personally responsible for the creation of their wealth. One could argue that their wealth is a by-product of their success rather than the reason for it. The other factor is the timing of the donation: whilst both have already made generous donations, neither is prepared to relinquish a level of ownership that would diminish their ability to influence their field of professional endeavour during their lifetimes.
It is perhaps indicative of the individual’s lack of faith in governments that they have chosen to create their own enterprise to implement programs that have previously been the mandate of government organisations. Given that many of the people they are aiming to assist are in parts of the world where governments are renowned to be corrupt, this is perhaps understandable. Regardless of their motives and rationale, it is interesting to note how closely aligned their actions are to those undertaken by the British in the 19th Century.
While the actions of these two individuals, along with a number of others, provide hope that extreme wealth is not without conscience, society would be foolish to rely on voluntary actions to achieve the required outcomes to re-balance the inevitable flow of money from the poor to the rich. The reintroduction of taxes on the transfer of substantial wealth could be a key part of a sustainable long term remedy. Of course it is only one half of the equation. The other half is how the money is used.
Giving to the poor
As previously discussed, what an individual values is relative not absolute. Politicians are very aware that voters have very short term memories. Subsequently they spend a substantial amount of time and money on promoting short-term gain to their constituents, even when it may result in long-term pain. They may convince themselves that this is a necessary compromise if they are to obtain the power they need to make the long term difference that got them into politics in the first place. As voters we are complicit in this compromised system.
Realigning the economic ecosystem requires some brave decisions. As with environmental management, a light hand is sometimes required, at other times major intervention may be needed. To determine what is appropriate requires an overall understanding of the ecosystem. Economic ecosystems are human creations, like farms or gardens. They rely on social constructs and government action to function. As can be seen in parts of the world where these things are not fully functional, the economic ecosystem becomes overgrown by violence and corruption. Even in a fully functional society, these things must be constantly weeded out. A thriving society requires a balanced economic ecosystem. The foundation of this alignment can be found in the hierarchy of need.
Governments should ensure that every individual in society has the bottom two tiers of survival and stability. This means that they have access to reliable water, food, shelter and safety. In many modern societies shelter and safety also include energy, healthcare and a basic education, for without these things the individual would be at a significant disadvantage.
Even in societies where this general principle is agreed upon, various governments have taken very different approaches to achieving this outcome. While no one approach has been entirely successful, some have been more successful that others. Like the pursuit of happiness, it is perhaps something to aim for rather than a continuous state of being.
Growing the middle
General MacArthur understood the importance of the middle class to economic prosperity and democracy. In post war Japan he gave clear instructions to redistribute wealth from the very wealthy Ziabatsu to grow the almost non-existent middle class. He sought to bridge the chasm that existed between the ruling elite and the subservient populace through economic intervention.
As outlined earlier, a fundamental component of democratic capitalist ideology is that it is a meritocracy. Here people are rewarded on the merit of their contribution, and everyone plays by the same rules, enabling anyone to succeed if they are good enough. It is a concept that has been quite successful for periods of time in a number of countries. Significantly these successful periods are usually aligned with the prevalence of an egalitarian ethos and significant government projects aimed at improving social infrastructure. Projects that will provide long term improvements to things such as water and sanitation, health and education, transport, power and telecommunication.
During these times of prosperity the standard of living for everyone is lifted to a new level and the portion of the population who are middle class, grows. In countries where many of these things are now in place, there is an opportunity to set a new benchmark to establish a higher standard of living for everyone; there is an opportunity to reinforce the existing foundations and build upon them a higher base from which people can begin to pursue their own happiness.
Certainly the pursuit of economic production and expansion is not the answer. Over time it tends to reinforce the faceless economy and the flow of wealth to the rich elite. At the same time the size of the middle class shrinks. A few of the middle class will transition into the upper class, but the majority slip back little by little into the working class. The Japanese economic model so admired in the 1980’s is an example of this. It stalled in the 1990’s and then rolled backward in the new millennium. This occurred as wealth flowed to the rich, who benefited from the success of their multinational companies moving their activities off-shore to take advantage of tax-breaks and cheaper labour. This fractured the Japanese economic ecosystem as it reduced the role of the middle and working class in these companies.
Interestingly the economic model most favoured this decade is based on the Scandinavian countries who favour strong government, a broad tax base and punitive taxes on high incomes. These countries rate highly on quality of life, with successful education programs, low crime rates and free health care. Interestingly their citizens do not object to the higher taxes as they perceive that they are getting good value in return through the various government initiatives. They also have a large middle class. In a sense they have a capped meritocracy, people are paid according to the value of their contribution, however at a certain point there is no individual benefit to earning more as it goes in taxes.
Tying the ends together
From time to time in political debates someone who has never experienced poverty will claim that the minimum wage or social welfare is too generous. One suggestion is that salary bands and tax brackets be set based on multiples of the minimum wage, with a Scandinavian approach so that the upper brackets pay very high tax rates. This can also be extended to a wealth tax on assets, for example placing a significant tax on the transfer of property worth more than a lifetime (40 years) on the minimum wage. For example if the annual salary of a worker on the minimum wage is $50,000 then the wealth tax on assets would apply for all property worth more than $2 Million.
This approach ensures that it is in every one has an interested in the minimum wage and that the value of individual roles are grounded in the reality of how far above ‘survival’ level they have become.
Recap
- Reward for effort – healthy economies need to unlock wealth
- Value is relative – people value different things
- Trade requires difference in value – hope and opportunity increase trade
- Money is a catalyst – wealth needs to circulate to be effective
- Trade creates economic ecosystems – economic ecosystems are human creations and need to be tended to (like farms and gardens)
- Economic measurements are incomplete – economic measurements do not take into account quality of life.
[1] Last Will and Testimony