Oxfam’s annual headline-grabbing stats on rising wealth inequality have been picked apart all over the web today.
Indeed, in no small part to the efforts of my colleague Ben Southwood over the past three years, most readers now take Oxfam’s claims about wealth with a pinch of salt.
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I don’t want to pick holes in their diagnosis, it’s their prescription that worries me. And it should worry you, even if you care about wealth inequality as much as Oxfam.
It’s called for taxes on wealth to fund new spending on healthcare, education and job creation. Healthcare, education and job creation are all good things, but funding them through wealth taxes would be a disaster.
Taxes affect behaviour and if you tax something you should expect less of it. That’s why we tax cigarettes and booze. It’s the same with wealth taxes. They discourage the accumulation of wealth. In other words they encourage rich people to spend more and save or invest less.
This would be bad for everyone. Not just the top one percent. Capital investment raises worker productivity boosting wages for everyone. Rather than taxing wealth, we should be reforming our tax system to stop discouraging investment, fixing or scrapping inefficient taxes like corporation tax and capital gains.
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By GlobalDataEconomists estimate that if the UK scrapped all of its taxes on capital investment and replaced them with progressive taxes on consumption then long run incomes would be seven percent higher.
Oxfam might argue instead that they don’t want to tax new investment but they do want to tax wealth that’s already been accumulated. Maybe the wealth tax they’d want would be one-off.
Donald Trump used to think that was a good idea. In 1999 he proposed a one-off $5.7trn wealth to pay off the whole of the US’ National Debt. It was a popular idea with the general public, but pilloried by economists.
The problem is no one trusts the government to keep it as a one-off tax. All of a sudden investors anticipate future ‘one-off’ taxes. Then they move their wealth overseas as a precaution.
The underlying problem with Oxfam’s wealth tax proposal is that we don’t truly care about wealth inequality. Wealth inequality only matters if it affects consumption inequality (which I’d argue only matters if it affects poverty). If Mark Zuckerberg wants to forgo fancy suits for a plain T-Shirt and instead invests his megabucks into creating new technology, then we’re all better for it.
In fact, the kind of inequality we should care about – consumption inequality – has been falling rapidly. Poor people around the world are now able to spend more on food, healthcare, and education than ever before. And that’s not just the case in the developing world.
Economists Alan Auerbach and Larry Kotlikoff looked at consumption inequality in the US, and found that once you stop taking snapshots and start looking at lifetime consumption, the US is much more equal than anyone previously thought. The Institute for Fiscal Studies did the same in the UK and found the same.
We should ignore both Oxfam’s diagnosis and their prescription. And stick with what works. That’s opening up markets in the developing world and cutting capital taxes at home.
