It is not often that a book dealing with economic and financial matters
creates vibrant discussion in the wider society as has been the case with
Thomas Pikkety’s “Capital in the 21st century”.
Pikkety tracked, amalgamated and analysed data related to income and wealth in various countries going back two centuries and concluded that inequality in various countries, but particularly in the United States, has now grown to the same levels that were last seen in the Belle Epoque[i].
Pikkety’s argument is that unless we wish to go through the same
experience of the 20th Century where excessive inequality was scaled
back by the horrors of two world wars that sandwiched the great depression of
the 1930’s, governments should set economic policies that reduce excessive
inequality.
The beneficiaries of present inequalities have used all arguments in an
attempt to discredit Pikkety and defend the status quo. They have depicted Pikkety as a re-incarnation
of Karl Marx with a mission to destroy capitalism and restore a socialist
society. This is a gross exaggeration
as Pikkety in no way challenges the benefits of controlled capitalism that must
tolerate substantial inequality among society to ensure that people are
motivated to deliver to the best of their abilities. There is no argument about
the power of fair capitalism to extract people out of poverty as is happening
in China, India and other emerging markets that are giving a fair chance for the
markets to work while controlling excesses.
Pikkety’s core argument in his seven hundred page book is that
capitalism builds its own dynamics that concentrates wealth in the hand of the
few and if such dynamics are allowed to build on their own momentum, especially
considering the rent-seeking potential of those in possession of excessive
wealth, within a generation wealth will be in the hands of very few who
inherited their riches and this would become socially less acceptable than when
wealth is the hands of the few that can actually claim they worked for it. Basically he argues that society can accept
that Bill Gates[ii]
is super rich because he pioneered Microsoft but will struggle to maintain
acceptance if Bill Gates’ wealth is inherited by his (not necessarily
deserving) descendants.
Unfortunately as with so many things in life the diagnosis comes easier
than the solution. Pikkety recommends
the introduction of a global wealth tax but this is as feasible as Honduras
winning the Brazil World Cup. However
the absence of a practical solution does not mean there is no problem.
To some extent we can argue that in Malta we do not have a problem of
extreme inequality and that we somehow have hit a fair balance between having
sufficient inequality to maintain the enterprise spirit to generate growth and
development and offering a social
structure which prevents extreme poverty.
We have also adopted policies that maintain fairly good equality of
opportunities giving flexibility for people to move up the social ladder
according to their skills rather than their parentage.
In this context one can understand the importance of free education up
to university and beyond, the stipend system which give students from families
in low levels of society a fair chance to overcome the social barriers that
would otherwise condemn them eternally to their low social status, and the free
health care system. We must ensure
sustainability of such policies that have protected the social fabric of
society. We must avoid the extremes one
finds in the USA where the atrociously poor share sovereignty with the
incredibly rich. To maintain such
sustainability we must inevitably question from time to time whether the system
can carry the load of universality where the rich and poor are equally entitled
to free health care rather than focus the scarce resources of the public purse
only on those that cannot afford it.
This brings me to the need that we from time to time challenge the
status quo entrenched in our systems of taxation and to open a debate about
whether changing circumstances merit adopting our systems of taxation for the
21st century.
We have a system of taxation that discriminates in favour of unearned
income and against earned income.
Whereas earned income is taxed at 35% at the margin for income over
sixty thousand Euro, we have final withholding tax at 15% on a variety of
unearned income (investment income and property rentals) irrespective of their
quantum. Furthermore we have no
taxation on capital gains.
We have to open a discussion about whether this is socially just and
whether it is conducive to becoming an economy based on enterprise rather than
on rent seeking. We have to take into
consideration that in order to protect our attraction as an international
investment centre we have to continue reducing direct tax rates. This could be
forced on us by international competition and could address the offensive
differential in tax rates applicable to earned and unearned income. However how would government protect its
finances while reducing direct tax rates to competitive international
levels? Probably it will have to make up
for loss of direct tax revenue by compensatory increases in indirect tax rates
and by relying on taxes on capital rather than taxes on income.
Which would bring us back to many of Pikkety’s arguments. Should capital gains continue to remain tax
exempt? Not even in conservative USA
are capital gains completely tax exempt although they are taxed at much lower
rate than earned revenues.
Should we continue to tax earned income at the highest rates but exempt
inherited capital other than real estate completely from inheritance and
donation taxes? And why should real estate be treated differently from other
asset classes, simply because it is less mobile and more visible?
There are no easy answers to these questions and changes to taxation
systems have to be done with hands that have the sensitivity of a brain
surgeon. But this discussion has
to start among society so that our political leaders will gain the courage to
plan the necessary changes for the longer term in the knowledge that society
has been involved and all points of view have been taken into account.
[i] The Belle Époque or La Belle Époque was a
period in history that is conventionally dated as starting in 1871 and ending with
the start of World War I in 1914. This period was characterized by optimism,
peace in Europe, new technology and scientific discoveries. The peace and
prosperity in Paris allowed the arts to flourish, and many masterpieces of
literature, music, theatre, and visual art gained recognition. The Belle Époque
was named, in retrospect, when it began to be contrasted to the horrors of
World War I.
[ii] In the particular case of Bill Gates
most of his wealth has in fact been donated to his charitable Foundation so
Bill Gates may not be a fair example of the risks that Pikkety defines.
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