By Tim Worstall.
"What joy to hear those calls for
inheritance to be taxed, good and hard, ringing out again. Parents,
after all, should be prevented from slaving their lives away to produce
gain for their children.
Among those who are getting it wrong again on this issue is
Polly Toynbee,
who says: “Alternatively, we could have fair property taxes: homes are
not taxed at all, and yet that is where all this burgeoning wealth comes
from.”
This statement comes as a bit of a surprise: as the OECD points out,
Britain raises more of its tax take from property than just about any
other rich country. Those rates bills do add up, you know.
Over at the Institute for Fiscal Studies,
Paul Johnson
is also wrong, but for a more subtle reason. He notes the recent death
of the great researcher into inequality, Tony Atkinson, and claims that
wealth is simply too unequally distributed. We must, therefore, do
something about it.
The problem here is that studies of wealth
distribution make a gross error (I shout about it so much that it is
now known as Worstall’s Fallacy): we already do quite a lot about the
inequality of wealth distribution.
Let’s consider income inequality for a
moment. We could measure this by market income. He earns that, she this,
the difference is the inequality between them.
But that doesn’t really give us the
clearest picture. We need to know more before deciding what, if
anything, we should do about it.
To that end, we actually measure
inequality of income by taking into account all the taxing and paying of
benefits that we do to reduce inequality. Those Gini numbers you see
thrown around – that’s after the welfare state has done its work, not
before.
As a detailed example, someone living only
on the state pension has no income at all if we measure by market
incomes. If we measure after the effects of the state pension, obviously
they have an income. And our decision about whether we should do more
for them – giving special payments to pensioners, say – will obviously
depend upon what we think about that post-pension income, not the
measurement that ignores it.
Yet with wealth inequality we entirely ignore everything that we do in this manner. A famous paper by
Saez and Zucman showing
us that wealth inequality has soared in recent decades contains a long
discussion of this (page 5 onwards). They specifically and deliberately
exclude anything and everything that the tax and/or benefits system does
to reduce wealth inequality.
The state pension is a flow of income over
time – it has a wealth value. It’s actually an inflation-proofed
annuity, and we know how to value those. But in the bizarre world of
Saez and Zucman, an inflation-proofed annuity that has been paid for
from savings is wealth, and an inflation-proofed annuity paid for from
tax revenues is not.
And the same is true of everything else.
The NHS is, for all its faults, a piece of wealth enjoyed by all
Britons. We do not have to pay £3,000 a year for private health
insurance. OK, we pay it through our taxes instead, but the existence of
health care free at the point of demand is wealth.
Similarly, free schooling means we don’t
have to find £5,000 a year per child – that’s wealth. And if an
insurance policy is wealth, then unemployment benefit is a form of
insurance, no? Private housing wealth is, indeed, wealth and is counted.
But a below-market rent for a house with a lifetime tenancy is also
wealth – yet that is excluded.
This is possibly the only point of agreement between James Galbraith (fils, not pere,
the one who did so much work with Varoufakis) and myself: the reason we
instituted the welfare state (for the UK) or the Great Society programs
(for the US) was because of a general belief that such things made the
populace richer. And they do. Therefore we must include them when we
measure how rich the populace is.
The end result of all of this is that the
cries that we’re returning to Victorian levels of wealth inequality are
simply nonsense. Back then, if you lost your job you could (and did)
starve to death. Today, you get a free house in the bad part of town,
free health care, free education for your kids, a pension if you live
that long (and even the contributions to your pension paid for while
you’re unemployed), food and, if you juggle the budget well, a bit left
over for tabs and booze.
This is not the same inequality. We must
move beyond Worstall’s Fallacy and start measuring wealth inequality as
we do income – once everything we do to reduce that inequality has been
taken into account. Only then will it be clear whether we should do
more, or even less, to address the problem."
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