Taxing billionaires more won't make poverty go away
The only viable solution is more innovative philanthropy - the rich should build free hospitals, schools, and housing.
Oh every time I close my eyes
I see my name in shining lights, yeah
A different city every night
Oh, I, I swear the world better prepare
For when I'm a billionaire
-Travie McCoy and Bruno Mars, Billionaire
It is a wonderful time to be a billionaire. Arguably the world's most exclusive club, this group comprised of a mere 0.0002 per cent of the world's population, got richer last year. According to Bloomberg's Billionaire Index, the 500 most wealthy people gained $1.2 trillion in 2019 - an increase of 25 per cent. The largest concentration in this group was in the United States - 172, with China boasting of 52 of the world's uber-rich. And from the evidence, money begets more money - Jeff Bezos' wealth grew from just $12.3 billion in 2010 to about $117 billion today - an increase of $104.7 billion in a decade. To give some context, that would take 60th place on the list of countries ranked by GDP. In other words, Bezos' wealth is greater than the combined GDP of dozens of African countries and larger than the GDP of countries including Sri Lanka, Kenya, Ethiopia, Oman, and Jordan.
So, what, if anything, should we do about this concentration of wealth in the hands of the very few? The question is not just academic because rising inequality is a hot political issue: several Democrats competing in the 2020 presidential election in the United States have made it a key priority. For instance, Bernie Sanders and Elizabeth Warren want to impose a wealth tax on the super-rich, whereas Joe Biden and Pete Buttigieg would increase taxes on those with higher incomes.
Class warfare in the land of capitalism? Some of the candidates have openly targeted wealth - Bernie Sanders, who continues to enjoy strong support in the polls, would eliminate billionaires altogether. The question is whether the war on wealth will pay off for candidates in the light of the crushing defeat suffered by Jeremy Corbyn who ran on a similar platform in the United Kingdom.
Curiously, there is strong public support for taxing the wealthy in the United States. A poll conducted by The New York Times and Survey Monkey in November 2019 showed that 63 per cent of Americans support a 2 per cent tax on households with a net wealth over $50 million. Whereas 77 per cent of Democrats approved of such a tax, support amongst Republicans was surprisingly strong at 57 per cent. What's more crucial, it is an idea supported by groups cutting across racial, gender, age, income, and educational divides. The only group with which the idea lacked majority support is Republican men with college degrees - 41 per cent of this cohort support the 2 per cent tax. In contrast, 61 per cent of Republican women with a college degree support the tax.
The roots for this disillusionment with capitalism and its traditional celebration of wealth are not far to seek. Inequality has been rising in the US and the 2008 financial crisis brought it closer to home for many Americans who may not have perceived their financial vulnerability previously.
According to data from the Federal Reserve, the top 1 per cent of the population possessed 23.9 per cent of the total household wealth in 1989 whereas the top 10 per cent held 55.5 per cent. The bottom 50 per cent households possessed 7.3 per cent of the wealth in 1989. Fast forward to 2019 and the top 1 per cent held 28.7 per cent whereas the top 10 per cent held 63.9 per cent. The bottom 50 per cent of households saw their share fall to a mere 5.9 per cent. This is nothing but staggering and shows that the system is not working for half of the households in the US.
And what's worse, this group continues to be extremely vulnerable based on their asset mix - half of the wealth possessed by the bottom 50 per cent of households is in real estate: probably their family home. A fifth of their assets is in consumer goods - not a category of asset that will increase in value. Compare this to the top 1 per cent of households: real estate accounts for just 11 per cent of their asset pool whereas equities make up 39 per cent and consumer goods a mere 2.7 per cent. In other words, if another real estate collapse occurs, the bottom half of the country will be plunged into a repeat catastrophic meltdown.
The gap between the richest and the poorest households is now at its widest point in 50 years. Given that half of the country's population is struggling whilst the top 10 per cent continue to get wealthier, it is not surprising that politicians are seeking to stoke a class war. However, it is folly to assume that support for the idea in opinion polls will translate into electoral success for the class warriors. History suggests that radical socio-economic transformation is difficult to achieve in the United States due to structural reasons. The richest section of society controls politics - not just by way of crude political donations to parties or candidates but much more subtly. For instance, major media outlets are owned by the extremely wealthy. The Washington Post newspaper is owned by the richest man - Jeff Bezos, and Fox News was controlled until recently by Rupert Murdoch. These control over the media and think tanks, alongside the insidious influence of lobbyists will ensure that the interests of the wealthy are protected.
Class warfare won't pay off for another reason - rising distrust in government and public institutions. Soaking the rich with wealth taxes and handing over that money to the government will only result in more corruption and waste. The proposal also goes against the grain of human aspiration. As Travie McCoy's lyrics illustrate, intuitively people don't want others to become poor - they want to get rich. As Bruno Mars croons, "I wanna be a billionaire so (expletive) bad, Buy all of the things I never had."
The only viable solution is more innovative philanthropy - billionaires could build new free hospitals, schools, and housing where income-screened services are provided for those left behind by the system. Instead, philanthropic donations have so far been limited to throwing money into existing structures - expensive facilities at rich colleges, scholarships for middle class kids, and the like. They merely transfer valuable funds to subsidise an expensive system and do not offer cheaper alternatives to the services that people truly need. America's billionaires need to use their collective brainpower to tackling inequality. A wealth tax is a lazy idea.
Sandeep Gopalan is the Vice Chancellor of Piedmont International University, US
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