Stop Singing Soak the Rich
Don't get in a panic over inequality: fixate instead on lowering taxes,
June 29, 2007
by Diana Furchtgott-Roth
The "soak the rich" movement has moved into full swing. A Treasury select committee is considering increases in taxes on private equity executives, and those hoping for broader tax increases on the wealthy no doubt feel emboldened by the passing of the baton from Tony Blair to Gordon Brown.
Yet all groups, even the lowest fifth, are now doing better than 10 years ago, as we can see by the proliferation of iPods and mobile phones: the Institute for Fiscal Studies reports that income inequality has actually declined since 1997. Raising taxes will make everyone poorer by driving business away from Britain at a time when London has just succeeded in eclipsing New York as the world's leading financial centre.
Countries with the fastest growth, such as the US, Canada and Britain, have more income inequality than countries with slower growth, such as Italy, Germany and France. Britain's gross domestic product has outperformed its European competitors since 1997, with millions of jobs created and unemployment rates curbed. Over the last year, 87,000 more people have been employed and GDP is almost 3% higher than a year ago. In contrast, Italy has seen annual growth of only about 1.9%, and France's GDP is about 2.1% higher than last year. There is no question that Britain is doing well.
Rather than panic over inequality, we need to be concerned about increases in unemployment, such as the rise from 4.6% in 2005 to 5.3% in 2006. The solution is not to raise taxes, thereby discouraging economic growth, but to lower them, to attract businesses and increase recruitment.
A snapshot of current incomes does not reflect wellbeing in the UK, because people frequently move around income groups as they age and advance in their careers. For instance, more than half of students - whose earnings are expected to rise in the future - are in low income households. Pensioners may have low incomes, yet many are living off accumulated earnings.
Inequality may not be as severe as some would make it seem. One source is skills levels. At the top end there are higher returns to education than there used to be, with the earnings of university-educated people pulling ahead of others. At the low end, the Department for Work and Pensions' Households Below Average Incomes survey indicates that 55% of adults of working age with no educational qualifications are in the bottom two quintiles. This is not unique to Britain, it is a worldwide phenomenon caused by changes in technology.
Changes in demography exacerbate inequality. As women get an increased share of degrees, more move into the paid workforce, creating more dual income couples. Many higher income households have two workers. We don't want to turn back the clock and tell women to go back to the kitchen and the nursery, so this isn't going to change.
The role of the government should be not to raise taxes and drive business elsewhere but to provide opportunities for social and economic progress. Since income is, by and large, the return on investment in education, we need to make sure children have the best education possible and that unemployed workers have access to retraining.
As Gordon Brown takes office his responsibility is not to eradicate inequality but to make sure businesses keep providing job opportunities. As tempting as it may seem to beat the redistribution drum, such policies will force productive businesses elsewhere, setting back employment opportunities of those who need jobs most.
This Op-Ed was featured in the UK Guardian of June 29, 2007.
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, was a Senior Fellow at Hudson Institute from 2005 to 2011.