6 January 2017

Here’s the real truth about inequality


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.

Tim Worstall is senior fellow at the Adam Smith Institute