21 January 2019

Oxfam’s inequality claims aren’t just misleading. They’re untrue


The World Economic Forum’s meeting in Davos gets underway this week. That means it is time for Oxfam to have its annual whine about global inequality. And, as usual, their report is a right stinker. What used to be a charity performing the honourable and righteous task of feeding the starving is now just another mouthpiece of the fashionable nostrums of the left. Today, Oxfam’s basic view is that inequality is what matters and let’s tax the heck out of the rich to compensate.

Given that there are ever fewer starving to feed, perhaps this change what’s a bureaucracy got to do to survive, but does their point of view make any sense? There are some minor points worth making. For instance, their insistence upon the desirability of wealth taxation runs contrary to absolutely everything that economics tells us. Famously, Mirrlees tells us that the optimal rate here is zero and there are entirely sensible calculations telling us that it should be negative.

Yet even if we don’t want to follow the actual science, it remains the case that Oxfam are talking of a 0.5 per cent tax rate upon the stock of wealth, something which in a world of 1 per cent or so interest rates is a really rather high rate. You might even call it confiscatory, and it is certainly high enough to create behaviour change and thus avoidance. This would raise, so they say, some $200 billion. That sounds like a lot — until you realise that the world’s governments already dispose of some $22 trillion or more a year.

Hands up everyone who thinks government having 1 per cent more a year is going to solve anything major. Or even minor – as Robert Colvile points out in the Times today, productivity in the charities and public sector fell by 1.9 per cent last year. If government had only improved as much as the tepid rate of the private sector – 0.7 per cent — we’d have had some 2.5 times more improvement in what government could do than the soak the rich plan. That might even be something sensible for us to try.

Much the same applies to getting rid of offshore tax avoidance. An estimated $100 billion needs to be collected, which works out at 0.5 per cent of what government already has available each year.

But the problems with Oxfam’s report run deeper. Their assumption that the rich should be paying their fair share sounds sensible enough. Adam Smith made a similar argument. But, contrary to Oxfam’s claims, this is exactly how our tax system already works. In the UK the top 1 per cent pay 28 per cent of all income tax, the top 50 per cent pay 90 per cent. And yes, these numbers are higher than they were a decade or two ago.

No, we can’t say that this is because the top 1 per cent gain more than 28 per cent of all income because they don’t. The same is roughly true for the US, where the top 1 per cent gain about 20 per cent of all income and pay 39 per cent of all income tax.

Across the rich world, tax systems are heavily weighted towards those better off paying disproportionately more into the common pot. It’s at least arguable that we already tick the “fair share” box that Oxfam are so worried about.

My real ire, however, is aimed at what most would consider a mere detail in the Oxfam report. We are told that: “This ‘trickle-down’ orthodoxy is now being challenged. Research by the IMF shows that redistribution is generally benign for economic growth, and that many countries have considerable room to raise taxes on the richest without harming their economies.”

I am one of those sad people who actually reads footnotes and worse, the reports to which they refer. The footnote on this passage takes us to the IMF paper it mentions. The conclusion is not quite what Oxfam want us to believe. Rather, the IMF found that below a certain level redistribution aids in growth, above that level the opposite is true. That basic idea is of course entirely unremarkable, we see this all the time in both economics and life more generally. The important question is therefore where the tipping point is? What is the optimum amount of redistribution? The peak of the Laffer Curve with taxation for example, the very thing Oxfam is ignoring with that idea of what amounts to a 50 per cent tax on the returns to capital above.

What that IMF paper actually says is that we can move inequality by about 13 percentage points of the Gini Index. Less than that and we’re leaving some benefit we can gain by redistributing more. Try to go over that amount and we’re making ourselves worse off, affecting growth negatively overall.

Thirteen points of movement on the Gini scale by redistribution is a little more than the US’s current score, about where the UK is and very much lower than where France or Sweden are

That is, it may well be true that some non-rich countries out there can make themselves better off with a bit more redistribution but it’s equally true, from the same source, that many to most of the rich ones should be lowering the amount of redistribution to do so.

In other words, Oxfam have completely misread the research they are citing to support their agenda. We can be polite and call it just that, a misunderstanding of the complicated stuff the IMF is trying to tell us. We could be a little ruder instead, and wonder why it was they made this apparent mistake. The thing is though, the why isn’t what matters.

Oxfam, for whatever reason is telling us things which are, according to their own evidence, simply not true. At which point, why should we believe a single thing they say?

Oxfam’s entire case rests upon the idea that greater taxation and redistribution will make us all richer. From the levels we’ve already got of both in the countries where anyone’s likely to read the report this isn’t true. Rather, we’re all already at or over the levels where it would or could be true.

Far from a persuasive recommendation for how the world should be, Oxfam’s report amounts to ignorance — accidental or otherwise — of the world as it is.

Tim Worstall works for the Continental Telegraph and Adam Smith Institute.