7 November 2019

Targeting billionaires misses the point about wealth creation

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The latest target in Labour’s class warfare election campaign is the humble billionaire, with various MPs and outriders (looking at you, Owen) wheeled out in recent days to lay into the hyper-wealthy. This isn’t political rocket science. In a country where many people are struggling to get by and where there are relatively high levels of inequality, it’s difficult to justify a few people being so rich.

But are things really that simple?

First, we need to make a distinction between those who have become wealthy by providing value to others and those who got their money by unfair means.

There are, of course, people who have become very wealthy through immoral and illegal means. For example, people who get rich through outright criminality, or who benefit from corrupt regimes. Then there are the heads of large corporations who use the government to maintain their dominant position in the marketplace and stifle competition at the expense of consumers. There are also land owners who gain their wealth as property is so expensive and who campaign against new developments as they know the value of their own property. Then there are those who hire lawyers and accountants to find loopholes in our tax system to avoid paying their fair share in tax.

Those are, you might say, the undeserving rich. Whoever wins the next election would be justified in going after these people – and I suggest a range of possible policy interventions later.

Many people also object to the fact that some people have become rich as they just inherited their wealth. Of course, some people do become wealthy as a result of the largesse of their parents or grandparents, but this is far less frequent than it used to be. For example, a study conducted by Merrill Lynch found that 70% of rich families lose their wealth by the second generation, and 90% by the third.

So, although some people do become rich through inheritance or unfair and immoral practices, this is not the case for most wealthy people. The fact some people are rich is largely determined by human capital. This was the finding of an economic study earlier this year which found that the wealthiest people are those who have added value to their firms. The importance of human capital is often overlooked in such debates but it’s something Adam Smith was writing about as long ago as the 18th century.

And it’s worth bearing in mind the fiscal risks of being too punitive towards the very wealthy. Our tax base is already extremely narrow, with the top 1% of earners accounting for some 27% of income tax receipts. We need only look across the Channel for a salutary example of what happens when governments target the very wealthy. The French government’s pursuit of the well-off has meant an exodus to these shores, helping make London the sixth-largest French city.

Rather than simply imposing heavy taxes on the rich, the government should target those who have become wealthy the wrong way.

First, we need to tackle the planning system. Many people are wealthy purely because the value of land is so high and they happen to own a lot of it. What is more, they use their power to prevent developers from building homes on nearby land. This is one reason why housing is so expensive in the UK and that some people have done very well out of that fact. The government should liberalise the planning system by scrapping restrictions on the height of buildings and allow people to build on the green belt. This would lower house prices, taking money away from the NIMBYs while also alleviating the financial pressure faced by people on modest incomes.

Then we need to look at regulations. It might seem counter-intuitive but big businesses love some forms of red tape and use their wealth and power to pressure governments to keep some of it in place. This is because they can afford to hire teams of lawyers and compliance officers in order to comply with the law. Small businesses – and potential competitors – can’t afford these things and so they are locked out of the market. As such, large corporations don’t face competition and can carry on overcharging consumers and generally gaming the system. The government should review its regulatory framework to see which bits of red tape to cut. This would enable entrepreneurs to challenge big businesses, thereby benefiting consumers.

The tax system should be reformed. It is far too long and complicated so that the only people who understand it are clever lawyers and accountants. The very wealthy can hire these people to help them find loopholes, meaning in some cases they end up paying less tax than their cleaners. A system where taxes are lower, flatter, and broader – as well as easier to understand – would mean that the very rich won’t be able to hoard their wealth at the expense of the public services the rest of the country relies on.

We should also focus on boosting human capital so that everybody has the chance of becoming wealthy, regardless of their background. This would most likely involve investing more in education. Not just on schoolchildren but also a fund to support adults so that they can acquire new skills.

It will obviously be tricky for the Conservatives to respond to Labour as it will look as though they are simply sticking up for the wealthy. However, their manifesto should contain commitments to reform the planning system to tackle the NIMBYS, cut regulations to help entrepreneurs and take power away from uncompetitive businesses, reform the tax system to reduce tax avoidance, and invest in education so that everyone has the opportunity to get on in life.

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Ben Ramanauskas is a research economist at Oxford University