Taxing the Rich Not the Better Way to Narrow the Income Gap?

Richard Wilkinson, is a professor emeritus of social epidemiology at the University of Nottingham Medical School and co-founder of the U.K.-based think tank The Equality Trust. He has an interesting theory about narrowing the income gap in Canada and that merely taxing the rich more will not address the real problem.

From an article today on the Huffington Post:

Since his book the Spirit Level came out in 2009, many policymakers have started paying attention to the social epidemiology professor’s ideas. This week, amid a cross-Canada speaking tour, Wilkinson met with officials in the government of Ontario.

As one such official told HuffPost, the meeting was an attempt to understand Wilkinson’s research on poverty and income inequality.

“It is a different way of looking at the issue. He’s got very interesting conclusions, so it behooves us as policymakers to listen and to figure out how it actually feeds into the work we do,” the official said.”

All of which suggests that discussion about income inequality is becoming more mainstream in Canada, where the gap has grown significantly in recent decades. Though Canada remains far more equal than the U.S., the rich-poor divide is deepening at quicker pace.

When it comes to closing the gap, Wilkinson said the major barrier in developed countries is “a misguided self-interest among the very rich.

At the end of the article there is a slideshow demonstrating  ten facts about income equality. These facts  are discussed more fully at his website:

When looking at the role of different countries in international trade agreements it looks as if the proposals supported by more equal countries are less dominated by attempts to serve their own economic interests at the expense of other countries. Sweden, Norway and the Netherlands have also contributed many times more in total (not just per head) than has the USA to the World Trade Organisation’s Global Trust Fund set up to finance technical assistance to developing countries.

There are translations of the material into French and Italian.

There is a graph on the website that shows the percentage of national income spent on foreign aid over  the gap in income equality. Canada lies somewhere in the middle with the US dead last. I wonder if this is what really needs to be recognized by all governments instead of spending so much time, money and effort on nonsense such as FBAR and FATCA.

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28 thoughts on “Taxing the Rich Not the Better Way to Narrow the Income Gap?

  1. Nobledreamer, this is a very interesting topic because there are no obvious answers. Taxing the rich won’t work because this will drive away the talented people who are successful and discourage others from being successful if their reward is to be vilified and plundered.
    Income inequality IS NOT A BAD THING per se. Is it reasonable for university grads to expect 6-figure salaries on graduation? Merit and experience, talent and hard work should count for something.
    The key to making income inequality acceptable is to ensure that there is genuine mobility from low to high, so that people know it is possible for them to make it in life. Instead of artificial barriers to success caused by regulations that prevent freedom to work, or corrupt practices that ensure the success of certain favoured constituencies and limit competition, or well-meaning programs that trap people in perpetual welfare, there must be more freedom to pursue individual goals, more choices in education , and less government interference in restricting the creation of entry-level jobs and offers of on-the-job training. People need to be free to hire whoever is best for their enterprise, and job-seekers need to have access to vocations without having to go through superfluous training and expensive certification requirements.
    The longer I live, the more impressed I am with the ability of ordinary people to solve problems locally, or even more broadly, without being micromanaged by some self-important authority figure making sure every I is dotted and T crossed. We are an amazing species, given the hope and opportunity to do our best.

  2. The rich can’t escape VAT. Although it’s a regressive tax and can take a bigger percentage of low income, your circumstances really depend on how much you pay. In the UK it’s 20%, but there’s a list of items like food which is exempt, and another list of items charged at 5%.

    But is it regressive when low income people in Europe receive back government benefits and services in return?

    If you’re rich enough to pay £5000 for pricey piece of furniture why shouldn’t there be VAT? In the US the rich whose income is capital gains based get away with 15% tax on earnings and then when they go to spend, guess what, they wind up paying 0-13% sales tax (including local city tax) with the average about 6-7% across the 50 states.

    The main problem is In the US nobody believes they should be paying taxes anymore. In Europe, you pay the price on the shelf, people don’t get the transactional reminder about paying VAT with every trip to the shop, but if you’re going to have a welfare state it’s going to need funding.

    The US has to bring in a federal consumption tax (VAT/GST), and raise taxes somewhat on the rich to balance the books. Why should the poor and the old continue subsidising cheap consumer goods, and suffer from poor government services, to keep the tax rates down for the well-off?

    I’ve lived in low-tax countries, and high-tax countries, and low-tax countries seem to be more of an economic free-for-all where more people are left behind. The US has scope for some modest tax increases and probably still be lower taxed than Europe overall. The economy won’t implode like the Republicans would have you believe.

    The longer the US waits the bigger the bill will be to fix the mess.

  3. Unfortunately in the US, taxes are virtually always used to fund new spending, not pay down the debt or reduce the deficit. It always seems to be “just this once, let’s tax the wealthy and get our house in order.” But even when taxes do go up, so does the deficit.
    I agree the rich, who already pay more taxes than anybody in the country, would likely tolerate a bit more taxation, but revenue isn’t the problem, it is unfettered spending. The anti-rich rhetoric is turning the wealthy away (http://hotair.com/archives/2012/05/10/bold-new-critic-of-obamas-class-warfare-nonsense-yes-most-of-my-hollywood-friends-agree-with-me/).
    It is idiotic that 47% of households pay no taxes. Everyone should have to pay something, because that which is free is never valued.
    It is highly likely that reducing loopholes and spreading the burden wider would allow more revenue than is coming in now, and may even allow a lowering of general tax rates in the process. Raising taxes brings in money for a short while until people adapt and figure out how to escape it. Lower tax rates usually lead to more compliance, hence more revenue.
    But the government still has to be made to live within its means. Enough already. It would help if we had a leader who had some idea of where economic growth really comes from.

  4. @foxyladyhawk

    Interesting perspective. I agree, your point about “genuine mobility” is key.

    “Merit and experience, talent and hard work should count for something.” This used to be such a visible and valued aspect of the work experience. I watched my Dad, who through no fault of his own could not finish university, rise to the rank of an electrical engineer (though they never matched his pay grade). Everyone in the company knew that if you wanted something done and done right, you went to him. He was creative, talented and respected and that meant more to him than loads of money. He worked hard and he enjoyed it. Though he himself never lost the stigma of not having that degree.

    I listen to my son and his generation and am perplexed by the idea they should immediately be earning big-time. They are used to the practice that “jumping through the hoops” automatically produces a predictable, specific outcome. I see this even in a situation as different as those who manage to pass the different levels of performance with regard to the Royal Conservatory exams here. While there are certainly those who deserve to pass, the majority cannot “play” at all, no spirit, nothing to say, only worrying about “correctness” (nothing is more boring to listen to than being “correct.”)

    The whole issue seems to be produced by “standardization” which ironically enough, is introduced in order to not only raise the standard but to provide good instruction etc. It doesn’t seem to work. ;-P

  5. @John,

    I’ve gone back to college and am taking Taxation I. (UGH). We’re being taught that any sales tax is regressive, when compared to income level so I am thinking about your comment, “But is it regressive when low income people in Europe receive back government benefits and services in return?”

    In theory, perhaps but in the examples the prof used, it seemed those in lower income brackets almost always spend a higher percentage of their income which also contributes to the “regressive” aspect.

    I’ve not lived in Europe and am not familiar with VAT. Value added tax? Is this the same as we have in some provinces in Canada? A harmonized federal/provincial sales tax?

  6. In general, a value added tax is imposed on the increase in value of a good after each stage of production. For example, someone buys some cotton for $3, makes cotton threads, and sells them for $5. The VAT applies to the additional $2. The person who buys the threads for $5 makes a piece of fabric and sells it for $10. The VAT applies to the additional $5. The person who buys the fabric for $10 makes a shirt and sells it for $15. The VAT applies to the additional $5. In the end, the VAT has been cumulatively applied to the entire $15.

    A sales tax, on the other hand, is not imposed on goods that are bought to be modified and sold later. Only the end user pays the tax, on the entire $15 in the example above.

    In Canada, there are both a federal VAT and a provincial sales tax (except in Alberta and in the three territories, where there is only the federal VAT).

  7. @Shadow Raider

    Technically in Canada five provinces have provincial VAT’s(Ontario, Quebec, New Brunswick, Newfoundland, Nova Scotia) one has a provincial VAT and is going back to a provincial sales tax for really screwball reasons(British Colombia) one is moving from a PST to a provincial VAT next year(PEI) and then Manitoba and Saskechewan have PST’s and expect to continue with PST’s/

  8. Thanks Shadow Raider. So a VAT is basically equiv to our GST.
    The textbook doesn’t say a word about the Territories, 😦

  9. @nobledreamer – What I meant was people on low incomes in the UK may be eligible for housing allowance, and other payments as part of the welfare state. My point is if someone is collecting say £500 a month in benefits from the state, and they’re income is on £10,000 and spend all of it so VAT would be £2000. They receive £6000 from the government in benefits. So if the taxation wasn’t so high in theory they’d receive less benefits. It’s a bit like taking from one hand and giving back with another but they’re still leftover with money. Obviously the calculation is an individual one.

    That’s why when people talk about the high taxes here, I always say how much are they getting back from the system to offset some of it?

    Obviously with VAT it’s the last person in the chain that pays that can’t claim it back. That’s why businesses in general aren’t bothered about by VAT because they generally have enough “VAT capacity” in effect they don’t pay it giving the excess to the HMRC of course.

  10. The European Union VAT is charged by each country individually. The EU simply issues a directive that all countries must apply a VAT of at least 15%, with exceptions allowed for some goods. Currently, the standard rates range from 15% in Luxembourg to 27% in Hungary.

  11. @Tim, you’re right, some Canadian provinces have a provincial VAT while others have a provincial sales tax. I don’t really understand the reasons behind either choice.

  12. An off-topic question for the Canadians, if I may. Was there any controversy regarding the creation of Nunavut some years ago? Brazil and India recently tried to create new states, but the proposals resulted in heavy controversy because of the increased administrative costs that would arise, and the new states were not created.

  13. @Shadow Raider

    Some provinces decided to harmonize their provincial sales tax with the federal sales tax. It’s very costly and time-consuming for businesses to deal with two different sales taxes-returns in multiple jurisdictions, different rules for which goods/services were taxable and so on.

    Alberta is different from all in that it has GST, no provincial sales tax and interestingly, has a flat tax of 10% on it’s portion of the income tax collected…..

  14. I watched the Fareed Zacharia GPS interview with the CEO of the world’s largest money management firm, Blackrock. Larry Fink is likeable guy, seemed to be aware of the struggles of the middle class in the US, especially in reference to the housing crisis:
    “if you are that family that’s struggling, trying to meet payments or in a neighborhood and seeing all the vacancies and unsold homes, it’s a big burden.”
    He remains bullish on America, but with caveats, and I want to draw your attention to the last paragraph I’ve posted here regarding the impending sequester at the end of the year:
    Mr Fink is “nervous about once again our time frame. We demand change so rapidly and change doesn’t happen that rapidly today. It evolves. The news cycle is so short.
    ZAKARIA: What kind of change do you think people are demanding?
    FINK: Well, we are going to have a fiscal crisis, or we do have a fiscal crisis? We have the sequester that we have to deal with at the end of the year. And that’s going to start impacting our economy this year.
    ZAKARIA: Why?
    FINK: Well, if you are a military company that derives a large component of your revenue through military, and you are looking at a potential 700 billion dollar cut in military spending over 10 years, you’re not going wait until Congress maybe on December 30th is trying to delay it. You have a responsibility to your shareholders to start focusing on contingent plans.”

    The entire interview is worth the read, but unfortunately I can only provide a link to the entire show:
    http://edition.cnn.com/TRANSCRIPTS/1205/13/fzgps.01.html

  15. Ha! Wouldn’t it be wondeful if the FATCA nonsense started causing all sorts of bad stuff to happen going right into the November election? The Democrats would have some explaining to do.

  16. I know you all have it circled in highlighter on your calendars, but I just want to remind you all that it’s FATCA hearing day in DC, or as Watcher calls it “Kabuki dance”.

  17. @bubblebustin I especially like this opening image/phrase
    “is like a stealth bomber flying on a mission..”
    and thanks for reminding us, totally forgot!

  18. All great articles, have Tweeted them.
    Yes, they will begin to notice when it hits them where it hurts, in their pocketbooks.

  19. You’ll see it all over the news when it becomes about how FATCA will harm the US instead of expats. We will be just a footnote then.

  20. @bubblebustin, like the saying goes …. You can always count on Americans to do the right thing after they’ve exhausted all other possibilities. Sigh.

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