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Monday, September 15, 2008

The myth of the super-rich

by Peter Wilby

New Statesman (September 11 2008)

Most of our tycoons are not wealth creators, but wealth drainers

Most Britons, and particularly readers of this column, will be familiar with the extent to which the super-rich are soaring away from the rest of us. Over the past five years alone, the average earnings of chief executives of FTSE-100 companies have doubled to GBP 3.2 million. Their pay has been rising five times faster than their employees'. The top one per cent of the population now enjoy 23 per cent of national wealth, while the poorest half share a mere six per cent. For most of the 20th century, Britain became steadily more equal. For the past three decades the movement has been in the opposite direction and it is estimated that Britain's wealthiest person, Lakshmi Mittal, is worth more than twice as much as anybody in the past 150 years.

The reasons for the international trend of growing inequality are still disputed. Most economists, however, agree that globalisation and technology both play a role, because they make business more competitive and, therefore, put a high premium on scarce skills, including those of entrepreneurship and leadership. Government policies - tax cuts, deregulation and anti-union legislation - have certainly added to inequality. But, the argument runs, these are made necessary by the increased competition. If we hit the super-rich with what are pejoratively called "punitive" taxes, it is said, they will take their money and wealth-creating prowess elsewhere. Then we all lose.

This account is challenged by Stewart Lansley, author of Rich Britain (2006), in a pamphlet put out by the TUC for its annual conference (Do the Super-Rich Matter?). Lansley argues that the largest group among today's super-rich are not wealth creators at all. They make their fortunes from land, property and finance and, in essence, are parasites living off an economy that is being slowly destroyed.

The share of domestic bank lending that goes to the manufacturing industry fell from 5.2 per cent in 1999 to 2.3 per cent in 2007. Britain is strong in only two sectors of advanced technology: aerospace and pharmaceuticals, which are both supported by government money.

Spending on research and development is declining. Output per worker is still well below the US, France and Germany. Internationally, Britain compares poorly on patent generation.

To some degree - which Lansley doesn't fully acknowledge - none of this matters. You could argue Britain is strong in the growth areas of the future, which are mostly services such as education, media and top-class football matches. But Lansley is right to point out that an extraordinary proportion of current investment and top-end earnings go to financial institutions and their employees. In effect, Britain has turned into an enormous hedge fund on which ministers have bet the house. Many of the super-rich specialise in shifting money around, allegedly so it can be used most productively. This too may be described as a service: wealth management for the world. Now the credit crunch has revealed that financiers, to put it mildly, did a less than brilliant job and that large sums ended up in their own pockets. Indeed, the high earnings in the finance industry came mostly from the speculative activity that got us into the present mess. One must wonder how long the world will continue paying for this kind of service.

But even if we keep their taxes low, the super-rich will eventually find reasons to leave, because Britain will lack the educated workforce, the transport, the policing, and perhaps even the stable democratic structures that make it a good place to live and do business. The mass of taxpayers will not indefinitely finance state spending while the country's 49 billionaires pay, according to one estimate, just 0.1 per cent of their income in tax.

Lansley proposes several measures to "cap unjustifiable fortune-building at the expense of others". Some, such as requiring banks to hold higher levels of capital in proportion to what they lend, might well have restrained a national spending spree built on credit, with the dire consequences that are now familiar. But the best proposal is that the super-rich should simply pay tax at roughly the same rate as most other people. Lansley suggests that, however many tax reliefs and avoidance schemes are available, they should all pay a minimum of 32 to forty per cent of their earnings to the Treasury. That would still leave them very rich, but also force them to make a fair contribution to services that they now seem to imagine are provided by the tooth fairy. It is a sad comment on new Labour that it will not contemplate a solution that is so obviously just.


Peter Wilby was editor of the Independent on Sunday from 1995 to 1996 and of the New Statesman from 1998 to 2005. He writes a weekly column for the New Statesman.

Bill Totten


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