When it comes to taxing the wealthy, heed the economists not the billionaires

Money doesn't talk, it swears, sang Bob Dylan. And liberal billionaires in the US are certainly not being polite about the latest policy ideas emanating from America's Democratic Party.

Howard Schultz, the billionaire founder of the Starbucks coffee chain who is considering running for president in 2020, last week condemned universal healthcare and higher rates of income tax on the superrich, as proposed by the new Democratic congresswoman Alexandria Ocasio-Cortez, as "un-American".

"It concerns me that so many voices within the Democratic Party are going so far to the left," Schultz lamented. "If I ran as a Democrat, I would have to say things that I know in my heart I do not believe."

Meanwhile Michael Bloomberg, the former mayor of New York and billionaire head of the financial terminal business, also last week warned that a wealth tax, as proposed by Senator Elizabeth Warren, another Democrat presidential hopeful, is potentially unconstitutional and risks turning the US into Venezuela.

The historical solecism of saying that high taxes on the super-rich are unknown in American history has been widely noted (the top marginal rate of tax between the 1940s and 1970s was well over 70 per cent).

But just as important is the question of what the impact of such progressive, inequality reducing, changes to US taxation would be now. Would overall growth suffer? Would the pie of prosperity be smaller, as the likes of Schultz and Bloomberg suggest? A new book by three International Monetary Fund economists, Jonathan Ostry, Prakash Loungani and Andrew Berg, attempts to provide some answers to those questions. And their answer is that redistribution, unless it was extreme, would be unlikely to hurt growth and could actually sustain it.

"Inequality undercuts the sustainability of economic growth. More unequal societies tend to experience more fragile growth," said Ostry at the Peterson Institute for International Economics in Washington last week. "There is too much caution about using redistributive fiscal tools in terms of their possible disincentive effects. On the whole, the macro data strongly suggests redistributive policies have done more good than harm ... Going for growth while assuming that inequality takes care of itself seems to us to be a dangerous gamble." In other words, Ocasio-Cortez and Warren are thinking along the right lines (although the devil will be in the detail of any policies) while those anti-redistribution liberal billionaires are essentially wrong.

Two other economists who specialise in tax research - Emmanuel Saez and Gabriel Zucman - advanced a subtly different argument in favour of higher US top tax rates and wealth taxes last month. "An extreme concentration of wealth means an extreme concentration of economic and political power," the pair wrote in The New York Times. "Progressive income taxation cannot solve all our injustices. But if history is any guide, it can help stir the country in the right direction."

The prospect of Schultz running as a well-funded independent candidate, splitting the anti-Trump vote and handing the property magnate the keys to the White House for another four years, seems to illustrate beautifully this argument about the distorting influence of massive wealth on politics.

It's often asserted that mainstream economists are all shills for neoliberal politicians, and ignore issues of inequality. The fact that Ostry, Loungani and Berg are thoroughly mainstream economists and all work at that supposedly neoliberal death star, the IMF, shows what a crude caricature this is. One can say the same of the ideas and arguments of Saez and Zucman, who are both based at the University of California, Berkeley and who have both been published in the most prestigious mainstream economics journals.

The fact is that the thrust of mainstream economic research on inequality and policy development among Democrats are moving in the same direction. And the old road of the anti-redistribution billionaires? Well, it appears to be rapidly ageing.

Why are we so ignorant about who is and isn’t rich? Blame psychological bias and misinformation

'When Austin Powers' nemesis Dr Evil came out of deep freeze and held the world to ransom he hilariously imagined that one million dollars was a lot of money. The response to the suggestion of shadow Chancellor John McDonnell last week that those earning an annual salary of more than £70,000 makes one rich has prompted similar guffaws.

Doesn't he know how much it costs to buy a house in London these days? Doesn't he know how expensive private school fees are? Honestly, how out of touch can you get? Of course, as many have pointed out, it's not McDonnell who is out of touch.

The most recent data from HMRC shows that the median average pre-tax income is around £22,400. An income of more than £70,000 a year will actually put you in the top five per cent of all UK earners. When Ed Miliband proposed a "mansion tax" on properties valued at more than £2m in 2015, right wing newspapers exploded with fury, screaming about how that this would lay waste to middle England.

In fact, it would have affected around 100,000 homes, less than half a per cent of the total UK residential dwelling stock. The average house price today, by the way, is around £220,000. And wealth is a far more unequally distributed than income, with the luckiest tenth owning almost half of all the assets.

Rich is like the inverse of "middle class". In Britain, everyone seems to think of themselves as middle class, whether they're earning hundreds of thousands of pounds a year or taking home barely more than the minimum wage. Being middle class (preferably the "hard working" variety) is a badge of honour. But people are extraordinarily reticent about allowing themselves to be labelled rich. Many would sooner present themselves in the Daily Mail offices as a Brexit saboteur.

Is this simply because people don't want to pay more tax and fear that admitting wealth will invite a raid from opportunistic politicians? Up to a point. But another big influence is reference point psychology.

People don't have a mental snapshot of the national distribution of income or assets in their heads when they consider the question of whether or not they are "rich" or "well off". They answer an easier question instead: where do they feel themselves to be relative to their peer group and relative to their own expectations? 

This helps explain why research shows people from all over the income distribution have a tendency to place themselves in the middle of the pack when asked to guess. We all know some people who are doing better than us and some who are doing worse.

Even the indisputably prosperous are prone to this. Consider the FTSE 100 chief executive who is awarded a compensation package of £4m a year. Rich? Not when you consider that the boss of an American company earns five times as much. What about the investment banker who extracts a bonus worth tens of millions of pounds from his employer? Well off? Not compared to that banker's hedge fund or private equity friends who might earn ten times as much. And so on right up to the billionaire classes.

But this psychology can be found well down the pay scale too, even among those who earn below £70,000. As HL Mencken put it, wealth is "any income that is at least one hundred dollars more a year than the income of one's wife's sister's husband".

So where does this fiesta of unscientific relativity leave tax policy? In a dire state is the answer. Most public finance experts, at least those who are not employed by the super-rich to evangelise for tax cuts, now agree that residential property in the UK is inefficiently and unfairly taxed. But it's proven impossible to reform the system in a more equitable direction because the bulk of the public can be so easily misled by politicians and the partisan media into believing that they personally will feel the pain.

The consequence is that residential wealth, which has risen substantially in recent decades, is under-taxed relative to income, which impedes our national productivity growth and encourages us to plough our savings into property, leaving us perpetually prone to a dangerous orgy of housing speculation. If we are ever to escape from this doom loop of public ignorance, dysfunctional policymaking and financial instability, the first step out will probably be an acknowledgement of the source of the problem: misinformation and right wing propaganda.

When political commentators react like scalded cats to the very suggestion that someone on more than three times the average income could be labelled well off, there is a problem. When we are inundated with chin-stroking discussions in the broadcast media (even among public broadcasters like the BBC) about who can fairly be considered rich, that tells us something important and troubling about whose financial interests the essential channels of information in our society are, directly or indirectly, serving. And it's not those who really are in the middle.

No, the rich are not bearing too much of the nation's tax burden

''Death and taxes, as we all know, are the two great guarantees of life. But a strong candidate for a third is crude anti-tax lobbying by the right-wing press.Their favoured argument in recent years has been that the "burden" of taxation is falling ever more heavily and unfairly on the very rich.

The Daily Telegraph this week presented an analysis showing that the top 1 per cent of income tax payers pay 27 per cent of all income tax receipts, up from just 11 per cent in the 1970s. The report also noted that the top 10 per cent of taxpayers account for 59 per cent of total receipts, up from 35 per cent in 1976.

It asserts that "the wealthy … are making a bigger contribution to the UK's income tax receipts than they have done at any other point during the post-war era". The piece throws in references to the pledge from the late Labour Chancellor Denis Healey to squeeze some unfortunate souls until "the pips squeak" and warnings from a Conservative MP about how oppressive taxes are in danger of deterring smart people from working.

But the analysis, like many previous ones in the same vein, is misleading because it neglects to mention a crucial piece of context, namely that the very rich have been getting richer in recent decades - especially those at the very top.

According to the World Top Incomes database, the total pre-tax income share of the top 1 per cent of UK earners has doubled since the 1970s from 6 per cent to around 12 per cent, largely a reflection of the explosion in pay of financiers and senior company executives. The pre-tax income share of the top 10 per cent has also risen since over that time from 30 per cent to 40 per cent. These groups are paying a larger share of the total income tax take because they have larger slices of the pie than they used to.

This says little about the direction of tax policy. Rather, it's an arithmetic property of a progressive income tax system, whereby above certain thresholds a fixed proportion of earnings go to HMRC.

Another vital piece of context which these analyses omit, as Jonathan Portes of King's College London exhausts himself in stressing, is that income tax is not the only tax. In 2015-16 the Government raised £630bn in taxes. Of this just 27 per cent (£169bn) came from the income taxes. Very large chunks came from National Insurance (£114bn), VAT (£116bn) and corporation tax (£45bn).

It is either ignorant or disingenuous to imply that the entire national tax burden is accounted for by the income tax take. Any consideration of the social fairness of the tax system has to factor in the incidence of other levies to be even vaguely credible.

There are, it is true, challenges presented by the disproportionate reliance of HMRC on a relatively small number of high-income individuals. But despite the complaints of Tory MPs and right-wing newspapers these challenges have nothing to do with equity or Ayn Rand-style effort deterrence.

This is rather an issue of practicality. The rich can shift their incomes about ominously easily, as we saw vividly last year when a change in the taxation of dividends prompted large-scale income forestalling. An army of well-resourced accountants generate (entirely legal) avoidance schemes, leaving HMRC outgunned and ministers chasing their tails.

A part of the solution ought to be to shift the focus of taxation from income to residential property, where wealth inequality is vast and avoidance is much harder. The capital gains and inheritance tax systems are also in crying need of reform. The tax rates on the income of company owner managers should be brought into line with that of employees to eradicate an obvious avenue for avoidance by the very wealthy.

But we should also be trying to reform the structure of our economy, which throws up such large pre-tax disparities in pay. Pay at the very top is sometimes a reward for outstanding effort, inspiration and entrepreneurial activity. But often it is merely zero-sum wealth extraction and the exploitation of uncompetitive markets.

A more equal distribution of earnings would make the tax system less fragile. There are also reasons to suspect this could result in more sustainable GDP growth due to higher corporate investment and productivity.

A new tax campaign angle for the right-wing press? Don't hold your breath.''