Date posted: 01/12/2016 6 min read

Capitalism, inequality and economic growth

Can a more inclusive style of economic growth help close the global gap between rich and poor?

In brief

  • Piketty believes the assumption that economic growth brings jobs and better social outcomes is false
  • He argues for a progressive annual tax on capital across the globe — up to 10 per cent on capital earnings
  • Working Australians pay 50 per cent more tax than those earning from capital gains

By Steve Lewis

When Australian Prime Minister Tony Abbott welcomes world leaders to Brisbane for November’s G20 summit, he’ll be under pressure to embrace more than a mantra of growth for growth’s sake.

Australia’s year-long presidency of the G20 coincides with a nascent debate about the future of capitalism, amid concern over inequality and the gap between the world’s uber-rich and desperate poor.

The G20 — representing 19 leading economies, plus the EU — has embraced an ambitious plan to lift global output by 2 per cent. Australian Treasurer Joe Hockey is forging ahead with a strong “go for growth” agenda, hoping to lock in other nations before the leader’s summit in mid-November.

But while world leaders will debate trade liberalisation, cross-border tax havens, jobs and investment, there is a growing call for the G20 to embrace an agenda aimed at lifting hundreds of millions out of abject poverty. Reimagining capitalism.

Closing the gap between rich and poor may not make front-page headlines. But world leaders, ranging from US President Barack Obama to China’s Xi Jinping, are being urged to seek out a more inclusive form of capitalism.

Economic growth equals inequality

The catalyst for this push? French economist Thomas Piketty, whose ambitious tome, Capital in the Twenty-First Century, has triggered a global firestorm since publication last year.

Capital has provoked robust criticism from journals such as The Financial Times. But the progressive Left has embraced Piketty as a Messiah whose work might, just might, trigger significant and lasting change.

Piketty has analysed data from 20 countries, some of it dating back several hundred years. From this, he concludes that the tendency of returns on capital to exceed rates of economic growth has been the main driver of global inequality. The rich get richer, the poor get the picture, as Midnight Oil once sang.

Several years after the “Occupy” movement set up their protest camps on the streets of New York and other world capitals, Piketty warns from the Ivory Tower that government inaction could lead to extreme inequality. This in turn could undermine democratic values and stir civil unrest on a scale rarely seen.

To remedy this inequality, the man hailed by The Economist as “the modern Marx” argues for a progressive annual tax on capital across the globe. The richer you are, the more you would pay — up to 10% on capital earnings, according to Piketty’s preferred model.

Such a tax “would contain the unlimited growth of global inequality of wealth”, he says, an inequality increasing at a rate that “cannot be sustained in the long run”.

Has the Piketty analysis resonated in modern Australia and New Zealand — two economies that escaped the worst of the global financial meltdown of five years ago?

That is the lesson of history, when you start to have severe stress, extreme groups start to have a veneer of respectability and become the saviours.

Trust deficit

Tim Costello, the chief executive of World Vision Australia, believes there is no appetite — yet — for a global wealth tax.

But Costello warns that failure by “rich” nations to embrace a more inclusive style of economic growth may have serious consequences.

Speaking at the conclusion of the C20 forum in Melbourne in late June, Costello said there is “recognition that the trust deficit in government is almost universal”.

“Ordinary people really don’t think there are serious policies that include them, when you have got youth unemployment at 75 million across the world, child slavery at 80 million, when you have 200 million unemployed.”

The C20 — civil society 20 — was about debating a program ahead of the G20 forum. Costello warns that failure by world leaders to heed the call for a new style of capitalism will backfire.

“If you come up with a growth package that doesn’t include jobs, that doesn’t include female participation and stamping out child slavery, this will only emphasise the trust deficit. And when the trust deficit widens, it then becomes seriously painful, so you are seeing the rise of anti-immigration parties across Europe.

“That is the lesson of history, when you start to have severe stress, extreme groups start to have a veneer of respectability and become the saviours.”

Combat tax evasion

So, what needs to be done?

A range of commentators and policy advocates want the G20 to embrace measures that will help developing countries stand on their own. For instance, Costello backs an initiative called Taxation Without Borders.

“If Sub-Saharan Africa is to have a tax collection system like Australia’s that pays for education and health, then it needs about 650,000 tax agents. Tomorrow. Train them, give them capacity, see that proper salaries are paid to them,” he says.

Cassandra Goldie, chief executive of the Australian Council of Social Service (ACOSS), agrees that urgent measures are needed to tackle rising inequality, both at home and around the globe.

The head of the peak welfare lobby argues that Piketty’s thesis is relevant to Australia and its trans-Tasman neighbour.

“We still seem to have a working assumption that if you achieve economic growth, then jobs, and better wellbeing and social outcomes will simply follow,” she says. “All the research globally shows that is simply not the case. We have got many demonstrations where growth has been achieved but in fact few jobs have been created out of it.”

ACOSS wants robust measures to combat tax evasion so that developing countries have adequate resources to fund health, education and infrastructure needs.

“The tax havens, the extent to which money going in doesn’t deliver anything going out, is a problem for all of us,” Goldie says.

“The integrity of financial systems, the effort to get mechanisms across the region and across the globe which avoids this chasing of tax havens is a big priority for the G20.”

Community advocates such as Goldie also want a bottom-up approach to decision making, particularly in areas such as infrastructure and social policy.

“We have been very critical of the lack of opportunity for civil society to be at the design table with government and with business on the welfare system,” she says.

“Infrastructure planning needs to be done bottom up from a civil society community perspective, that has a deep expertise in what is needed, and then shared with a ‘for profit’ perspective, so that we are genuinely partnering from the beginning to the end, through identification, through build, through to delivery. That will be the strongest protection against some of the devastating experiences that have happened when you’ve had high levels of corruption and complete inattention to the negative social impacts on local communities.”

Wealth tax

Richard Denniss, executive director of the Australia Institute, is even more aggressive in his calls for changes to superannuation and cutting the multi-billion-dollar subsidies to the mining sector.

He believes the debate triggered by Piketty is timely and may lead to positive solutions.

“Politicians often think they can’t afford to tackle inequality because they have to grow the economy, but actually ignoring inequality can slow the rate of economic growth,” Dennis says.

“When there is a big gap between the rich and poor, governments have to spend a lot of money on police, they have to spend a lot of money on security, individuals have to spend a lot of money on CCTV and barbed wire to protect their houses — and all of that is money that could have been invested in health, education, training, transport.”

If Piketty’s global wealth tax is not a practical solution, at least for the moment, what can be done to address this rising inequality?

During the past 50 years, Denniss says, it has become very hard for ordinary working Australians to reduce or avoid their tax. At the same time, it’s become “much easier for people whose income has come from their capital, from their wealth, to almost make tax voluntary”.

So, if you have someone who earns A$100,000 from work, versus someone who earns A$100,000 by buying and selling shares, the capital gain is taxed at half the rate of wage income.

“This isn’t secret; it’s called the 50 per cent capital gains tax discount. So the premise of the Australian tax system is that income from capital should be taxed at half the rate of income from going to work. You don’t need a global tax agreement to tax income from capital more equitably,” Denniss argues.

Perhaps the biggest problem rests with the superannuation system when it comes to tax leakage. Denniss isn’t anticipating short-term reform, given the powerful interests at play.

“Superannuation is unique in Australia. Labor figures are proud of it because they think they invented compulsory superannuation. The Liberals love it because it plays to self-reliance and individualism. Unions like it because industry super funds have become so big. Employer groups like it because they are well represented on those same industry funds. The big accounting firms like it, the big legal firms and big banks like it — no other issue has so much power coalesce around it as superannuation,” Denniss says.

Tax haven state

On the face of it, the figures are stunning. While it costs around $3.5 billion to administer the entire tax system, annual superannuation fees amount to a whopping $20 billion. This means the average Australian spends more on super administration than electricity, carbon tax or not.

Progressive voices want superannuation concessions curtailed, particularly for those on high incomes and who have stashed away millions of dollars — avoiding tax in the process.

Denniss argues that the tax treatment of superannuation has “fundamentally altered the perception of equity in Australia.

“We now have people receiving millions of dollars a year in income from their superannuation, paying not a cent in tax. Again this isn’t a loophole; it’s a design feature.

“This is better than offshore tax havens, it’s a safe tax haven regulated and backed up by the power of the Australian nation state.”

The problem is that with such powerful interests lined up in support of superannuation, it’s hard to see how a populist push could bring about significant change.

While Australia and New Zealand have their share of haves-and-have-nots, the issue of equity is of much greater significance in China and India where the rate of growth has been enormous.

The two rising economic powers have seen the size of their middle classes grow by literally hundreds of millions as they open up their economies. China, in particular, could be seen as the poster child for addressing inequality, according to Denniss.

“There is some evidence that economic growth helps people at the bottom a little bit. But the IMF and the World Bank no longer believe that privatisation, deregulation and free trade are sufficient to make economies grow strongly and to help the poor. The country that has most systematically ignored the advice of the World Bank and the IMF in the past is China; the country to lift the most people out of poverty is China.”

That is because the communist state has opened up its economy in a very structured way, maintaining a range of restrictions and introducing measures that try to lift up the poorest among its 1.35 billion population.

Purchasing power

While progressive voices have leveraged Piketty to call for changes to the capitalist model, others argue that the French economist has little relevance in an Australian or New Zealand context.

Chris Berg, policy director of the freemarket Institute of Public Affairs, believes Piketty’s “core” finding — that the rate of return on capital will be higher than growth — is contestable.

“His projection relies on a lot of very strong assumptions that won’t necessarily hold true for the future, and certainly won’t hold true for Australia,” Berg argues.

“One of the problems with Piketty’s book is that he has myopically focused not on the poor, but on a 1% sliver of the rich. It’s basically the Occupy movement’s thesis — that the world is divided into two camps, there is the 1 per cent and the 99 per cent,” he says.

The IPA director argues that economic growth will not only raise the incomes of people at the bottom end of the scale, but it will also produce cheaper consumer products that leads to higher living standards.

“What we are seeing over time is a rather extraordinary closing of the gap between the rich and the poor when you talk about consumption equality — that is, what can people afford?”

Berg believes there are problems that do need to be solved in order to address inequality. Most notably, he wants changes to try and tackle the skyrocketing cost of residential housing. 

“We obviously have a very broken house market at the moment. The idea that it’s a lifetime’s worth of work to buy a house is a remarkable change from even 20 or 30 years ago,” he said.

Increasing the supply of land and adopting a lighter touch on suburban planning would help address the worsening problem, he says.

But in the end, Berg doesn’t believe Australia has an inequality “crisis” or that the issue warrants special attention at the G20.

“The thing we have to worry about is how are the poor being treated by public policy. We need to ensure that their living standards remain high, and get higher over time. That is not an inequality problem and I don’t see that the inequality debate is tackling those sorts of issues,” he says.

Steve Lewis is an author and journalist and a senior adviser with Newgate Communications.

This article was first published in the August 2014 issue of Acuity magazine.