Piketty is wrong, says William Cash: those blaming the wealthy for economic inequality are missing the point – a country needs the rich in order to flourish
The week before the Sunday Times published its annual Rich List survey of UK wealth, I participated in two very different wealth-inequality-themed debates in London. The wording of the motions told you everything you needed to know about political attitudes towards the UK’s top wealth creators (those on this year’s Rich List have ‘doubled their wealth since the 2009 economic crisis’).
The first debate, organised at Conway Hall on Red Lion Square by the New Statesman, was entitled ‘How do you solve a problem like the rich?’. Speakers included Owen Jones, the left-wing intelligentsia’s answer to Russell Brand; he also appeared as the star striker the following night at the Spectator debate in a Barbican concert hall called ‘Politicians should leave the wealthy alone’.
That our most successful wealth creators, entrepreneurs and philanthropists and our most heavily taxed high-achievers — including surgeons, civil servants, lawyers, industrialists and business leaders — can be described as a ‘problem’ reveals much of how the wealth debate has been turned into a divisive form of populist politics: us v them; bankers v ordinary people; the haves v the have-nots.
Economic inequality in modern Britain should not be a problem for society. The rich already help to pay their way to create a more fair society. Simply blaming the rich for rising levels of social inequality is to forget that to redistribute wealth, you first have to create it. Having relative inequality, with the richest bearing the greatest tax burden to pay for our hospitals and schools (which they don’t tend to even use), is the price we pay for economic prosperity in a fair and just society.
As Fraser Nelson, editor of The Spectator, said in his opening remarks at the second of the debates: ‘My side of the debate is out to defend the seemingly indefensible, the most derided group of people in Britain. We want to persuade you that the richest are not a problem to be sorted, a disease to be cured. You may resent them — but we need them here. We need their money… Inequality is a problem in Britain, don’t get me wrong. But there is a choice between what Tony Blair called the “politics of anger” and the “politics of answers”.’
The rich are not the real problem; and I do not blame the mobile army of international super-rich who have descended on Mayfair’s or Chelsea’s garden squares for coming here to take advantage of the tax system that successive British governments — most notably under Tony Blair when Gordon Brown was chancellor — created. The Blair regime was so friendly to the super-rich that Peter Mandelson famously said New Labour was supremely relaxed about people getting ‘filthy rich’.
One reason that the economy is so dependent on the financial services sector (in which many non-doms work) is that the UK itself has an economic problem — the UK’s economic growth has largely been in reinventing itself as a service economy at the expense of its manufacturing sector. This means that foreign banks, law firms and private equity firms needed to be lured to London via ‘tax competition’ and a relatively benign tax regime that resulted in the number of non-doms coming to the UK actually doubling under New Labour.
Our trade deficit has had to be plugged by financial services, which are one of the few sectors in which we have a surplus. So killing the golden goose didn’t make any sense for the last Labour government, which is why they chose, for the most part, to leave London’s wealthy alone.
Very little has changed today. It is not so much that the rich — or super-rich — are a problem; it is more that they are a necessity. This becomes clear enough when you read a February 2015 House of Commons briefing note entitled ‘Financial Services: Contribution to the UK Economy’. In 2014, financial services contributed £126.9 billion in GVA (gross value added) to the economy, with nearly 4 per cent of all jobs. The only OECD countries that are more reliant than the UK on their financial services as
economic life-support are Luxembourg, Australia and the Netherlands.
Government research by PwC found that the banking sector alone contributed another £65 billion last year in tax receipts. That includes income tax, national insurance, corporation tax, the bank payroll tax and the banking levy — but doesn’t include the extra billions in VAT paid on dinners at 5 Hertford Street, private jets or stamp duty on London houses.
The other myth often peddled by the left — and most loudly by its high priest Thomas Piketty — is that as the richer get richer, the poor get poorer as a result of the great wealth divide. Alas, this just isn’t true. Piketty’s sums and research simply do not fit the narrative he wants us believe, namely that the rich always get richer. This is an economic fiction. In a cautionary attempt to warn its UHNW clients about the importance of proper financial planning, JP Morgan has gone to the trouble of trawling through the original pre-war Forbes Rich List of the richest 30 families and found that only one family from the original list was on the new list when it was revived as the Forbes 400 in 1982.
As a report by Bank of New York Mellon into Forbes lists has shown, most rich families actually lose most of their wealth by the end of the third generation — hence the phrase ‘shirtsleeves to shirtsleeves in three generations’. The Mellon report describes this failure of the super-rich to hold on to their wealth: one-third of families make it to generation 2; 10-12 per cent to generation 3; and only 4 per cent to generation 4. A remarkable 90 per cent of rich families have lost almost all their wealth by end of third generation. At the Vanderbilt family meeting in 1973, there were 120 family members and not a single millionaire among them.
The real reason super-rich families’ fortunes fail is nothing to do with Pikettian economic theory about the wealth divide, but everything to do with litigating, bickering, divorce and death. In many ways, our old ruling and aristocratic families are now the financial servants and waiters of the world — albeit living off good tips. Most of them certainly can’t afford to live in the fancy London neighbourhoods where they were brought up.
It is also not true that the right wants to make it harder for the less well-off to pay their weekly bills and rents. Where there is a truly worrying wealth divide opening up is between the working-class poor and the middle classes. That is a problem area that needs attention — not the rich or super-rich.
My deepest issue with the left’s war on the rich is that they seem hopelessly unaware of the revolutionary strides that have taken place in recent years to close down the tax loopholes that have allowed offshore tax evasion in secret Swiss and Liechtenstein bank accounts and tax havens. The cliché fairy-tale world of tax havens that seem to belong in a John le Carré novel, as conjured up by Ed Miliband, simply no longer exists. Former OECD blacklisted countries such as Switzerland, Monaco and the Cayman Islands are now heavily regulated.
The best we can do is tax the rich fairly — and then leave them alone.