In the space of a few centuries, the phenomenon of scarcity as the central problem of the economy gave rise to another, less obvious, but more complex one: distribution. The market economy, capable of creating enormous amounts of wealth, proved incapable of redistributing it with the same efficiency. The widespread lack of access to such fundamental goods and services as decent housing, basic health care and education or essential infrastructure are symptoms of a society trapped in cycles of wealth perpetuation, which turn social mobility into a sporadic, individualized event, and not in the movement of a structural nature that it should be.
In your most recent report, OXFAM notes that the richest 1% of individuals in the world appropriated two thirds of the total wealth generated between 2020 and 2021, with the remaining third being divided by the remaining 99%. Additionally, the richest 10% manage an incredible 90% of the total wealth generated in these two pandemic years, which implies that the overwhelming majority of the world’s population shares 10% of the wealth pie; with much of the wealth created somewhere between North America, Europe and Australia, this imbalance in wealth distribution is even more pronounced in countries of the global south.
Inequality is thus a huge embarrassment of modern capitalism; a kind of thorn in the side of a system that, according to many, has the merit of almost always managing to resolve itself. The price to pay for the astronomical levels of material wealth that we manage to produce is the contingency of not being able to distribute it properly.
The historical evolution of this phenomenon shows us where the great flaws of capitalism are, and also exposes some clues on how we can correct it. A large part of the decline in inequality over the course of the 19th century was due to the modernization of tax systems: first, with the introduction of new taxes on capital gains and certain forms of wealth; second, by the universalization of progressive tax systems. Tax progressivity simply implies that the richest pay not only a higher absolute amount of taxes but also a higher percentage of their income. The first large-scale progressive tax systems began to be developed in both the US and Europe during the late 19th and early 20th centuries.
According to data from World Inequality Database, in the US the top of the richest held, in the early 1930s, close to 45% of the total wealth produced in that country. By 1980, this figure had dropped to 21%, the lowest figure recorded in history. Unsurprisingly, the effective tax rate for most of the 20th century in the United States was high, reaching close to 94% in the middle of World War II, which greatly contributed to the correction of inequality during much of that century. In the 1980s, following strong years of inflation and deficits wide, a new wave of economic liberalism significantly reduced taxes and thus began a new turn of the cycle, with the gap between the richest and the poorest widening again, in a trend that has continued to this day, in a way more or less transversal, between Europe and the United States.
With the gap between rich and poor at an historic peak, what about its coexistence with the current cost of living crisis in countries like Portugal? Perhaps it is a symptom that market dynamics leave many problems unresolved. Thus, there remains the hope of some interventionism to correct these trends, according to the lessons that history has already enshrined. The challenges to create a new tax on capital have been heard for several years now.
More recently, in a column from the british newspaper The Gguardian, economist Joseph Stiglitz points to the need to create a new wealth tax somewhere between 2-3% — along the lines of former Democratic candidate Elizabeth Warren — and supports the creation of a new maximum income tax bracket of 70% in the United Kingdom. In Davos, at the summit where the world’s economic elite gathered, several billionaires expressed their desire to see the idea of a special tax on (their own) wealth discussed. The situation has become worrying to the point that the elite itself recognizes the exaggeration of their privilege and the need to change a system that favors them disproportionately.
But capital is agile and has a great impetus to look for ways to become more profitable. The creation of a wealth tax is therefore subject to strong constraints, starting with the huge resources that are available to the ultra-rich to evade taxes. Many of these strategies are well documented and are genuinely difficult to combat, in large part due to the mobility of capital between countries. Thus, the discussion on property taxes is a largely cooperative work: the more countries that adhere to said tax, the better the results will tend to be. At the same time, disconcerted efforts to create a tax on wealth can often lead to the flow of capital to other countries, which in the long run only contributes to the decapitalization of the economy, with potential real effects in terms of employment and wealth production. Additionally, this effect is aggravated in smaller economies that are open to the outside world, such as the Portuguese one. Currently in Europe, only Spain, Switzerland, Norway, France, Belgium and Italy have any type of wealth tax.
Constructing solutions that go against the interests of an economically and politically dominant class will always be a challenge. But it is precisely for this balance of forces that the state exists, whose instruments and scope will always be necessary to correct market failures that arise with the assiduity that is recognized for them. And with your help, it might be worth remembering that prosperity and inequality don’t necessarily have to go hand in hand; history reveals that, at times, the creation and fair distribution of wealth can be more than an obscure theoretical concept. As always, just create the right incentives.