Social justice and economic health

Tommy Potter

Currently, approximately the richest 10% of people consume more than half of the earth's resources. A significant part of the economy serves the parasitic consumption of the richest. How to reduce parasitic consumption and at the same time preserve the productive capital that feeds, waters and clothes us all?

An increase in social justice must be accompanied by an increase in social productivity and the acceleration of scientific and technological progress. Increasing the productivity of social labor (and not “selecting and dividing”) is a mandatory requirement, since otherwise the transformations do not make sense.

To make things fair, everyone gets a piece of the pie! (https://www.schwarwel.de/)

Benefits for business slow down the economy

For many people, this statement - high inequality is a drag on the economy - causes distrust. After all, they have heard for many years in a row that taxes are being cut for the rich in order to boost the economy in accordance with the “trickle down” theory. Trickle-down economics suggests that if you enrich the rich, wealth will trickle down to the poor and middle class. This theory is based on the assumption that tax cuts and business incentives will help create jobs and ultimately lead to higher living standards for everyone.

This theory is guided by the governments of almost all countries, despite the fact that it has repeatedly proven its ineffectiveness. Instead of leading to a distribution of wealth and a better life for everyone, it results in the further enrichment of the rich by reducing social programs and public investment, creating an even greater divide between rich and poor.

You don't need to go deep into economics to understand that tax exemptions for the rich shrink the national pie. Enough elementary reasoning.

Suppose there is a certain country, isolated from the outside world, with a single government and a single currency. At one point, it was decided to reduce the tax burden on the richest citizens. According to the theory, the rich will have more money, they will create new industries and everyone will be happy...

So, the rich have more money at their disposal, and the rest have less. Can the rich in this situation expand production and create additional jobs? Answer: “No, they can’t. The population has less money, so they can buy fewer goods, not to mention more. Therefore, jobs, as well as the production of goods, will have to be reduced! ”

The second question immediately arises: “What should the rich do with their “extra” money?” Answer: "Purchase goods that do not lose value, such as gold, works of art, real estate or land." As a result of increased demand, prices for all these goods increase, which is what we are seeing. As property values rise, rents also rise...

In addition, the redistribution of the “national pie” in favor of the rich is the reason for the exponential growth of inequality. The greater the inequality, the faster it increases. It’s not hard to guess that sooner or later this will end badly...

Cutting social spending or reducing wages has the same effect as cutting taxes for business. It increases inequality and shrinks the economy...

The same reasoning is also true for the global economy, with the difference that the situation is aggravated by tax wars and the presence of tax havens.

This is also confirmed by the study “ Equality and Efficiency ” by Andrew Berg from the IMF. ( English original ). (The files are downloaded automatically to the downloads folder).

Inequality in Germany

During the “German economic miracle,” the marginal tax burden on the super-rich was very high, and for the rest of the population lower than it is now. Thanks to this, the economic growth rate was higher. At the same time, the well-being of not only the rich, but also all segments of the population increased.

Since the eighties of the last century, the tax burden on the rich has gradually decreased. By now, the richest citizens pay little, if any, taxes. As a result, their property is growing rapidly, and the income of a large part of the population is falling.

One can only guess what success the German economy would have achieved if GDP growth rates had been the same as during the “economic miracle”, when inequality was relatively low...

Income inequality in Germany 1980 – 2019. The blue curve shows the share of income (after taxes) of the poorest half of Germany's population , and the red curve shows the share of the richest 10%.

Inequality in the United States

Such redistribution of the “national pie” with slight variations occurred in almost all developed countries - thanks to the victory of the ideology of illiberalism. A good example is the United States. Below are two diagrams from the book “Why We Can't Afford the Rich” (English original: Andrew Sayer “Why We Can't Afford the Rich”)

In these charts, the five bars on the left divide the population into equal groups. The leftmost column represents the poorest quintile (or percentiles from 0% to 20%), the next column the second poorest quintile, etc. The five columns on the right in both graphs represent subgroups of the richest 20%, more precisely the subgroup of the richest 5%.

Figure 1.2: Change in real household income in the United States, 1947–1979.
Data from the Census Bureau and the Economic Policy Institute, compiled by Colin Gordon. Income includes social transfers. Average top 5% returns (market returns only) according to Piketty and Saez (P&S): taken from the “World top incomes database”. Top 5% data taken from both sources, http://www.epi.org/blog/growing-growing/

Figure 1.3: Change in real household income in the United States, 1979–2012. Data from the Census Bureau and the Economic Policy Institute, compiled by Colin Gordon. Income includes social transfers. Average top 5% returns (market returns only) according to Piketty and Saez (P&S): taken from the “World top incomes database”. Top 5% data taken from both sources, http://www.epi.org/blog/growing-growing/

quote:

So, first, the situation in the early post-war period (graph 1.2). At that time, the majority of the population was participating in the post-war boom. Low-income households grew slightly faster, while the top 5% grew slightly slower than others, starting at a higher level. But since 1979 the situation has completely changed (Fig. 1.3). The conclusions leave no doubt. The incomes of the majority are stagnant or growing very slowly, and the bottom 5% are suffering significant losses while the rich pull away and reap the benefits of growth. Just the top 0.01% saw a real 685% increase in income! The 2008 crisis did not stop this divergence. Despite all the “We'll get through this together!” rhetoric, the austerity policies that followed hit low and middle incomes disproportionately hard and caused the gap to widen even faster.

In fact, there is much more inequality within the top 1% than between them and the 99% of the population. Incomes in this percentile... grow faster the higher they are. The top 0.5% increased their share faster than the remaining 1%, but more slowly than the top 0.1%. And the top 0.01% (one part in ten thousand) became richer even faster.

Globalization and tax wars

Tax wars are conflicts between states or companies related to taxation. This may include competition between countries to attract foreign investment by lowering tax rates or offering tax incentives, as well as disputes between companies and tax authorities over the appropriateness of taxes. In addition to reducing taxes on the rich, tax wars create conditions for tax evasion.

Here excerpts from books “THE TRIUMPH OF INJUSTICE: How the Rich Dodge Taxes and How to Make Them Pay” EMMANUEL SAEZ & GABRIEL ZUCMAN)

In Chapter 4:1)

If globalization means ever-lower taxes for its big winners—the owners of large multinational companies—and ever-higher taxes for those it leaves out—working-class families—then it probably has no future. Tax injustice and inequality will continue to rise. And for what purpose? There is a significant risk that more and more voters, falsely convinced that globalization and fairness are incompatible, will fall prey to protectionist and xenophobic politicians, ultimately destroying globalization itself.

Notes: The figure depicts federal corporate tax revenue and federal individual income tax revenue as a share of national income since 1913. Both the corporate and individual income tax increased sharply during World War II. Individual income tax revenue has stayed about stable (around 10% of national income) after World War II while corporate income tax revenue has eroded. In 2018, federal corporate tax revenue was only about 1% of national income, the lowest since the Great Depression. Complete details at taxjusticenow.org.

Optimal taxation

Taxing the rich more is certainly fair. But to what extent? We assume that by increasing taxes on the rich we will stimulate the economy and increase overall prosperity. But if the burden on the rich is too high, it will lead to equalisation and slow down the economy. This is one of the main reasons for the bankruptcy of the countries of the "socialist community". Complete equality is therefore both undesirable and impossible.

How to define "optimal inequality"? John Rawls (in his book A Theory of Justice) proposes two criteria:

1 We gradually increase taxation on the rich to the maximum of general welfare. Even though further tax increases could increase the welfare of the poorest.

2 We continue to increase taxation on the rich, while the welfare of the poorest increases. Even if the overall welfare starts to fall. If, by increasing taxation on the rich, the welfare of the poorest begins to fall, then we are on the road to equalisation and the tax burden on the rich must be reduced.

Given the challenges facing society, I vote for optimality in terms of efficiency. Unfortunately, the general consensus is that it is impossible to achieve optimal inequality in modern political conditions, if such a goal is set at all.

Continue: Debt & credit cycles