Business/Finance

The despicable inequality and cruel egalitarianism of wealth: towards a draft wealth tax to fund a basic income

Automating dull jobs into obsolescence

Part 3 of a series.

WealthTo those who have, more shall be given. Cities get more investment. From those who have little, more shall be taken. Small towns are finding that they are excluded from the excitement happening everywhere else and little investment goes their way.

The idea of capitalism – that goods should bear market prices, that justly acquired property is yours, and exchange between willing participants be free of encumbrances – is everywhere under threat.

There is, however, little policy difference between the extreme-left and extreme-right populist response. Both demand a remarkably statist approach to government, and both are perpetually outraged by “elites.” For each, elites appears to mean liberal educated people, rather than the wealthiest 1%.

What is most noticeable is how this wave of populism – from Brexit, to Donald Trump, to Italy and France – has united the working and capital class against liberal, educated middle class folks.

There is one difference between them, though: the extreme-right are hardcore bigots.

It is the main reason why left-wing responses have fallen by the wayside to the more fascist, bigoted political winners. Left-wingers say, “We all need to cooperate to defeat the ruling class,” while right-wingers say, “It’s those people’s fault and we can kick them out the country and jail everyone else.” Then they elect the ruling class back into power.

Any populist uprising needs scapegoats and there always need to be two groups:

  1. The enemy within: any visible minority will do;
  2. The enemy without: any internationally-recognisable organisation with obvious ties to the “enemy within” is perfect.

In the 1920s it was Jews, and now it’s Muslims. Plus ça change, plus c’est la même chose.

It’s certainly easy to blame visible minorities (especially visible immigrants) but no study has shown that immigration has harmed economies. Quite the contrary. Since immigrants tend to be young and arrive in order to work, they are net contributors to the tax system.

Consider what would happen should Donald manage to deport 11 million Mexicans and the UK deport all its EU migrants:

United States United Kingdom
Total unemployed 8 million 1.6 million
Total to be deported 11 million 3 million

If Donald Trump actually manages to somehow deport 11 million people, even if the 8 million unemployed could seamlessly slot into those open jobs, that would still leave the country with a shortfall of 3 million.

And robots are the bingo moment. Deporting millions of people is no different from the impact of bubonic plague in the middle ages. After the economic disaster worked its way out, it triggered mass innovation and the eventual industrial revolution.

If companies are forced into having droves of critical staff removed, they’ll buy robots – for agriculture and manufacturing. And the specialist services jobs, like medicine? There’s an app for that … what will probably happen is telemedicine. All those nice Indian and Mexican doctors will still be available, just not in the same room …

In 1860 the United States census recorded that four million African slaves were living in the country. The majority of those slaves supported the American South’s vast cotton farms where cotton bolls had to be individually picked.

American cotton was cheap and fed into rapidly industrialising England. Then came the Civil War, the emancipation of the slaves in 1865 and cotton prices began to climb.

The cost of labour spurred innovators to try and find a way to mechanise cotton picking. The Price Campbell Cotton Picker Corporation created their first cotton picker in 1889. International Harvester bought over the patents in 1924 but it wasn’t until 1943 that the first effective pickers came into production. The problem was that mechanical cotton pickers damaged the bolls and so ruined the crop.

The first pickers could only harvest one row at a time but still replaced forty hand pickers. The current John Deere machines are 4-row pickers.

In 1870, out of a population of 40 million, 28 million Americans worked in Agriculture. In 2010, out of a population of 300 million, fewer than 900,000 people work in agriculture.

Maybe that still doesn’t give an impression of how much has changed. In 1945 it took 14 hours of labour to produce 100 bushels of corn on two acres of land. By 1987 it took 3 hours of labour to produce that same 100 bushels.

Millions of people lost their jobs on farms and headed for the cities to find work.

Industrialisation began first in England and in the textiles industry. Richard Arkwright’s water frame, James Hargreave’s Spinning Jenny and Samuel Crompton’s Spinning Mule all contributed to a revolution in spinning cotton. The flying shuttle allowed automated textiles.

All of this so incensed handloom weavers that they started a short-lived revolution. Mobs would invade textiles factories and destroy the machines. These were the Luddites and their rallying fears of automation destroying jobs and creating unemployment has served to prevent the introduction of numerous innovations and labour-saving devices ever since.

Economists as fancied as Karl Marx and John Maynard Keynes predicted social disaster as a result of automation. Even Paul Krugman, a Nobel Prize-winner, has worried about the “hollowing out” of the middle class.

All of this has been rubbished as the Luddite Fallacy. After all, says economist Alex Tabarrok, “If the Luddite fallacy were true we would all be out of work because productivity has been increasing for two centuries.“

And yet, and yet …

There are about 3.2 million truck drivers in the US – people working long hours ferrying goods from dock to shop. Within 10 years this entire career could be as dead as being a switch-board operator or street-lantern lighter.

The scale of the potential disruption means that governments must have mechanisms – and cash – available to support all those left behind by the inevitable march of efficiency.

And it is unclear if they even understand the risk.

In 2012 in rural parts of South Africa, a small-scale war began between workers on table grape farms and the owners of those farms.

Grapes in South Africa sell for between $1.50 to $3.00 per kilogram at retail. The farmer gets $1.

Every year over 50,000 people labour to pick table grapes by hand across 33,000 acres of farmland. A skilled picker can harvest between one and two tons of grapes per day. That’s about one-sixth of an acre. It’s slow, painful, back-breaking work.

It’s also pitifully paid. The minimum wage is $5 per day.

All of which explains the frustration which farmworkers have expressed across the Western Cape. As similarly-educated mineworkers have held their employers hostage and secured wages of $950 per month, farmworkers continue to earn only a tenth of that.

Confrontation was inevitable.

Yet the profitability of agriculture is certainly not anywhere near as clear as that of the mining industry.

According to figures provided by the South Africa Table-grape Industry, the annual cost for producing an average of 6.3 tons of table-grapes from an acre of land is about $5,600, of which $2,000 is directly attributable to labour. If the minimum wage were to increase to $11 per day, as government proposed, then gross profit before income tax would fall from a positive $740 per acre, to a loss of $740 per acre.

The average farm in South Africa is about 90 acres, implying net profit before tax of $66,500.

Farmers’ annual labour costs are about $180,000 and they employ, on average, 140 people, of whom 20 percent are seasonal workers.

To date, farmers have resisted mechanisation. Representatives have said that it’s because they recognise their importance as employers, but it’s obviously more nuanced than that. Mechanised grape harvesters require that vines be very carefully and accurately laid out.

Converting old trellises so that automated harvesters can drive over them is not a rapid or low-cost undertaking. It means that farmers have to start from scratch. It can take three to five years to get up to full production– years of minimal revenues and numerous new costs.

Tow-behind units, which can be pulled by existing tractors, cost around $60,000. Full, self-propelled units will cost over $150,000. Overall conversion costs will be in the hundreds of thousands of dollars.

Few farmers, on profits of $66,500 a year, would be willing to incur those sorts of costs unless the benefits were extraordinary.

Which they might be. A machine can harvest 80 to 200 tons of grapes a day. A single harvester can do the work of 40 people. A farmer could harvest his entire farm on his own in a week with one machine.

As politicians, unions and sundry hangers on do their best to make political capital out of the wage dispute in the Western Cape the danger of 50,000 workers losing their livelihoods to machines forever is very real.

To date spending $400,000 on converting an existing farm for mechanical harvesting hasn’t looked like a promising investment. If labour costs were to go up by $140,000 a year, though, then the returns start looking very good indeed.

The South African government is already grappling with 40% unemployment. It is woefully unprepared to deal with more.

And the US under Donald, with his obsession for local manufacturing and deporting Latinos, is going to place its businesses under similar pressure to automate production.

Once the machines come in, they never leave.

What is supposed to happen to the millions of workers pushed out over such a short period? And, while this is happening, owners of those machines are going to earn ever-greater profits. Worse, since those profits derive from capital, not employment, and the wealth tax rate under President Donald will be almost zero, the ability of the state to compensate the losers will evaporate.

Reconciling mass unemployment and under-employment (via the “gig economy”) with low taxes will leave everyone part of an angry precariat.

Which brings us back to where I came in.

We need to introduce a universal wealth tax and all the revenue generated thereby returned to the people. Individuals and companies should be permitted to get as wealthy as they like, and that wealth – so generated – should be put to work for everyone through a fair and progressive tax on all wealth.

Presenting a draft wealth tax and basic income proposal

Data on wealth presented here are derived from the annual Knight Frank Wealth Report (2016). Note that, with a nod to Gabriel Zucman, mentioned earlier, at least $7.6 trillion is hidden in tax havens, and so these wealth estimates very clearly underestimate actual wealth.

This table presents the tax revenue that could be raised from a progressive tax on wealth:

Wealth bracket Tax Rate US EU UK Effective Rate
$ 1 million 0.1% 20,900,000,000 18,727,000,000 4,225,000,000 2%
$ 10 million 1.0% 36,700,000,000 24,456,000,000 5,340,000,000 18%
$ 30 million 2.5% 98,569,500,000 66,808,500,000 14,952,000,000 44%
$ 100 million 5.0% 152,760,000,000 104,460,000,000 23,860,000,000 88%
$ 1 billion 10.0% 61,000,000,000 43,000,000,000 10,500,000,000 177%
BIG p.p. p.a. 1,163 347 919

The final decision on what the wealth tax should be in each bracket (and even the range of each bracket) will be both a technical and political decision. It is critical, however, that all wealth be measured and a nominal 0.1% tax will ensure that all owners of wealth report an annual return.

My objective is to ensure that everyone contributes a similar proportion of their wealth and income as tax. Since the wealthy pay less overall tax than does everyone else, you can see that this ensures the contributory principle.

For wealth above $1 billion, the effective rate is designed to ensure that the estate is gradually wound down to below the bracket threshold. An alternative, should such a rate not be considered politically acceptable, would be a suggestion by Piketty. No wealth should be indefinitely inherited. My suggestion is that a death tax be 25% of the total estate on the first receiving generation, 50% on the second, 75% on the third, and 100% on the fourth.

Finally, to ensure compliance … A task team should be set up within the tax office which is there to investigate hidden wealth. Taxpayers will be granted five years from the date of implementation of the wealth tax to register their wealth.

Should they voluntarily bring wealth into the tax net after this period, they will suffer a penalty equivalent to 50% of the value of the wealth. If they do not, on discovery, the entirety of the wealth discovered (100%) will be forfeit.

A final word on invisible wealth

Maybe you are still not convinced. Allow me to share a final story.

In November 2013, The Economist posted an article called “Über-warehouses for the ultra-rich”.

The world’s rich are increasingly investing in expensive stuff, and “freeports” such as Luxembourg’s are becoming their repositories of choice. Their attractions are similar to those offered by offshore financial centres: security and confidentiality, not much scrutiny, the ability for owners to hide behind nominees, and an array of tax advantages. This special treatment is possible because goods in freeports are technically in transit, even if in reality the ports are used more and more as permanent homes for accumulated wealth. If anyone knows how to game the rules, it is the super-rich and their advisers.

Because of the confidentiality, the value of goods stashed in freeports is unknowable. It is thought to be in the hundreds of billions of dollars, and rising. Though much of what lies within is perfectly legitimate, the protection offered from prying eyes ensures that they appeal to kleptocrats and tax-dodgers as well as plutocrats. Freeports have been among the beneficiaries as undeclared money has fled offshore bank accounts as a result of tax-evasion crackdowns in America and Europe.

Understand this. The ultra-wealthy are buying objects of art and storing them in freeport warehouses, not to enjoy, but as a way to put their wealth outside the tax net. But they are also putting their wealth outside of their own enjoyment.

There was a story I read as a young boy in which the moral is that an evil man will starve rather than feed his guests, while a good man – even if poor – will enjoy the food he has and share it, no matter how little.

The objective of a wealth tax is to bring wealth back into our economies, to ensure that all get to enjoy the benefits of productivity gains from new technology, and that the losers from globalisation and automation are compensated.

If, along the way, the super-wealthy are rendered a little more human, then that’s a wonderful side-effect.

Now, start lobbying your political representatives …

Read Part 1 or Part 2.

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