The rich need to pay their fair share

In proposing one key idea for the new social contract, I will rather sneakily take six of the 73 policy recommendations in the final report of the IPPR Commission on Economic Justice, under one general heading. 

The core argument of the Commission is that the way the UK economy – and many other developed economies – is now configured does not work: simply put, it is not raising living standards for a majority of people.   

This problem – which has seen the decoupling of GDP growth from average wage growth – has been experienced in the UK economy for about ten years, since the start of the financial crisis’; in the US it has been going on for about thirty-five. This is the first time, since such data has been available, that we have seen GDP growth but wages failing to rise alongside. 

Once growth and wages diverge, it is very hard to say that the economy is working, as the one thing we can all agree on is that in a successful economy , living standards would be rising. And this is not the only problem. We have big regional disparities too, with London and the South East now diverging from the rest of the economy, in wealth inequality, productivity, and investment rates.  

The conclusion the Commission reached from this is that the British economy needs fundamental reform. Incremental tinkering will no longer be sufficient – and certainly not the austerity policies we’ve seen in recent years, which have greatly worsened the problem. 

Is fundamental reform possible? Many people will doubt it. Indeed, one of the most striking aspects of public opinion today is fatalism, the view that “this is just the way it is.” But history does not support this.  

In two periods over the last century, the UK economy, along with most other developed economies, underwent fundamental reform. The first was the shift in the 1940s to what we now call the Keynesian post-war consensus, following the disaster of the Great Depression. The second was the period in the 1980s which followed the crises of the 1970s, when a radical set of free market reforms were introduced. The Commission argues that we need a paradigm shift of comparable scale today. 

Today, we have two crises on our hands. We have an economic crisis of stagnant wages and low investment and productivity. We also have a political crisis of legitimacy that has followed, evidenced in the rise of radicalism on both sides of the political spectrum.  

This political crisis reflects a breakdown of the social contract: the idea that if you work hard, if you contribute to your community, you will be looked after by the state with decent public services and the economy will ensure that work pays. 

The IPPR Commission on Economic Justice ur report has many policy proposals to deal with the economic crisis, from industrial strategy to reform of financial markets, a new macroeconomic policy to a new Sustainable Economy Act. But today I want to highlight a more controversial point: that the rich and powerful should pay their fair share.  

For the breakdown in the social contract is not just about ordinary people feeling that work no longer pays and the state is not providing properly for them. It is also that the rich and powerful are not contributing their fair share – and they are getting away with it. While so many people are struggling to make ends meet, there is a group at the top who are continuing to do not just well, but better and better.   

This generates a deep feeling of unfairness and injustice. It is a major reason, I believe, why anti-elite populism has taken such a hold in so many countries.  

So, here are my six propositions for getting the rich and powerful to pay their fair share: 

1. Tax wealth the same way we tax income – at the moment if you receive your income from capital gains or dividends, you pay it at a lower rate than on your labour. This is unfair.
2. Tax inheritance on the beneficiary rather than the deceased through a lifetimes gift tax.
3. Get rid of the outdated systems of council tax and business rates and tax the value of land.
4. Tax companies properly. In the UK corporation tax has been reduced from 30% to 19% in the last decade. The ideas was that this would raise investment rates – but it hasn’t. The Commission recommends a rate of 24%, which is the same as the next lowest in the G7. We note that many companies support such a change – particularly those (such as high street retailers), who pay business rates and national insurance contributions regardless of their profits while profitable financial companies which can afford to pay have seen their taxes reduced.
5. Introduce an ‘alternative minimum corporation tax’ for multinational companies which consistently declare very low or zero profits. This would be based on their UK sales, applied to their global rate of profit.
6. Close the tax havens – including, but not only, the Crown Dependencies that we control. A huge amount of tax avoidance takes place around the world, much of which is funnelled through the City of London: it needs to end.  

If we can make the rich and the powerful pay their fair share, we have a chance at making the average citizen feel that this is an economy that works for them.

Michael Jacobs is Professor at the Sheffield Political Economy Research Institute (SPERI) and chaired the IPPR’s Commission on Economic Justice

This post is a summary of Michael’s remarks at the APPG’s Future of Work and Inequality conference