The problem with the rich
I have been thinking about “the rich” quite a bit recently, what with the crash and the budget. I feel I need to try to get beyond the “bash the bankers” and “soak the rich” rhetoric and work out where my problem lies and whether it is “with the rich” or just some of the blighters.
Attitudes to riches and the rich are often personal and emotional. Emotions that have I experienced include:
- Jealousy: I guess we have to be upfront and accept that there must be an element of this. However, if you are reasonably comfortable, such an emotion may be easily put aside, but if you struggling a high degree of saintliness would be required not to feel at least a twinge of this emotion as the rich go by in their swank cars.
- Embarrassment: I was slagging off bankers (and how they did not generate real wealth) to a distant cousin – “Oh my husband is a merchant banker” she says. Whoops.
- Fear: Although I am nowhere near “mansion tax” territory, I am concerned by the new popularity of taxes on wealth. Might I, if our economy really “goes Greek”, suffer confiscatory taxes on my modest savings intended for my decrepitude – whilst colleagues who have enjoyed wine women and song and have no savings will be bailed out at my expense? (This is the issue of moral hazard – if people know they will be bailed out, why should they save for a rainy day?)
- Surprise and Concern: I was recently told that someone of my age who I knew as a student has recently made massive charitable donations – totalling more than I am likely to earn in my entire working life. After reflecting on my relative financial failure, I worry how she made so much money (it would not have been inherited) – she was brilliant and industrious (probably still is), but to make sufficient money to be able to be that generous; I hope she has not been corrupted by the sector in which she works and has retained her integrity.
- Confusion and Discomfort: Researching my family history I found a number of people in the past who “did very well” and even a present day (very) distant cousin who has achieved significant public success and who makes the “Rich lists”. Again one wants to think well of people, particularly if they are your “kin”, but how did they make their money and at whose expense? (Fortunately no slave traders found.)
The concept of “Richness” is relative and depends on what you are measuring. There is a difference between being rich in terms of gross income, rich in terms of disposable income, and rich in terms of accumulated wealth (which might be inherited wealth or unspent income).
So how do I disassemble my feelings and attitudes?
I guess I have no objection to someone “being rich”. I do object to those who are rich and like to let you know it (the Bullingdon tendency) – but that is different; members of the Bullingdon Club would still be objectionable prats even if they did not have a farthing to their name.
So I suppose it is something to do with how they became rich (and at whose expense). So how to become rich:
- Inherit it: Strangely I have no principled objection to people receiving money that they have not earned. I don’t, however, like it that the really wealthy seem to see Inheritance Tax as an optional tax that a decent accountant can help you avoid (leaving the wealthier end of the middle class to pay most of this tax on wealth). Death is one of the occasions when my objection to taxes on wealth is subdued – it’s not as if you are robbing the deceased of wealth that they need. Possibly those who inherit should pay tax on the legacies they receive rather than the estate pay tax on the legacies it doles out. The rest of us pay tax on money coming into our account – I don’t see why big beneficiaries should not share their unearned good fortune.
- “Non working capitalists”: By this I mean those who have a shed-load of wealth (shares, land, etc. from whatever means) and who sit back and live off it. Nothing wrong here I guess, but I would like to know that they were paying tax at the appropriate (i.e moral) rate. I hear too many disturbing stories about tax rates on dividends and capital gains being significantly less than tax rates on income. I do resent it if people are taxed more on the fruit of their labours (whether by hand or by brain) than from the mere ownership of the means of production, distribution and exchange etc.
- Gambling: Some gambling (e.g. the gee-gees) might possibly involve some skill (even if only with a pin) and might be termed “earned”, but some (e.g. Lotteries) is pure chance. Again I can see no reason why such gains should be taxed at less than the rate you would be taxed if your gain was from your own labour. The puritanical streak in me feels it is corrosive to society that with one pound you can become rich beyond imagination and not even pay taxes.
- Earned: this should be the “remainder” category and therefore “good”, but I think how you earn it is important (and comes back to my earlier point about at whose expense you earn your income). Consider the cases of the utility company chief executive, the banking director, the footballer, the pop star.
- The utility company chief executive makes his money from sticking his hand in our pockets and extracting money every month or quarter. If I don’t like it I can go to a different utility company but I would be hard pushed to do without gas water and electricity – so I do not have an option but to contribute to the riches of such chief executives. I do not feel that the utility “market” is genuinely competitive, so I suffer, and the “market” in chief executives for utility companies is also not genuinely competitive. Their remuneration committees seem to try to pay “top quartile rewards” irrespective of whether there has been top quartile performance. Any statistician will know that you can’t all be “top quartile”, but when remuneration committees try to achieve this they work a very effective ratchet (racket?) on top salaries. I don’t notice much in the way of differences between utility companies; I think the electrons are all the same, the therms are approximately the same, and the water may taste slightly different but should have approximately the same level of purity (and you can’t change water company).
- The (retail) bank director is in a very similar position, but I do envisage that if I got really pissed-off with them, I could (just possibly) do without a bank. Otherwise the above arguments still hold. And don’t think that the Co-operative bank is necessarily hugely better; the Daily Mirror reported three years ago that its chief executive received a salary of £500,000. (ref: How toxic is your bank? 20 Jan 2009). The 2010 financial statements (p27) report that their chief executive received just shy of £1.2M in emoluments and after 12 years service with the group (or its predecessors) has a pension pot with a transfer value of more than £2.9M.
- The (premiership) footballer gains his riches ultimately from TV fees, from gate receipts, and from endorsements and merchandise – all ultimately from us. We are not, however, captive in quite the same way, we don’t have to watch football (at least some of us don’t). But again it is not a truly free-market – it is controlled by a very small number of people and most of the consumers have abdicated choice in order to follow “their” team.
- The pop star gains his or her riches from royalties on CD/mpeg sales, box office receipts from gigs, and from endorsements and merchandise. Again we are not as captive – if we dislike an individual we can stop buying his or her CDs and mpegs – and we will directly (in a very small way) reduce his or her rate of accumulation of wealth. I like the idea that I can withhold my contribution to their wealth – something I cannot do in respect of utility companies and banks etc. – it somehow makes the means by which they become wealthy more acceptable.
Once we have looked at how the rich gain their wealth (and how much it is at our expense – and how much say we have in that), the sheer size of some people’s income is still an issue. We could just say “we live in a capitalist society, so you pay what the market requires”, but sometimes the market is rigged and even where the market is relatively “free”, we may still find ourselves pondering the size of some people’s income.
I suspect that the acceptability of an income is related to how much we earn – up to a certain multiple (5 times?) we can tolerate, but beyond a particular multiple (20 times?) it leaves all realms of comprehension and acceptability. I cannot get my mind around how a CEO can be “worth” multiple millions of pounds per year. It’s not just how he (it’s usually he) can deliver that sort of value (we are talking about £50 per minute just to cover his salary – his little taximeter turns over several times quicker than the meter at a petrol pump), but also what he can do with all that lolly. In a day and a half he can earn (before tax) sufficient to pay a year’s fees at a public school – three days if he is being a good boy and paying tax at 50% on his marginal income.
Billboard (Feb 11, 2011) reported that Justin Beiber (“a popular solo artist, your honour”) earned more that $22million in 2010*. I don’t know his work, but how can it be worth that much? * “based solely on U.S. earnings” but not including “revenue from merchandise sales, sponsorships, synchronization deals, international tour dates, songwriter performance royalties from terrestrial radio play, DVDs and ringtones”.
But, just suppose: what happens if someone genuinely believes that they are not worth these stratospheric sums? I guess the pop star could decline some of his royalties or take a smaller percentage of the box office takings, but would that make his recordings and gigs cheaper (for us) – or just make the record companies and arena owners richer? I fear the latter – so do I just have to hope that the pop star (or who-ever) is incredibly philanthropic?
So I think I have three objections to “the rich”:
- Do they pay the appropriate rate of tax on their incomes/earnings/gains (call it what you will)? I have a problem with people paying a lower rate of tax on unearned income and gains than they do on earned income.
- Am I able to avoid contributing to their riches? I can with the likes of pop stars and footballers, but I can’t with the likes of utility directors.
- Is the scale of their salary within comprehension and tolerance?
The tax rate issue is complicated by “issues of political pragmatism” but I stand by the principle that I propose. I think action is required to create genuine markets in goods like utilities and retail banking – and I would like to see a genuine market for the services of senior executives. I don’t think (within a capitalist system) I have an answer to the scale issue – public revulsion does not seem to rein in the financial aspirations (greed?) of some of the rich and even if it did would we – the ultimate consumers of what their organisations produce – actually benefit?