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When it comes to taxing the wealthy, heed the economists not the billionaires

Money doesn’t talk, it swears, sang Bob Dylan. And liberal billionaires in the US are certainly not being polite about the latest policy ideas emanating from America’s Democratic Party.

Howard Schultz, the billionaire founder of the Starbucks coffee chain who is considering running for president in 2020, last week condemned universal healthcare and higher rates of income tax on the superrich, as proposed by the new Democratic congresswoman Alexandria Ocasio-Cortez, as “un-American”.

“It concerns me that so many voices within the Democratic Party are going so far to the left,” Schultz lamented. “If I ran as a Democrat, I would have to say things that I know in my heart I do not believe.”

Meanwhile Michael Bloomberg, the former mayor of New York and billionaire head of the financial terminal business, also last week warned that a wealth tax, as proposed by Senator Elizabeth Warren, another Democrat presidential hopeful, is potentially unconstitutional and risks turning the US into Venezuela.

The historical solecism of saying that high taxes on the super-rich are unknown in American history has been widely noted (the top marginal rate of tax between the 1940s and 1970s was well over 70 per cent).

But just as important is the question of what the impact of such progressive, inequality reducing, changes to US taxation would be now. Would overall growth suffer? Would the pie of prosperity be smaller, as the likes of Schultz and Bloomberg suggest? A new book by three International Monetary Fund economists, Jonathan Ostry, Prakash Loungani and Andrew Berg, attempts to provide some answers to those questions. And their answer is that redistribution, unless it was extreme, would be unlikely to hurt growth and could actually sustain it.

“Inequality undercuts the sustainability of economic growth. More unequal societies tend to experience more fragile growth,” said Ostry at the Peterson Institute for International Economics in Washington last week. “There is too much caution about using redistributive fiscal tools in terms of their possible disincentive effects. On the whole, the macro data strongly suggests redistributive policies have done more good than harm … Going for growth while assuming that inequality takes care of itself seems to us to be a dangerous gamble.” In other words, Ocasio-Cortez and Warren are thinking along the right lines (although the devil will be in the detail of any policies) while those anti-redistribution liberal billionaires are essentially wrong.

Two other economists who specialise in tax research – Emmanuel Saez and Gabriel Zucman – advanced a subtly different argument in favour of higher US top tax rates and wealth taxes last month. “An extreme concentration of wealth means an extreme concentration of economic and political power,” the pair wrote in The New York Times. “Progressive income taxation cannot solve all our injustices. But if history is any guide, it can help stir the country in the right direction.”

The prospect of Schultz running as a well-funded independent candidate, splitting the anti-Trump vote and handing the property magnate the keys to the White House for another four years, seems to illustrate beautifully this argument about the distorting influence of massive wealth on politics.

It’s often asserted that mainstream economists are all shills for neoliberal politicians, and ignore issues of inequality. The fact that Ostry, Loungani and Berg are thoroughly mainstream economists and all work at that supposedly neoliberal death star, the IMF, shows what a crude caricature this is. One can say the same of the ideas and arguments of Saez and Zucman, who are both based at the University of California, Berkeley and who have both been published in the most prestigious mainstream economics journals.

The fact is that the thrust of mainstream economic research on inequality and policy development among Democrats are moving in the same direction. And the old road of the anti-redistribution billionaires? Well, it appears to be rapidly ageing.


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