Why extreme wealth is extremely dangerous…
I am an ardent supporter of wealth creation. If a person is prepared to put in the effort, to take on risk, to do what others won’t, they deserve to be rewarded. And that reward should be above and beyond what most would consider ‘normal or acceptable’ remuneration.
But there is a big difference between reward and capital.
Money does more than talk
Consider for a moment the oligarchy that rules Russia. Putin is immensely wealthy and has rewarded his sycophants with opportunities to garner equal or even greater wealth.
The result is a nation where a very small number of billionaires ultimately determine the lifestyle and even futures, of the masses.
I have used Russia as an example because it is generally considered to be a first world nation despite the crippling poverty of so many of its citizens.
If we consider third world countries, there are countless examples where wealth determines national outcomes. In fact, one has to look hard to find examples where wealth does NOT determine political outcomes.
The Golden Rule
The bottom line is that ‘he who has the gold, ultimately makes the rules’. And rule number 1 is always going to be that ‘he who has the gold deserves more gold while those without gold deserve none’.
Could this be true in leading first world countries such as Australia and the USA? Absolutely.
In the USA, the wealthiest 1% of the population has more of everything (except misery) than the bottom 90% but that only tells a very tiny part of the big picture:
The bottom 90% have their ‘wealth’ tied up in their non-income producing home and that is usually mortgaged. The top 1% have their wealth busy generating additional wealth.
Jeff Bezos, the founder of Amazon, is currently worth around $USD140 BILLION dollars. If he spends $100 million on a new home, that still leaves $139,900,000,000 of capital to do the heavy lifting.
Do I object to Bezos’ success? Not for a minute. He saw opportunities and took risks where others couldn’t or wouldn’t.
But I do object to his ability to use capital to build an empire that will inevitably be able to influence political outcomes.
Maybe time will prove me wrong, but history suggests otherwise.
Who rules the ruler?
Consider the influence that the Koch brothers, Rupert Murdoch, Robert Mercer and Sheldon Adelson have. They’re combined wealth is a constant sledge-hammer being used to shape outcomes that favour their own objectives, not those of the nation.
The American electoral system is such that it enables those who have money, or access to powerful supporters, to get elected. Trump did NOT get elected because he was the most qualified candidate. He was elected because he was able to outspend everyone else in the race. Truth or ability was never part of the equation. The more wealth you controlled, the more you wanted Trump on your team!
The result is a system of government that is top heavy with wealth. Even many of the Democratic Party’s sitting members have significant wealth. While Trump’s wealth of around $3.1 billion dwarfs that of the Clintons at just $125 million, most of us would consider the latter amount to be extreme wealth.
When did equality become so unequal?
Here in Australia, we have always been proud of our egalitarian society… a society where wealth distribution was relatively even. But can we still make that claim?
In the financial year 2015/16, Ian Narev, CEO of the Commonwealth Bank, took home $12.3 million. That’s $260,000 every week. Every three days, he grossed more than the average Australian worker earned in that year!
Was he worth that amount? History certainly suggests otherwise but his example is far from unusual. (1)
The differential between the average Australian worker’s pay-packet and that of those at the top of the ladder has accelerated almost exponentially since the early 1980’s. It’s simple maths – someone who earns $12.3 million has a whole lot more left over to invest than someone earning $125,000, let alone $50,000.
But what about the ‘movers and shakers’?
There are three kinds of wealth. Inherited, public and created. Inherited is obvious. Created wealth includes success such as that achieved by Bezos, Bill Gates, Warren Buffet and, here in Australia, true entrepreneurs like Harry Triguboff, Frank Lowy, Mike Cannon-Brookes, Scott Farquar and Lindsay Fox. And then we come to public wealth…
Many of the world’s wealthiest have become so through the exploitation of public resources. Gina Rinehart is Australia’s richest woman and quite possibly our richest citizen. She inherited a not-inconsiderable legacy from her father, Lang Hancock.
The jewel of the estate was and remains the mining leases – the right to extract iron ore and other minerals and sell them at market prices to the highest bidder. Rinehart has shown acute business acumen in multiplying her legacy and I admire those abilities.
Over the years, the Hancock legacy has paid it’s ‘fair share’ of royalties to state governments and generated significant company tax revenue for Australia. But minerals and oil are common wealth. They do not belong to a company or individual. If Australia had a resources tax – allowing the ‘common people’ to share that ‘common wealth’ in a land correctly titled the ‘Commonwealth of Australia’, Gina would still be fabulously wealthy but, I argue, the nation would have received a far better return on those resources.
Politically, Lang Hancock was pretty much right of Ghengis Khan. Gina Rinehart has also made it clear that she has little or no time for those struggling to make ends meet. In a 2012 interview, she stated that those jealous of the wealthy should “spend less time drinking or smoking and socialising and more time working”. She went on to add that there is “no monopoly” on becoming a millionaire”.
Another Australian, Clive Palmer ($1.8 billion) also owes his wealth to an abundant share of ‘common’ resources (and a great deal of litigation). He intends to use his wealth to change the face of Australian politics in the upcoming federal election. As Ross Fitgerald of the UK’s Spectator so succinctly summarised:
“ … bold-as-brass and with massive cash flow once more, he’s now threatening to spend $50 million (according to his spokesman) or as much as it takes on electing lower house and Senate candidates throughout Australia. This is despite an estimated $300 million in unpaid nickel refinery debts, including almost $70 million to reimburse the taxpayer for some 800 sacked workers’ redundancy entitlements.”
Clive is a classical proponent of the Golden Rule.
Meanwhile, back in America, the legacy of the US oil barons is still very active today. It is used to influence decisions that may or may not be for the public good. Call me cynical, but I can’t ignore that golden rule.
Then there is the ‘common purse’ from which many have gained extraordinary benefit.
Walmart Inc (a majority family owned business) operates more than 11,000 stores. It is the world’s largest private employer with 2.3 million workers spread across 27 countries. That’s a lot of pay packets every week. That’s a big plus. But many, many of those employees are on minimum wages – so low that they have to rely on food stamps and other public assistance programs to survive. Sam Walton’s heirs are doing OK, thank you very much, but is the tax payer?
Here in Australia, we have seen many examples of significant private wealth being created via ‘employment programs’ funded out of the common purse. The ‘pigs at the trough’ mentality has become so pervasive in some quarters that, as one trough empties, the same starters are already lined up at the next one.
Many of these programs are governmental knee-jerking. Short-term solutions to long-term problems where the thinking seems to be that, ‘if we throw enough money at it, it will go away until after the next election’. But there are connected people who are consistently able to benefit from this public largess as public wealth moves to private hands.
Perhaps the greatest example of public wealth moving to private hands is the defence industry. But that is the subject of a book, not a post!
And so we return to the core question of this missive…
Should we penalize wealth creation?
Is the solution to put a lid on wealth creation? To penalize people who become successful? To return to the tax system of 1980 with a top marginal rate of 60% for those with an assessable income of more than $35,000 (very approximately $110,000 in 2018 terms)?
I argue that it should certainly be considered. Someone earning $250,000 in 1980 managed to keep around $109,000 or roughly 44% of his or her gross income. The person earning $760,000 in 2018 (the inflation adjusted equivalent) kept closer to $445,000 or roughly 59% of the gross, totally ignoring the much more generous deductions available today for that person.
Did we make a big mistake abolishing death taxes?
There was another tax here in Australia up until 1978 that helped to redistribute wealth… Death Duties. Australia was, in fact, the first nation to abolish death taxes. Many others have since followed.
It was a politically astute decision. It benefited conservative voters who typically have greater wealth – the haves versus the have nots. Interestingly, in that same budget, a surcharge of 1.5% was added to taxable incomes which, of course, hurt lower income earners much more than the ‘well-off’.
Which politician has the grit?
It would take a brave politician to advocate for the return of death taxes but I argue it is the solution to wealth inequality.
Jeff Bezos has earned his money. But his heirs will not. They will benefit from a pre-existing base of $140 billion. Some of his heirs may even be smarter, more intuitive and/or work harder than Bezos. But that $140 billion is one hell of a launching pad.
And so, we come to the bottom line. What is reasonable wealth? Is it $10 million? Maybe $25 million? Some would argue $1 million. Trump would argue, in the words of Madonna, that “the only thing better than more is more”.
My needs are relatively modest. I would advocate that the family home should always be exempt from any form of death tax. That would apply whether that home cost $100,000 or $100 million. Ultimately, it’s a non-income producing asset.
I would also advocate for an exemption of the first $5 million of income producing assets.
Above that figure I would argue for an escalating scale of taxes on every asset – income producing or not (for example, art works). That scale should start at 10% and rapidly rise to as high as 50% for estates over $250 million. There could be exemptions for family owned and run farms up to a certain size to prevent the forced sale of such assets but generally speaking, exemptions should be minimal to prevent manipulation by the wealthy.
Am I dreaming? No, it’s possible today to fight for and possibly achieve such radical (or reversionary) reforms. But the window is closing rapidly. Like the USA, our electoral system is now heavily favouring those capable of outspending their opponents.
A wealthy parliament is never going to legislate against the Golden Rule.
1/ Ian Narev left the CBA following a money laundering scandal that lead to a $700 million fine being imposed on the bank. During his six year stint at the CBA helm, the bank also faced other scandals including the CommInsure irregularities that cost thousands of CBA customers many millions.
Unfortunately, The CBA scandal apperas to be dwarfed by that faced by another Australian bank, Westpac. While the CBA money laundering scandal involved some 56,000 separate instances, it appears that Westpac’s could exceed $23 million!
According to a summary of the issues published in December, 2019 by Reuters, Westpac, CBA and the other two leading banks, Australia and New Zealand Banking Group (ANZ) and National Australia Bank (NAB), have had to allocate $8 billion AUD, approximately $5.4 billion USD, to refund customers for overcharged fees, miss-sold products, and non-compliant financial advice. On top of that, CBA’s management agreed to compensate over 40,000 current and former employees with $25 million AUD after it came out that they were underpaid.
Despite the scandals and loss of shareholder value and public trust, senior management at all four banks continued to take home massive paypackets and fringe benefits.
2/ Bernie Sanders, American presidential candidate for 2020 is a strong supporter of death taxes as a way to reduce inequality. Sanders supports a living wage, universal health insurance and big infrastructure investments funded by reforming the tax system. Those reforms involve higher taxes for the very wealthy.
The U.S. political right and even some within the Democratic Party are already working hard to discredit him by spreading misinformation.
Sanders’ 2020 campaign is an unprecedented grassroots movement driven by hundreds of thousands of volunteers. At this stage it appears to be the largest, organized groundswell of public opinion since the Vietnam War. No wonder the elite are concerned!