My Thoughts on the Paradise Papers

Some people are very rich. It’s very hard to tax them proportionately to their wealth, without the cost to them of paying the tax exceeding the cost to them of hiding their wealth. And so they hide their wealth.

You can try to increase the cost of hiding wealth. But rich people, as we now know, generally avoid rather than evading. So you’d need to change legislation. This would be costly and the results uncertain. Every new legal loop has a new loophole. The cost of the changes might exceed any gain in revenue. And any gains there are might be temporary until the super-wealthy discover cheaper ways to game the system.

You could have Piketty’s global wealth tax. But how much would such an international agreement cost to set up? It faces a real monster of a Prisoner’s Dilemma. How long would it last, even if its benefits were broadly felt? The European Union couldn’t retain Britain.

You could reduce taxes on the super-wealthy until the cost of avoidance exceeded that of just paying the tax. But that’s giving up on the project of using tax as a redistributive mechanism.

You could stop the super-wealthy becoming super-wealthy in the first place. That’s the ideal long-term solution. It would mean pushing back the political tide of the last forty-odd years. It would also, I think, involve pretty serious price and wage controls. Well — it would involve reversing the price and wage controls that rigged the system in favour of the super-wealthy for the last forty years. But the newspapers would report the reversals as new controls. Maybe it will happen. But it’s hard for me to imagine us getting there from here.

A short-term solution might be to tax consumption. The purpose of taxation isn’t really to collect revenue (as most of my readers don’t need to be told). Rather, taxation is for reducing private-sector spending, so that the public sector can spend more without creating inflationary pressure. When the wealthy hide their wealth, the immediate effect is deflationary: money flows out into offshore havens instead of being spent. This clears ‘fiscal space’ into which the state can spend, just as effectively as taxation does. The only problem is that the money stashed away can flow back in, when the wealthy spend it on their luxury purchases, or use it to pump up asset bubbles, or bribe Parliament. So why not tax things that rich people spend their money on, in order to discourage this spending?

Tax sales of yachts, private jets, luxury apartments, etc. — not to get revenue, but to kill the markets. Yes, you’ll hurt people working in those industries. But if the market works as well as some economists say it does, it will automatically reallocate productive capacity towards making things that the non-wealthy need. And if it doesn’t, the state can claim that productive capacity and use it to provide public services for those who need it the most. Either way is a better distribution than the one we have. Except for the super-wealthy. But I think they’ll be ok.

Myleene Klass famously told Ed Miliband “you can’t just point at things and tax them”. Well, tell that to the cigarette manufacturers. The wealthy only get in the way of public spending when they spend. So deter them from spending. This is only a temporary solution, but it might help the long-term solution too. People generally get wealthy for the luxury of it. Make luxury more expensive and more people might think twice about making wealth their ultimate aim. That also seems good.

Of course this somewhat goes against the liberal idea that the state should be morally neutral, that it shouldn’t make decisions on the basis of value-judgements about the good life. But I’ve long believed that to be a logically incoherent idea. The negation of a value judgement is also a value judgement. What’s the practical difference between refusing to endorse the value-judgement V and endorsing the value-judgement ~V? I can’t see any. So screw liberalism. Do what’s right.

Lecturer in Philosophy, University of St. Andrews — personal website: https://axdouglas.com/

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