It's more than all right for some

Rich Britain
July 28, 2006

Following the Glorious Revolution of 1688, England - later Britain - evolved into a plutocracy. Taxes and interest rates fell and trade was freed. Vast wealth was created in consequence but it was distributed unequally, and by the end of the 19th century a mere 0.04 per cent of the population owned some 80 per cent of the land. Money bought power and power bought money: by 1865, 76 per cent of MPs were either titled or members of the gentry. America's age of robber barons followed a similar trajectory; in 1906, a third of US senators were multimillionaires.

But the Great War stalled 250 years of burgeoning plutocracy, and the subsequent expansion of the state, the crash of 1929, the retreat from globalisation embodied in America's Smoot-Hawley Tariff, the costs of the Second World War and the postwar entrenchment of socialism only screwed the rich further. By 1979, marginal tax rates in Britain had driven many into exile. More pertinently, in the UK and the US, the culture changed; people no longer fawned over the rich. Wealth had ceased to be chic, and people aspired to serve society, not their bank balances. But those attitudes coincided with national failure and, by the late 1970s, America and Britain were in economic decline. The future seemed to belong to Japan, Germany and France. Britain was burdened with inefficient nationalised industries and inflation, and the Winter of Discontent precipitated the election of Margaret Thatcher.

Thatcher restored the market to primacy. She cut taxes, lifted currency controls, privatised the utilities and slashed regulations. As the markets ripped, so did plutocracy. In Britain in 1979, the best paid 1 per cent of the population had enjoyed 6.5 per cent of the national income but by 1999, that 1 per cent had doubled its share. Personal wealth is now a feature of our country. In 2000, some 2,000 people in the City received bonuses of at least £1 million, and people such as FTSE 100 company directors (230 of whom were paid more than £1 million in 2004) and their professional advisers such as accountants and lawyers accumulated assets of millions of pounds. There are more than 100,000 millionaires and more than 40 billionaires in Britain today, and they are the subject of Stewart Lansley's Rich Britain .

Thanks to rises in indirect taxes, our tax system has become regressive. Whereas in 1979 the poorest fifth of the population paid 31 per cent of its gross income in taxes, by 2002, it was paying 38 per cent. Meanwhile the richest fifth of the population, which in 1979 paid 38 per cent of its gross income in taxes, was in 2002 paying only 35 per cent. But these developments have not outraged the populace: remember that Labour was set to win the 1992 general election until the party's leader John Smith proposed raising the top rate of income tax to 50 per cent - whereupon the polls deflected instantly. The culture has changed in America too. When Gordon Gekko in the 1987 film Wall Street said "greed is good", the audience agreed. Society is now so plutocratophile that when the Beckhams held their pre-World Cup £1 million party for fellow celebrities, the event featured approvingly on every TV and radio news bulletin and in plutocratic porn magazines such as Hello! and Heat . Greed is good for Tony Blair, too, and in 2004 he boasted in a speech to City financiers at Goldman Sachs that they were paying tax at a rate "lower than in most of Mrs Thatcher's years". Meanwhile, in the US, President George W. Bush directed half of his 2001 $1.35 trillion (£730 billion) tax cuts to the richest 1 per cent. Indeed, for the super-rich, paying taxes has become voluntary. By various collusive practices, including the claiming of non-domiciliary status, tax exile and the use of offshore tax havens, the super-rich and their corporations avoid paying at least £25 billion a year to the UK Treasury. And the state indeed colludes: Blair told The Guardian in 2004 that if Britain were to raise the taxes of the rich "large numbers of those taxpayers, probably the wealthiest, would simply hire a whole lot of new accountants to do this and that. And actually your whole tax take would be a lot less".

In Rich Britain , Lansley, a journalist, chronicles these events with distaste. He believes the popular culture has it wrong and that Britain's and America's economic recovery since 1979 owes little to the new plutocrats, whose wealth he says comes not from wealth creation but from wealth redistribution. So, he says, the new rich are largely asset-strippers, whose money comes from financial legerdemain and from laying off workers, not from innovation.

Lansley is wrong. Even if the new rich were only asset-strippers (and even he absolves James Dyson and Bill Gates of that charge), asset-stripping - like company bankruptcy - is an integral part of capitalism, because it is the mechanism by which markets promote efficiency. Lansley believes in the state, but in the month that we have learnt that the Home Office is not fit for purpose, that the tax credit scheme has again overpaid £2 billion and that the National Health Service computer is £13 billion over budget and may not work, Lansley's support for more taxes on the private sector to support the state looks perverse. He denies that market freedoms in the US and UK have stimulated growth, but the annual publication of James Gwartney's Economic Freedom of the World confirms that the countries with markets that are the most free grow richest: free markets may generate economic inequalities but they produce wealth. Lansley notes that the global economy did better between 1945 and 1979 than it has since, which he claims shows that the new culture of tax cuts has been damaging, but global growth in the period 1945-79 was dominated by the once-rich war-torn countries reconverging on America - a one-off phenomenon. In any case, current rates of global economic growth are exemplary. Moreover, France's high labour productivity does not flow from its egalitarianism but from its inflexible labour markets, which drive industrialists into investing in machinery rather than in labour (hence the high unemployment rate in France).

Lansley claims that there is no correlation between companies' boardroom salaries and their profitability, and that the directors' huge salaries reflect only the capture of our companies by the executives. Here he is on solid ground, and commentators since Adam Smith have worried about the incentives of directors. Share options were meant to help resolve that problem by aligning executives' interests with that of the owners, but the repeated abuse of options (and of golden hellos and goodbyes) reveals that we have yet to fully crack the problem. But the answer is to improve corporate governance, not to raise taxes. As Blair said in his Goldman Sachs speech: "If you cap someone's income... that would drive them abroad." Of course markets are unfair, but they incentivise vast private investment and entrepreneurialist innovation and they create vast wealth.

The inequalities they produce are more than tolerable - especially as they raise absolute wealth even for the poor. Of course it is a shame that social mobility is so low and that the children of the rich enjoy unfair advantages: of the ten richest British landowning families in 1880, no fewer than eight featured on The Sunday Times Rich List in 2005. Even in America social mobility is low, and only about 5 per cent of seriously rich people - even those apparently self-made -come from the working classes.

Surprisingly typical of successful entrepreneurs are men such as Richard Branson and Dyson, both privately educated, as was Gates. Yet the state often aggravates social immobility. Between 2003 and 2004, for example, the Common Agricultural Policy paid £1 million to the Duke of Marlborough, Pounds 900,000 to the Duke of Richmond and £800,000 to the Duke of Westminster. And social mobility has been reduced since Labour abolished selection by academic ability: the best schools are now reserved for those whose parents can afford the highest mortgages.

Lansley believes there should be a maximum wage to mirror a minimum wage, but his argument that envy of the super-rich disrupts society is false.

People are largely envious only of their peers. I know no one who feels diminished by Gates's billions, but I know many who would be upset by an S-class Mercedes in their neighbour's driveway. And for Lansley to condemn the rich for a lack of philanthropy is unfair. The most philanthropic societies are those that have markets that are the most free (which is why French philanthropy barely exists), and I was startled to see how many of the plutocrats that appear in this book (the Rothschild family, Charles Clore, the Weston family, Sir Christopher Ondaatje, Lord Kalms et al) have also been benefactors of Buckingham University. That such a high proportion of Lansley's named rich should have given money to Buckingham suggests that he has criticised them inappropriately.

This book is a cry of rage against the most beneficent non-zero-sum game we know, Dr Johnson's men innocently employed in making money. Although well written and packed with interesting facts, its thesis is wrong. Rich Britons is the price - an acceptable one - we pay for rich Britain.

Terence Kealey is vice-chancellor, Buckingham University.

Rich Britain: The Rise and Rise of the New Super-Wealthy

Author - Stewart Lansley
Publisher - Politico's
Pages - 265
Price - £18.99
ISBN - 1 845 147 6

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