Labour: Making the Rich Richer

Submitted by Anon on 11 October, 2007 - 3:19 Author: Martin Thomas

Their triumphalism has been a little chastened. New Labour politicians these days are not quite as bold as Tony Blair was when he told Jeremy Paxman on BBC Newsnight before the 2001 election that he was not bothered about a widening gap between rich and poor.

“Paxman: Is it acceptable for gap between rich and poor to widen?

“Blair: The key thing is not... the gap between... the person who earns the most in the country and the person that earns the least... The issue isn't... whether the very richest person ends up becoming richer. The issue is whether the poorest person is given the chance that they don't otherwise have...”

Inequality still increases under New Labour. But Ed Miliband, who has the job of drafting the New Labour manifesto for the next general election, bangs on about equality being important. Only, he says, “in the kind of world we live in it is much harder to do anything directly through tax with people at the top end”.

Of course, it is true that a drastic drive for equality — a socialist revolution — could not succeed in Britain alone without provoking a flight of capitalists, an economic blockade, and so on. Fortunately it would stimulate workers' struggles in other countries as well as flight of capitalists to them...

It is true, also, that “globalisation” — sharpened global competition, including competition between governments to offer their home economies as sites for world-market production — creates pressures to cut social overheads.

But take the simplest snapshot measure of inequality, the Gini coefficient, calibrated so that it is 100 when one person gets all income and everyone else zero, and 0 when everyone gets exactly the same.

The UK's latest Gini is 35 (for 2003). It was 33 in 1996; it was around 25 in the 1960s and 70s.

Almost all other north-west European countries have lower Ginis (less inequality) than Britain. Sweden's Gini is 23; Denmark’s 24; Finland’s 25; Belgium’s 26; France’s 28. All those countries are just as "globalised" as Britain.

Contrariwise, the USA, somewhat less “globalised” than Britain, has a Gini of 46; Japan has a Gini of 30. High Gini seems to correlate with weak labour movement (not exactly, of course) rather than high globalisation.

Figures for child poverty — the living standard of a child who is poorer than 90% of kids in the given country, but better off than 10% — show up the UK even worse. That child in poverty is 54% better off in Sweden than in the UK; 42% better off in France; 38% better off in Germany; and 11% better off even in the USA.

Poorer countries tend to have higher Ginis than richer ones. But there again there is wide variation between different countries, despite them all being “globalised” — from Taiwan at 34 and South Korea at 37 to mainland China and Venezuela at 45, Mexico at 50, and Brazil at 57.

The backstop Miliband argument is that capital and capitalists are too mobile. Raise top income tax rates, or corporate tax rates, and they will flee. Britain will be left with no more than a few dozy locally-based industries, run by managers who couldn’t organise a snack in a tapas bar.

In fact there is no rigid compulsion that fixes the top income tax rate at the UK’s 40%. Sweden’s is 57%, France’s is 56%, Germany’s is 47% (all 2005). There certainly is no inescapable imperative for the sort of tax loopholes which leave private-equity bosses in the UK paying (as one put it) “less tax than their cleaners”, and makes Britain a desirable base for Russian oligarchs.

Most rich countries have top corporate tax rates above the UK’s 30%: Japan, 41%; Germany, 40%; USA, 39%; Italy, 38%, France and the Netherlands, 35% (all figures 2003).

Top rates don’t tell the whole story. Every country has many loopholes for those taxes, and companies tend to adjust their revenues so as to “show” their profits in the country with the laxest tax regime. Another measure is revenue from corporate taxes as a percentage of GDP. The UK, at 2.9%, is below Belgium and the Netherlands at 3.5%, or Finland, at 4.3%.

Big business tends to prefer low taxes across the board, because higher taxes on their workers put them under some pressure to raise pre-tax wages. But, contrary to popular impression, what the UK has been doing since Thatcher came in is not cutting taxes. It is shifting taxes from direct to indirect, and thus making the tax system regressive. The poorest 20% of households pay 42% of their incomes in tax, and the richest 20% only 34% (2003). No iron law of globalisation stops British governments rebalancing taxes to make them fairer.

Social provision requires some taxes, of course. But the level of the sort of social provision that reduces inequality depends on how the government chooses to spend tax revenue, as well as the size of revenue.

Although UK military spending has decreased (as a percentage of GDP) since the Cold War, it is still higher than any other NATO European country bar France: it takes 2.4% of GDP, as against 1.3% in Belgium or 1.5% in Germany.

It’s true that the British government has spent more on schools and health in recent years. But much of the spending has gone to pay PFI contractors, or new hospital managers, or super-paid head teachers.

Pensions in the UK are lower than in almost any other rich country. The New Labour government has chosen to alleviate that not by raising pensions, but by adding a means-tested benefit, Pension Credit. Inevitably, many, and especially the poorest, fail to get it. The UK has more old people in poverty than any other North European country except Ireland: 17% of 65-74 year olds and 26% of over-75s, as against, for example, 4% and 11% in Sweden, 4% and 14% in Finland.

In any case, it can’t be the case that there is an iron law about the percentage of top incomes taken in taxes, because those top incomes vary a lot from country to country even in the midstream of globalisation. Top bosses’ pay is on average about twice as much in the USA as in the UK, and much more in the UK than most other countries in north-west Europe. No iron law there.

Inequality is not just inequality between top bosses and the poorest pensioners or children. Since the Thatcher years, inequality within the working class — the difference between better wages and worse wages — has increased sharply in Britain.

That is affected by government policy, too, on at least two counts. A lower (or no) minimum wage means more inequality. Australia’s minimum wage is 54% of GDP per head; Belgium’s 48%; the UK’s 45%; the USA’s 25%. The UK does not come out as badly on this comparison as others, but plainly there is no rigid rule that sets an exact rate for minimum wages in a globalised economy.

More vicious anti-union laws mean weaker unions, which means more inequality. There is no iron law of globalisation that keeps the UK’s anti-union laws as vicious as they are.

In fact, a major driving force to increase inequality is... an already high level of inequality. With inequality already high, more of the well-off opt out of public provision, and that public provision becomes pauper provision, with no strong political lobby to defend it.

The well-off tend, more and more, to live in different areas from the worse-off, and provision in the poorer areas falls into a hole. The UK is not nearly as far along this road as the USA is.

And — here again the USA shows the future, despite the fact that it is less vulnerable to global pressures than smaller economies — more and more, the poor cease to vote, and politics becomes a matter of chasing the votes of the comfortably off. Politicians become more and more responsive to the lobbyists who tell them — who have always been telling them — that ruin will follow unless they slash taxes on wealth, top incomes, and profits, and make poverty so desperate that the poor will be forced to take any job going however low the wage.

That is what has been happening with New Labour. Not a gallant but unavailing attempt to counter the pressures of globalisation, but subservience to the rich.

Figures from:

Ben Jackson and Paul Segal: Why inequality matters (Catalyst, 2004)

Luxemburg Income Study

US Congressional Research Service: Comparisons of U.S. and Foreign Military Spending (2004)

US Congressional Budget Office: Corporate Income Tax Rates, International Comparisons (2005)

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