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3 March 2022

Why you should care about the wealth gap – even if you think you don’t

Excessive economic inequality has specific consequences that threaten our democracies.

This article originally appeared in Prospect magazine.

Economic inequality can sound like a terribly abstract thing, and a decided minority concern. Conservatives sometimes support policies which address poverty but not those that seek to reduce economic inequality. And at first glance, that might seem reasonable. After all, the needs of the destitute are clearly more compelling than those who, while comfortably off, still earn less than the rich. Who really cares about income inequality between those who are doing just fine and a handful of billionaires? Besides, differences in people’s talents, hard work and choices are real, and if some excel on these counts—and get seriously rich in the process—then is the resulting inequality really wrong in itself?

As we argue in our contribution to the Institute for Fiscal Studies’s Deaton Review of Inequality, while some degree of inequality in income and wealth is justified, there are still very good reasons to be concerned about it—namely, the consequences. Consider three, relating to politics, tax and opportunity. In every case, excessive economic inequality turns into an inequality of another sort which undermines the fundamental values of our society.

Taking politics first, democracies are founded on the idea that all citizens are equals and this includes equals in the making of law and policy. To this end, democracies guarantee that each citizen has the formal right to vote and to run for office. But this equal distribution of rights rings hollow in a system where the wealthy can donate large sums of money to their preferred candidates and influence political outcomes. In the UK, there is a clear link between major donations and becoming a member of the House of Lords, and thereby an unelected legislator for life. Studies in the US point to the lack of responsiveness of policy-making to those with low incomes and substantial responsiveness to the better off. It also helps to have your own money to run for political office.

Turning to tax, and the basic civic obligation to pay it, many former public regulators in the US are employed by the very rich to hunt for loopholes in the tax system. This allows the wealthy to hide much of their wealth, so that many of them pay a lower percentage of taxes than ordinary working people. Last year, ProPublica, the non-profit organisation of journalists, obtained IRS records showing that Tesla founder Elon Musk, then the second, and now the richest person in the world, paid no federal income taxes in 2018. The very rich can often hold their stocks and shares in ways that draw no tax: billionaires now pay lower tax rates than their secretaries. And it is not as if they are paying much in corporate taxes either. By sending profits abroad, companies like Facebook, Apple and Google have paid little or no US corporate tax. Recently, the leaked “Pandora Papers” let in the light on the hidden world of tax havens, shell companies and complex trusts that shelter the assets of the super-rich at the expense of everyone else. The UK effectively stands at the centre of a network of havens, thanks to “crown dependencies” such as the Channel Islands and “British overseas territories” such as the British Virgin Islands. As journalist Adam Ramsay points out, these micro-jurisdictions rely on the UK for military protection, but enjoy the autonomy to make their own laws, including on tax. They use it to fill their own coffers with a small slice of the vast resources the rich shunt their way, which suits both the haven and the tax dodger, but at the cost of the rest of the world. The unpaid taxes by the super-rich mean more unbuilt hospitals, more decaying roads, worse schools—and more taxes for the rest of us.

Last but not least, if we are each other’s civic equals, then we should all have a fair shot at success. It is not just egalitarians but also liberals and even conservatives who avow some commitment to equality of opportunity. If you are talented and willing to work hard, then your race, gender, or the social class you are born into should not hold you back. But current levels of economic inequality mean that many children will be left behind and never have a fair shot at developing and using their talents. In the US, not only do wealthy families congregate in areas with better-funded public schools—and the gap between school funding in rich and poor districts has been growing in the last 20 years—but they also send their children to private schools. Beyond this, wealthy families can hire private tutors, coaches, and game the screening mechanisms that control access to the top universities. The rich essentially function as a social caste, hoarding opportunities for themselves. Meanwhile, other talents languish. In the UK, social class remains one of the most powerful predictors of success, whether measured in test scores, educational attainment or university completion.

The three warping consequences of economic inequality that we have pointed to interact. Political inequality cements tax inequality, which then begets more economic and political inequality. Research by the openDemocracy website points to tax havens as a major source of funds for the Conservative Party and the Brexit campaign. Tax inequality frustrates collective efforts to promote equality of opportunity, by sapping the public resources required to give every child the education and other resources they need for a fair start in life.

The combined result strains the basic civic promise of democratic society: that we are political and civic equals, with an equal right to try and make the most of our talents. How should we address this? It is a huge question, but we can spot four obvious starting points in the hunt for a solution.

First, reassert civic equality in tax obligations. That means calling time on the power of tax havens to provide a mechanism for the very rich to escape the moral obligations of their citizenship. The UK is in a particularly important position here given its historic links—and current security support—to many of the havens.

Secondly, address wealth as well as income inequality. In the US, Emmanuel Saez and Gabriel Zucman have proposed a wealth tax for the ultra-rich. Set at 2 per cent on net worth above $50m with an additional 1 per cent rate above $1bn, they estimate an additional revenue of $210bn per year. Funds from such a tax might be used to help finance a universal wealth floor, possibly in the form of universal capital grants, which could do a lot for equality of opportunity. Sovereign wealth funds, something many countries have developed in recent decades, are another way to democratise assets.

Third, support the power of ordinary citizens coming together. If working- and middle-class groups are well-organised, they can achieve extra clout relative to the very rich. Legal frameworks have an important bearing here: the scope and pattern of trade unionism, for example, depends on how far labour law encourages or discourages it. The right legal reforms can nurture popular associations that offer the potential to push back against oligarchic power.

Last but not least, rethink political representation. As things stand, elected representatives can become beholden to the very rich whose money can make all the difference to campaigning for office. One obvious response is to tighten rules around campaign finance. Other priorities are cracking down on lobbying, and the “revolving door” between political office and business. Another option, explored by Hélène Landemore in her book Open Democracy, is to develop new forms of representation. Citizens’ Assemblies—assemblies chosen on a lottery-like basis to be roughly representative of the population in terms of race, gender and class—are worth considering as part of the mix, even if though they could never fully replace wholesale elected representation.

In sum, economic inequality may not matter in itself.  But it nonetheless really matters. Why? Because it warps the institutions that were meant to equally serve us all. Extreme wealth enables those who have it to circumvent and/or capture our common institutions, putting the civic promise of democracy under increased pressure. To save the civic promise of a society of equals, we must place limits on economic inequality and the unequal power that flows from it. To be a democrat is also, in this limited sense, to be an egalitarian.