Jake's View

Rich are easy target but tax offensive won't help the poor

As the wealthy can flee, real efforts to lift those at bottom should start with smart government

PUBLISHED : Thursday, 01 May, 2014, 1:18am
UPDATED : Thursday, 01 May, 2014, 1:18am

[Thomas] Piketty's 700-page blockbuster details how wealth has become more concentrated this century and how the gap between rich and poor has widened to an extent that it can only, in his view, be redressed by significantly increased taxation of the rich.

Stephen Vines column,
SCMP, April 30

I haven't read Mr Piketty's book and I have to confess that the prospect of ploughing through 700 pages of the world's oldest complaint somewhat deters me from doing so.

I can also cite one good reason, readily apparent in this town, as to why his remedy does not work. It has been tried in his homeland, France, and the result has been that in Hong Kong you can now hear French around you at every turn. The French middle classes have fled.

That's the middle classes, not the rich. There are not many of the rich left in France. They left long ago, even if only to Monaco. Squeezing them to satisfy dreams of egalitarianism would be like wringing out a dish cloth to water the Sahara desert, gone before it hits the sand.

The fact is that taxing the rich works out in practice to mean underinvesting

It is French working-class people who really carry the burden. They cannot find jobs abroad as easily as their educated English-speaking middle-class compatriots can do and so they stay home to be embraced by their taxman. Walk through the suburbs of any French city and you will be struck by how poorly the working people live for the wealth of their country.

Their president, aided by the likes of Mr Piketty, tell them ceaselessly that their problem is the rich, that the rich will now be made to pay and the money will then go back to the poor.

Except, of course, that it doesn't. French bureaucrats take twice as much of the pie for themselves in remuneration as they give the downtrodden in social transfers. And rather than paying for it by taxing anyone, they like to fund it with debt. The French government has not turned in a fiscal surplus in 40 years and its debt load now stands at an eye-popping 94 per cent of gross domestic product. What is your advice here, Mr Piketty? Shall your country default on debt payments?

But it is not only because the rich flee that this simplistic hit-the-rich remedy does not work. The value of financial assets is a function of how much future income they can generate. A block of flats has wealth value because it generates rental income. An equivalent volume of sea water has no wealth value as you cannot drink it and anyone can go boating on it.

Change the income that the asset generates and you change its wealth value. Tax the rental income of the block of flats and its value goes down. Do it too heavily and fewer rental flats will be built. Soon you have a housing shortage.

This states it simplistically, of course, but I am working here with 700 words, not 700 pages. The fact is that taxing the rich works out in practice to mean underinvesting. Sooner or later your economy has to make up for it by enticing money back again and then you risk a truly shocking Russia-style scale of wealth polarity. I shall put it another way. The bottom stones of the pyramid always carry the greatest weight. The greatest burdens in any economy are always carried by the working poor. Others may seem to carry them but the weight of them is always passed further down to rest on the bottom layer.

Don't fool yourself, as Mr Piketty does, that you can make the rich carry the greatest weight by building the pyramid upside down so that it stands on its capstone. That would be wonderful but it's magic. It belongs in the world of fantasy.

If you want to relieve the burdens on the working poor then don't place those burdens there in the first place. For government that means keeping expenditures down and making sure that the wheels of the economy turn smoothly by upholding rule of law and getting in the way of those wheels as little as possible.

I shall read myself to sleep on Captain Hornblower tonight. In fiction, derring-do on the high seas appeals to me more than landfill.