It's time for the Davos super-rich to pay their fair share

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22 January 2015

As the rich and powerful gather in Davos, IIED director Camilla Toulmin urges a change in attitudes to taxation to tackle growing inequality.

The world's top bankers discussed international financial systems at the World Economic Forum in Davos (Photo: swiss-image.ch/Remy Steinegger, Creative Commons, via Flickr)

Politics, power and wealth have always been woven closely together. It was ever thus, with the rich seeking friends among those who govern, and those in government finding common cause with the wealthy.

If you visit the palazzo of the Doria-Pamphili dynasty in Rome, now open to the public, you learn that their riches grew greatly in the 17th century when a son of the family became pope, at a time when papal rule over much of central Italy gave them access to great powers of patronage, as well as large tax receipts.

Inequality of income and wealth is a hot topic at the World Economic Forum taking place in Davos this week, and was the focus of an Oxfam and Oxford University debate held in advance. The event focused on trends in inequality in developing countries, and lessons from policies implemented to tackle the growing gap between rich and poor.

Taking a cue from Thomas Picketty, author of 'Capital in the 21st century', speakers predicted that the already significant gap between rich and poor was likely to widen further unless concrete steps were taken to change the current trajectory.

Oxfam's latest report, for example, asserts that in a couple of years' time, we can expect the top one per cent to have wealth equivalent to the holdings of everyone else, the 99 per cent – a staggering level of disparity that has massive implications for how power is held and exercised, the life chances of people, and risks to political and social consensus.

Clearly government has the most important role to play in redressing these disparities, and the evidence from many Organisation for Economic Co-operation and Development (OECD) nations shows that distribution of income after tax and social security payments does this to some extent. The state should demand from its citizens that they contribute in proportion to their ability to pay. 

In the 1960s, marginal tax rates on the richest households were more than 80 per cent, with apparent broad consensus that wealthier people should make a proportionately larger contribution to public services than middle and low income groups. But attitudes have changed, and now great cries of protest are heard from the rich when an increase in taxes is proposed.

In many rich countries today, the marginal rate of tax on the wealthy is below 50 per cent, with actual levels of payment often much below this due to clever tax 'planning' and low rates levied on income from investment and other capital assets. Hence, as super-rich billionaire Warren Buffett famously pointed out, he pays less tax than any of the staff in his office, including his secretary.

When Buffet highlighted this fact, US President Barack Obama spoke out, saying: "Warren Buffett's secretary shouldn't pay a higher tax rate than Warren Buffett". Obama again spoke out against inequality in his State of the Union speech this week, with his call for an economy (and a budget proposal) that generates rising incomes and chances for everyone who makes the effort.

The politics of wealth and inequality

At the Oxfam debate, we heard the importance of understanding the politics of wealth and inequality, which seems to be the crux of the problem. Since the early 1980s, when market fundamentalism became the dominant narrative about how economies should be managed, the rich have got steadily richer, regulation has fallen away, and global companies have become massively powerful.

Politicians need funding support for their parties, and seek friends with large wallets. The media, much of which is owned by the elite, attack the 'inefficiencies' of government, and belittle the central role of the state to both provide public services and redistribute income. Thus, the votes of the wealthy weigh far more heavily in our democratic process than those with less cash.

A wide variety of tax dodges have arisen that enable the rich to minimise their contribution to the public purse – many of these fall within the law, but rightly offend the ordinary citizen.

The new Fair Tax Mark allows companies to tell their customers that they are paying their fair share and not going in for funny tax dodges. Large multi-nationals like Starbucks, Google and Amazon have been shamed at the UK parliamentary audit committee as details emerge of their minimal tax payments to the UK exchequer.

These tax dodges arise partly because transfers of money within the company allows them to claim profits in low tax jurisdictions, rather than where the profit was generated. Individual nations seek to attract companies to set up offices by offering low rates and other sweeteners. And they're helped on by senior tax officials moving from being game-keeper to poacher, as has happened in the UK.

So we have a race to the bottom even among countries within the European Union, which should have a stronger collective spirit to address this shared problem.

Greek citizens may this weekend challenge this state of affairs, with pollsters predicting a likely victory for Syriza, a party standing on an anti-austerity platform. Many people in Greece appear to feel they have been paying the price for a system that benefited the rich and powerful for far too long.

At a global level, the continued existence of tax havens, (several under UK authority) presents even greater opportunities for flows of cash (some illicitly acquired) to escape scrutiny. Oxfam is calling for a global tax conference to take this forward. Ambitious? Yes. Needed? Urgently! Otherwise, we risk further tearing of the social and political fabric which should bind us together.

So if there is one thing that the Davos crowd should agree on, it's to line up behind Warren Buffett and demand that they pay their fair share.

Camilla Toulmin (camilla.toulmin@iied.org) is IIED's director.

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