Taming plutocrats

The rich must pay
January 3, 2013

In 2009, the Gates Foundation gave out $1.8bn in grants to improve health in developing countries. If it were a state, it would be the world’s 10th largest international aid donor. Its operations certainly resemble a state, complete with an eight acre headquarters in Seattle housing 1000 staff and a virtual diplomatic service in the countries it assists. Its buildings are designed to look like arms reaching out to the globe.

This is the more attractive face of plutocracy and the “new global super rich,” described by Chrystia Freeland in her new book, Plutocrats. “After a few million or something, it’s all about how you’re going to give back,” as Bill Gates puts it. But there are also less attractive facets.

A century and a half ago, Alexis de Tocqueville wrote of the United States: “nothing struck me more forcibly than the general equality of conditions among the people.” Today, the top fifth of Americans own 84 per cent of national wealth. The top 1 per cent own nearly a third.

How big is the global plutocracy? Credit Suisse defines “ultra high net worth individuals” as those with net assets of more than $50m. Last year the bank reported that the number of them worldwide had surged to an estimated 84,700, of whom roughly a third had net assets of more than $100m. Nearly half of them are in North America and a quarter in Europe.

“The past decade has been especially conducive to the establishment of large fortunes,” Credit Suisse noted, contrary to expectations that the 2008 crash might have halted or even slowed the trend. So we are talking about a fairly numerous global plutocracy, defined by income, whose lifestyle and mores influence a still larger hinterland of the mere “super rich.”

A big and under-debated question is the compatibility of this plutocracy with modern democracy. This is a more specific issue than the growing concentration of wealth within society at large. It is about the political status of the new class of the super rich and their ability to shape law and society in their own image. “Figuring out how the plutocrats are connected to the rest of us is one of the challenges of the rise of the global super elite,” argues Freeland.

The failure of public policy to tackle the wilder excesses of corporate greed which create and sustain much of today’s plutocracy is a defining challenge of progressive politics for the next decade.

Today’s super rich believe they deserve their wealth, like the 19th and early 20th century British aristocracy who struggled so bitterly against the rise of democracy. They are constantly looking over their shoulder at those who are even richer, who make them feel almost poor; and they believe their income is highly vulnerable and under constant political attack. As Robert Harris puts it in his novel, The Fear Index, “He was remembering now why he didn’t like the rich: their self-pity. Persecution was the common ground of their conversation, like sport and the weather for everyone else.”

The plutocrats are fighting hard against the irreducible minimum requirement of democratic equality—that they contribute to the state on the same basis as everyone else. Thanks partly to the scrutiny of Mitt Romney’s tax affairs, people now see that plutocrats do not do so. It is not that they pay somewhat less tax, proportionately, than the middle class. They avoid and evade tax wholesale, courtesy of tax havens, tax loopholes, and gaming different tax treatments for different classes and locations of income and assets. This is organised by what Freeland calls the “income defence industry” with its international armoury of lawyers, accountants and consultants, who are paid multiples more than the public officials they confront and routinely outwit.

“Within the top 1 per cent, the richer you are, the lower your effective tax rate,” writes Freeland. In 2009, the top 0.1 per cent paid just 21 per cent. The top 400 tax payers in the US paid less than 17 per cent of their income in tax.

When tackling deeply entrenched interests, the imperative is for a simple and easily understood reform, which cannot be contested by them with a straight face. In the case of the plutocrats the simple reform is this: they should pay tax on their overall income, however derived, at no less than the average rate for middle income earners. I see this reform as the critical test for reconciling plutocracy and democracy in the next generation.

When President Barack Obama suggested a modest reform to this end—that private equity firms should not be able to exempt large swathes of the income of their staff from tax by calling it “carried interest”—Steve Schwarzman, founder of the private equity behemoth Blackstone, said it was “like when Hitler invaded Poland in 1939.”

It looks like we are in for a heroic political struggle. Let the battle commence.