This blog post is the first in a series of posts that come from students of our capitalism and democracy undergraduate course. As part of the course, students were asked to write about an issue pertaining to the political economy of distribution. The best blog posts have been selected to provide an opportunity to exceptional young scholars at UCD to contribute to the debate on the future of European and global economic governance, and to promote the insightful scholarship being undertaken at UCD to a wider public audience.
In modern democratic capitalism, inequalities require justification[1]. Democracy aspires to that justification resting on merit. Can we justify today’s magnitude of global inequality on the basis of merit?
Estimates suggest that the wealthiest 1 percent of individuals own 50 percent of global wealth today (Piketty, 2014: 438)[2]. Furthermore, over half of the largest fortunes worldwide are inherited, so not earned at all (Piketty, 2014: 443). In a global order that accommodates the meagre allocation of wealth in many African and South Asian countries, and which gives rise to starvation alongside enormous private fortunes, literally too big to spend, it seems difficult to justify today’s magnitude of inequality.
If we can’t justify today’s inequality, what can we do to reduce it?
Piketty historical analysis of distribution suggests that we need either another world war, or the effective introduction of global political institutions that regulate global patrimonial capitalism (Piketty, 2014: 471).
International political theory to date has largely focused on development and aid in the form of transfers from rich to poor nations. However normative fiscal policy is a field of growing importance as we move to consider redistribution not only as a charitable aim, but as a means of social utility.
The idea of a global tax on the wealthy has come to the fore in current debate due to the ground-breaking work of Thomas Piketty. In “Capital in the Twenty-First Century” Piketty proposes that the “ideal tool” to reduce inequality would be a progressive global tax on capital levied on individual wealth (Piketty, 2014: 515-517). However Piketty’s suggestion is not an altogether unique one. Some twenty years ago, Thomas Pogge proposed a global resource tax, whereby each state pays a tax on any resources it extracts within its territory (Pogge, 1994: 200).[3]
Examining Pogge’s proposal can inform the debate on Piketty’s tax. In particular it is enlightening to ask why Pogge chose to tax resources while Piketty aims his tax at capital.
Before embarking on this comparison it should be acknowledged that the notion of any such global tax may seem wholly unrealistic. The obvious difficulty is that taxes require a central redistributive agency, which is clearly absent at the world level. Piketty himself acknowledges that his tax is a “utopian ideal”, which he admits would require an unrealistic level of international cooperation (Piketty, 2014: 515). However he also convincingly argues that the proposal can serve firstly as a reference point against which alternative proposals can be evaluated, and secondly as a direction in which willing countries can move incrementally[4] (Piketty, 2014: 515-516). Evaluating Piketty’s and Pogge’s taxes against one another may be useful in informing us of the direction in which we should move.
Resources versus capital – the tax’s target
Why does Pogge base his global resource dividend (GRD) on resources, and Piketty his on individual capital? The resources versus capital debate can be analysed from three perspectives: the cause of inequality, the justification for taxation and the results of the taxation.
First, in relation to the cause of inequality, Pogge views “the uncompensated exclusion from the use of natural resources” as one of three reasons for inequality-based injustice (Pogge, 2001: 61)[5]. For him the arbitrary control of the world’s resources by a small number of governments is the primary cause of inequality and injustice. Thus he argues that those who make more extensive use of the world’s resources have a duty to compensate those who (involuntarily) use very little (Pogge, 2001: 66).
But is the unequal distribution of natural resources really the cause of global inequality? If so, why do many citizens of oil-rich countries like Nigeria and Sudan still live in poverty?
Sovereign wealth funds of oil-producing states hold investments of approximately $3.2 trillion at a global level. Domestic households in Europe hold $70 trillion (Piketty, 2014: 458). It seems then that inequality goes far beyond resources.
Indeed, using extensive data from over 200 years, Piketty has shown that inequality results whenever the global rate of return on capital exceeds the rate of economic growth (R>G). When this condition is satisfied, wealth continues to accumulate in the hands of fewer and fewer wealthy people (Piketty, 2014: 351). Thus it seems that so long as the rate of return on capital exceeds economic growth, which it always has, then inequality is inevitable. The phenomenon is much broader than a question of natural resource distribution. The world’s richest are now rich because they own financial capital (and to a lesser extent real estate), not because they control the world’s natural resources.
By basing his tax on individual capital including all forms of wealth instead of resources, it seems that Piketty is more accurately tackling the source of global wealth accumulation.
Secondly, Pogge’s decision to target resources seems to derive from his conviction that such a redistribution is justified. His proposal is based on the idea that the global poor own “an inalienable stake” in all limited natural resources (Pogge, 2001: 66). The governments who control these resources are not entitled to exclusive property rights over them because they are the shared goods of the planet, so it is justified to redistribute the wealth extracted from them. Pogge does not explain why exactly this applies to resources (which he is willing to extend to non-renewable resources, leaving the borders rather vague) but not to all forms of capital. Couldn’t the same be argued for any inherited wealth that one has not earned by merit?
It has already been said above that the scale of current inequalities – which are too large to be based on merit and which if current trends continue look set to increase exponentially – are unjustified in a democratic society. The democratic values that justify intervention to restrain inequality apply equally to wealth in general as they do to resources.
Thirdly, the success of a global tax will depend on how it is organised. To be clear, Pogge envisages a system whereby the governments of resource-owning countries pay a proportion of the value of resources they extract directly to poorer countries in need (Pogge, 1994: 201). Returning to the case of Nigeria or Sudan, would these governments be required to raise the dividend (using whatever means they wish according to Pogge’s proposal) and then pay some of this to back to themselves? This of course would be futile.
But if resource-rich countries that are also home to some of the world’s poorest people are not also recipients of the same tax they pay, then it appears that Pogge’s tax cannot achieve its aim of alleviating poverty. Whether Piketty’s tax can do a better job depends on how it is distributed, which leads to the next question.
Destination and distribution
Pogge’s proposal is relatively clear in terms of how it would be distributed: governments would transfer the dividends to one another through a facilitating organisation such as the World Bank or the UN (Pogge, 1994: 202). He claims that this would avoid the necessity of a world government. This claim is of course questionable: scepticism may be understandable in relation to both enforcement and legitimacy.
There are still more questions to be asked in relation to Piketty’s tax. Writing empirically, Piketty does not specify the destination of his global wealth tax or how it would be redistributed from rich to poor[6]. These issues are to be decided by democratic debate. He explicitly states that “the primary purpose of the capital tax is not to finance the social state but to regulate capitalism” (Piketty, 2014: 518). But to the extent that the tax will end up raising a revenue, how and where should this be spent?
Elsewhere in the book, Piketty argues that modern redistribution does not consist of tansferring income from the rich to the poor in a direct way but rather by the financing of public services and replacement incomes in the areas of health, education and pensions (Piketty, 2014: 479). At the global level, does this raise the implication of a global welfare state? Increasing funding of individual welfare states would of course aid reduction of inequality within states but would do nothing to address inter-state inequality. Yet it seems unrealistic that Piketty is suggesting such a massive intrusion into the system of state sovereignty. But what about the European level?
Ultimately only democratic debate will answer the questions raised here.
In conclusion, Piketty’s tax is undoubtedly a utopian ideal, as indeed is Pogge’s. The crucial fact remains that the level of international coordination and willingness required to put either proposal into practice is highly unlikely to be forthcoming.
To the extent that we accept the possibility of instituting Pogge’s tax without a world government, something that is by no means a given, that tax would appear to be more plausible. However that judgement of course depends on how Piketty’s global wealth tax is implemented. Piketty would appear to have the upper hand in targeting more precisely where 21st century wealth actually lies.
April Duff is a fourth year student in University College Student studying Law with Politics (International). This blog post is part of her coursework for the module “Capitalism and Democracy“.
Bibliography
Barry, B, “Humanity and Justice in Global Perspective”, in Pennock, J.R. and Chapman, J.W (eds), 1982, NOMOS XXIV: Ethics, Economics and the Law, New York: New York University Press, pp. 219-252
Casal, P, 2011, “Global Taxes on Natural Resources”, Journal of Moral Philosophy, 8:307-327.
Piketty, T, 2004, Capital in the Twenty-First Century, London: The Belknap Press of Harvard University Press.
Pogge, T, 1994, “An Egalitarian Law of Peoples”, Philosophy and Public Affairs, 23(3): 195-224.
Pogge, T, 2001, “Eradicating Systemic Poverty: Brief for a Global Resources Dividend”, Journal of Human Development, 2(1): 59-77.
Pogge, T, 2011, “Allowing the Poor to Share the World”, Journal of Moral Philosophy, 8: 335-352.
Rawls, J, 1993, “The Law of Peoples”, Critical Inquiry, 20(1): 36-68.
[1] One way of looking at the question of justification is through John Rawls’ theory that a just global order is one that would be rationally chosen by independent individuals or states operating under a veil of ignorance (Rawls, 1993). It is questionable whether states under the veil of ignorance would choose the scale of inequality between states that exist in today’s world order.
[2] Piketty derives these estimates from a variety of global wealth reports compiled by international financial institutions.
[3]Brian Barry adds to the debate a suggestion of a tax on GNP , with redistribution conceived as a negative income tax (Barry, 1982). The EU is currently debating the idea of a tax on financial transactions.
[4] Piketty is particularly enthusiastic about the idea of a resource tax developed first at European level (Piketty, 2014: 571, 516)
[5] The other two grounds he identifies are the effects of shared institutions and the effect of a common and violent history (Pogge, 2001: 61)
[6] Piketty instead concentrates on the usefulness of a global tax as a means of improving financial transparency (Piketty, 2014: 518-521).
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