Why the rich shun taxes

Anyone who has followed the World Economic Forum debates would have surely chanced upon the illuminating one in which Dutch Historian Rutger Bregman heavily criticised the rich for not paying their share of taxes.

The traditional view of economics and politics has been that the rich would want to be taxed less, as they believe that they could directly contribute to nation-building in a more productive and efficient manner, instead of letting governments fritter away the increased taxes in an irresponsible and inefficient manner. After all, is it not true that business entrepreneurs are more adept in building functioning businesses and creating more jobs with the increased money that is available to them by way of reduced taxation?

Sounds good and appropriate?

May be not.

Our societies (in almost all countries) are characterised by income inequalities and non-inclusive growth benefitting few rather than the many. Inclusive growth remains a dream for many nations which aspire to equitable income distribution and growth benefits for all. Is it wise to just leave this most important objective of governments and societies to the whims and fancies of the richest people of the world? Of course, there have been good examples of the very rich people like Bill Gates, but there are also many, many bad or poor examples of rich folks who do not invest their less-taxed money on much-needed job creation or philanthropy.

Achieving a reasonable level of income equality is a very essential pre-requisite for national economic development. Such equality will then extend to education and healthcare for the citizens. As we know intuitively, any society will develop in a holistic manner if we address education, healthcare, infrastructure and systemic issues plaguing the society leading to crime and inner-city violence, etc., So, equitable income distribution is an absolute must for a society to develop faster without its attendant ills, and put it firmly on a path to economic and social growth.

But then, the rich do not want to pay more taxes. As the U.S. just demonstrated, the U.S. Congress successfully passed the tax reform bill which essentially reduced the tax rates for the wealthy (Republicans favour less taxes and less role for government in nation-building as core fundamental principles of their Party). When the wealthiest nation in the world is not playing ball to raise taxes on its most wealthy citizens, it means that the rest of the world is going to be disillusioned, thinking probably that they are on the wrong trajectory, based on what some academics state in their opinion pieces. Then the world would lose its battle against income inequality.

I quote here from the World Economic Forum 2019 event transcripts (I could not resist it!): “The ratio between executive pay and that of an average worker has grown from 30:1 in 1978 to 312:1 today. The top income tax rates in 1970 worldwide was 62%; that has been negotiated down to less than 38% in rich countries, and 28% in developing countries. In many countries, high tax rates on the rich have been abolished, while $170 billion every year is taken to tax havens.”

I am sure it is clear to my readers where the developed world is headed: less and less taxes for their wealthy (as their governments probably do not need the increased tax collections that are absolutely possible and needed for reducing their own countries’ income inequalities and providing for their homeless people sleeping on the streets). This is not a good thing even for the developed world.

What about developing countries? Many developing countries are unfortunately characterised by heavy levels of corruption, money laundering, stashing of illegal money, public bribing to win elections illegitimately, and weak systems of judiciary to counter the encroachment by the executive and the self-serving legislatures. This has become a never ending downward spiral of less and less money being devoted to national development and eliminating poverty. Of course, we can argue that pulling poor people above the line of poverty is a more urgent need in these countries than accomplishing income equality or reducing income inequality. But then, the poverty lines are set so low that it would take many generations before the poor folks could reach any semblance of equality in the society, while at the same time not having equal access to education and healthcare.

It is important for governments to realise that they cannot forsake the development of their countries by surrendering to blackmail by their rich people to take the business elsewhere, like what many tech companies did in the U.S. over the past couple of decades. Under pressure from President Trump’s administration, companies like Apple have finally agreed to bring their money back from low tax jurisdictions to the U.S. and invest in job creation in the U.S. [sorry folks, I have to give credit where it is absolutely due, and in this particular case, President Trump did the right thing to exert pressure that was much needed to make tech companies behave – after all, they should show some patriotism, not just driven by economic greed caused by low taxes elsewhere].

It is not at all surprising that the rich do not wish to pay more taxes, and are, in fact, working to persuade their governments to reduce not just their income taxes but even their inheritance taxes. They mostly think they are smarter (and most of them are) than the rest of us. They think that they are capable of strongly influencing their politicians and governments. They think that they can invest the extra money left in their hands in ways wiser than what their own governments can do.

Well, well, now you get the overall picture – where the society is and where the rich at the top are. Don’t get me wrong – it is not illegal to be rich, but it is unconscionable not to be willing to pay fair share of taxes or avoid and evade taxes altogether. What happened to the people in the middle and bottom of the pyramid who helped the rich man’s enterprise to get to where it is today? Without them, can anything of value be produced in any industry or business? Did they get their due share of incomes? Did the rich even bother to find out if these folks got their fair access to education for their children, healthcare for their families, and so on and so forth. Did the governments bother at all? As long as democratically elected governments are subservient to purely economic interests, the situation on the ground is unlikely to change, and income inequalities will continue to persist.

Good to think about during a Sunday………..

Have a great week ahead, folks.


Vijay Srinivasan

10th March 2019

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