Analysis and discussion of the implications of financial markets for the dynamics of inequality

A CEPR-TFI online webinar on Finance and Inequality, organised by Laurent Calvet (EDHEC and CEPR), 14 April 2021
Posted on April 20, 2021

Imagine a world where there’s one boss and the rest of us work for him for free. Don’t worry, it’s only make-believe – and an extreme scenario. But it does illustrate a point: inequality (the disparity between the haves and the have-nots) is a growing, global problem. So, what can be done to help distribute that wealth – and its advantages – more equally?

The tenor of the webinar was that no matter how well we can design financial products to help consumers take control of their personal finances, you have to start at the top when dealing with a problem of this magnitude. That means working with governments to implement fiscal policy which can turn the tide and help redistribute the wealth held at the top of the financial food chain more effectively. Easy-peasy? Not exactly.

The reason this needs to be set in motion at fiscal level is that when talking about the top 10, 5 or 1% of the world’s wealthiest, sometimes half of their accumulated wealth comes from high-return assets, not earnings. This means that movements at the top of the wealth distribution are governed primarily by high returns on wealth and on individual risky assets; they do not have much to do with income distribution.

So the logical way to redistribute that wealth through society would be to tax capital gains. The only problem is that there are so many loopholes. In the US especially, affluent families can keep bequeathing their wealth from generation to generation. There’s no capital gains tax until someone actually cashes in some of those shares, bonds or what-have-you. They could theoretically avoid taxation forever.

So how about a wealth tax? Once popular throughout Europe but now largely phased out, a wealth tax would not have to wait until someone realised their profit to tax it. The problem here, though, is that it would discourage new entrepreneurs and start-ups. Just imagine: you’ve come up with this amazing idea and turned it into a budding business. Then the taxman says you’re worth millions and have to pay wealth tax. But because it’s still a start-up, you don’t have any liquidity. So what do you do? Sell part of your company – your soul – to a venture capitalist so you can pay the tax bill? So no, this is not an ideal solution either.

Stefan van Woelderen: ‘Wanting a more equitable society is not just political. It’s common sense, and it also makes good business sense.’

So where does this leave us? As some of the panelists remarked, an estate or inheritance tax could be the solution. After all, the problem with high-level wealth is that it gets passed on from one generation to another with little taxation and therefore without being redistributed into society; that’s especially the case in the US. Interestingly, intergenerational poverty works the same way: the lack of money and opportunities passes from father to son (this time, though, probably with taxation). Theoretically, an estate tax would also symbolise equality: everyone starting off on the same footing. But with monikers like the ‘death tax’, it’s still hard to get around the bad reputation. Moreover, it’s fraught with exceptions, such as for heirs who would have to close down their business if they had to pay it. And at the end of the day, it’s even easier to avoid than wealth tax.

Governments do have a trump up their sleeve, however. As remarked by Jeffrey Sachs speaking from the American perspective, the socialisation of consumption in Europe – healthcare, education, housing to a certain extent, some part of child-rearing – could serve as a guiding light. This is socialised in Europe and privatised in the US. So in Europe, part of GDP is socially distributed, which could make a difference in combatting inequity.

And an alternative to removing wealth from those at the top of the distribution would be to empower others to access high-return assets and to manage those and the associated risks properly, so they can enjoy the high returns that are so important for getting higher up in the wealth distribution in the first place. Possible examples include the sovereign pension fund in Norway and teachers’ pension plans in Canada, but this concept has yet to reach the mainstream.

Although the fiscal viewpoints differed at times, it was clear to everyone at the webinar that the trend towards digitalisation, AI and robotics favours people with money, an education and opportunities. Which means inequity will only grow, as it eats away at the fabric of society. Since there’s obviously no simple solution to this complex and global problem, working top-down and bottom-up simultaneously to find ways to help those who struggle financially looks like the way to go.

View back the webinar here.