A War on the Rich Won't Help the Poor
By David Henderson
It has now been 30 days since my Wall Street Journal article on Oxfam appeared. So I have permission to run the whole thing below.
A War on the Rich Won’t Help the Poor
Oxfam notes that poverty has declined sharply, then ignores the quickest way to reduce it even more.
The antipoverty charity Oxfam recently published a 76-page report, “Reward Work, Not Wealth,” that advocates taxing the rich to reduce inequality and help the poor. But the report’s conclusions contradict its empirical findings.
Early in the document, the authors write: “Between 1990 and 2010, the number of people living in extreme poverty (i.e. on less than $1.90 a day) halved, and has continued to decline since then.” A few sentences later, they add: “Unless we close the gap between rich and poor, we will miss the goal of eliminating extreme poverty by a wide margin.” It’s a curious assertion, given that the authors just acknowledged 20 years of enormous progress, despite persistent inequality.
There are two ways to close the gap. The first is to concentrate on making the poor better off. Mostly that has happened, thanks to liberalized international trade and reduced costs for shipping goods. Just as Walmart and Amazon have cut costs for Americans, the introduction of container shipping crushed transportation costs for the world. The second way to reduce inequality is to make the rich worse off. Any guess which method Oxfam’s report emphasizes? “Governments should use regulation and taxation to radically reduce levels of extreme wealth,” the authors conclude.
Which taxes, specifically, should be raised? Those that “are disproportionately paid by the very rich, such as wealth, property, inheritance and capital gains taxes.” The report calls for increased taxes on high incomes, as well as “a global wealth tax on billionaires.”
In a relatively free economy, the main way to get wealthy is to produce something that people value. This has been a basic economic insight at least since Adam Smith’s “The Wealth of Nations,” published in 1776. But it’s missing from the Oxfam report. The document’s title, “Reward Work, Not Wealth,” is strange: Wealth is one of the main rewards for productive work. High taxes on wealth and the wealthy reduce the incentive to produce.
The Oxfam authors, to their credit, do criticize government-made monopolies. They note that crony capitalist Carlos Slim is the world’s sixth-richest man because the Mexican government gave him total control over the telecommunications industry. But then the report fails to draw the obvious conclusion: It’s a mistake to give the government enough power over economic life that it can create monopolies.
Although the report doesn’t use the phrase, what it effectively advocates is the creation of a tax cartel. Since capital is extremely mobile and will go where it is lightly taxed–witness the corporate “inversions” of American companies–the report suggests “a new generation of international tax reforms.” Negotiating tax rates would take place under the aegis of “a new global tax body that ensures all countries participate on an equal footing.”
The report also compares the income of the poor with the wealth of the rich. For instance: “Between 2006 and 2015, ordinary workers saw their incomes rise by an average of just 2% a year, while billionaire wealth rose by nearly 13% a year.” But it’s a false comparison: one person’s paycheck versus another’s net worth.
To get the story right, you need to compare income for both groups. Two economists, Tomas Hellebrandt and Paolo Mauro, studied this and concluded, in a 2015 paper published by the Peterson Institute for International Economics, that global income inequality declined between 2003 and 2013 due to rapid economic growth in poor nations.
This is even more impressive than it sounds, given the math involved. Say that wages in a developing country rose by 10%, and in the U.S. by only 1%. For a family in the poor country earning $2,000, that would mean an extra $200. But for a family in the U.S. making $50,000, it would equate to $500. In other words, income inequality would increase, even though wages grew 10 times as fast for the poor family. [By the way, this is incorrect: Hat tip to my frequent co-author Charley Hooper for pointing it out.]
Finally, the Oxfam report mentions nothing about what would be the quickest way to reduce world-wide economic inequality: let people emigrate from poor countries to rich ones. Michael Clemens, an economist at the Center for Global Development, has written that wealthy nations’ tight restrictions on immigration leave “trillion-dollar bills on the sidewalk.” Allowing people to move to jobs in which their productivity would soon multiply by fivefold or more would make everyone better off.
Oxfam started honorably during World War II as a group of Quakers, social activists and academics at Oxford who wanted freer trade. Specifically, Oxfam wanted the British government to allow food to reach the citizens of Nazi-occupied Greece. That was a long time ago. Today Oxfam’s annual budget exceeds $1 billion, and it gets almost half of that from governments and the United Nations. So maybe it’s time for a new name. Oxgov has a nice ring to it.
Mr. Henderson, a research fellow with the Hoover Institution, is editor of the Concise Encyclopedia of Economics.