An economy for the 99 percent

Why does anti-poverty work so often end up as an anti-wealth campaign?

Oxfam, the billion-dollar British-based global charity conglomerate, founded to relieve poverty in Greece (does nothing change?), has issued a report entitled “An economy for the 1%: How privilege and power in the economy drive extreme inequality and how this can be stopped” (2016).

Not surprisingly, given the title and its source, the report finds that inequality is bad, is getting worse, and a lot of the blame for this lies with “tax havens” such as the Cayman Islands which, Oxfam claims, “enables the richest individuals to hide $7.6 trillion.”

At the pinnacle of this inequality, apparently 62 individuals have the same wealth as the poorest 50 percent of the world combined; a group that, they point out, could fit in a bus, if billionaires ever travelled by bus.

But is this right? Are Oxfam’s figures correct, are their claims valid and do we have a problem with the global economy?

Well no, not really. There are several flaws with Oxfam’s calculations, some even bigger problems with their conceptual approach and some huge errors in their proposed solutions.

Unrealistic comparisons

The first problem is that when Oxfam is comparing wealth between people in different countries, it uses market exchange rates, rather than the “purchasing power parity” exchange rates that are normally used in such comparisons.

Purchasing power parity (PPP) is basically a more formal version of the Big Mac index; what matters is not how many U.S. dollars the bank will give you for your money, but what you can buy with it in the place where you are living.

So the average household income in India is around 375,000 rupees per year.  If that was taken into a bank and converted into U.S. dollars, it would get somewhere around $5,500; but since that isn’t what is going happen to it, that isn’t much use. What we want to know is what standard of living it will buy in India, and doing that analysis finds that it is equivalent to an income in the United States of over $28,000. Not riches by Western standards, but far from the poverty that $5,500 suggests.

The Oxfam report even uses fluctuations in foreign exchange markets to claim that the poor are getting poorer. They claim that the income of the bottom 50 percent has actually dropped in the last five years, whereas all that has actually happened is that the dollar has become stronger, so while in 2008 it would take less than 40 Indian rupees to buy a U.S. dollar, it now needs nearly 70.

On Oxfam’s figures, an Indian family with the same income would now look over 40 percent poorer than they were in 2008, simply because of a shift in foreign exchange markets that will have almost no effect on a low-income family.

In fact, when we use PPP exchange rates to compare what people can actually buy with their money, the income of the poorest in the world has risen by more than that of the richest; since 2008 the income of the poorest tenth has doubled (+99 percent) and overall the income of the poorest half of the world is well over two and a half times what it was then (+166 percent). In contrast although the income of the richest tenth has increased, it has done so much more slowly, only rising by three quarters (75 percent).

That looks like a result that poverty campaigners should be celebrating, not complaining about.

Treatment of debt

The second problem with the Oxfam report is that it uses net assets rather than gross to work out which wealth band people are in – in other words it adds together your assets and deducts your liabilities.

While that may sound sensible, it produces figures that are useless for making international comparisons.

Think about two people; one is an African subsistence farmer, who very rarely even sees cash; the other an American youngster, recently graduated from Yale with student debt, who has just started work for Merrill Lynch and has bought a house on a 95 percent mortgage.

Who is the wealthier? Well, if we follow the logic of the Oxfam report, the African farmer is richer than the Yale graduate.

How do they get such an absurd – even offensive – result?

What they do is add together the American’s assets and deduct his liabilities.  If the house is worth $500,000, add a bit of money in his bank account to take that up to $501,000. But then they deduct his 95 percent mortgage, which on $500,000 will be $475,000, and $50,000 of student debt and a credit card bill of $1,500, and those debts together are higher than the value of the assets.  That gives a negative wealth of $25,500.

The African subsistence farmer, on the other hand, has a couple of dollars that he made selling a bit of excess produce at market last week, but no debt (no-one is likely to lend him any money, because he has no cash income to make the repayments).

But that couple of dollars the African farmer has makes his wealth greater, at least mathematically, than the Yale graduate’s net debt. Absurd (and rather insulting to tell the genuinely impoverished African that he is wealthier than a Yale graduate working for Merrill Lynch), but that is how Oxfam thinks.

Yes, Oxfam say that 62 billionaires are, together, richer than the poorest half of the world’s population, which is an astonishing figure. But the way Oxfam do their calculations, a street busker with a couple of dimes in his collecting tin is “wealthier” than the combined wealth of the poorest third of the world’s population, because he at least has positive wealth but they, overall, have more debt than measured assets.

Impoverished West?

This deduction of debt explains why, in Oxfam’s figures, around a quarter of the “poorest” 10 percent of people in the world are allegedly in Europe and the U.S.; this is not genuine poverty in global terms, but merely the ability to borrow money and so have a negative financial worth.

Demographics

What is fascinating about the way Oxfam calculate wealth is that even if we had a perfectly equal society, they would still be able to complain about massive wealth inequality simply because of demographics – the fact that at any point different people are at different ages, at different points in their life.

Imagine a world where everyone goes to Yale and everyone leaves with student debt, to all get a job with Merrill Lynch (on the same salary) and buy the same type of house on the same sort of mortgage.

Perfect equality, but still the recent graduates will still be in debt and will have negative wealth; those who have been working a few years will have paid off some of their debt but will still be more or less break-even in terms of assets and liabilities; but those who are older will have paid off their debt and mortgage, and will be enjoying a valuable house and well-filled retirement savings plan. Then as they retire, they start to eat into their retirement savings and their wealth starts to drop again.

With that sort of scenario, even with everyone having, over their life, exactly the same incomes, assets and liabilities, the method of taking a snapshot view in one year means that those coming up to retirement will be wealthier than those either younger or older.

Indeed, if you want to put a few figures to the scenario, it is fairly easy to get a situation where the “richest” 5 percent have more wealth than the “poorest” 50 percent combined – within a society of perfect equality.

Inevitable inequality

The fact is that inequality is an inevitable part of the human condition, and all attempts to arrange society in any other way has failed – and have usually ended up with more inequality and poverty rather than less.

The Oxfam report says, of income inequality, that it “is unimaginable that the CEO of a tobacco company in India is as productive as 439 of his employees combined.” But is it really unimaginable that the person who builds the business, who creates the markets for the company’s products, and therefore generates value for those employees’ labor, is legitimately so valuable to the business? The fact that Oxfam cannot imagine a rational explanation does not mean that none exists.

Even Oxfam does not operate on the principle of equality that it espouses.

According to its annual report, Oxfam’s UK staff are paid an average of almost £33,000 per year, but their overseas staff get less than half of that – an average of just £14,500.

And looking at the top of the organization, Oxfam’s chief executive was paid £122,538 last year; that’s nearly four times the average for their U.K. staff and almost ten times the average for their overseas staff.

To borrow Oxfam’s own rhetoric, can we really imagine that their chief executive does more to help the poor than ten members of staff who are actually working in the third world to deliver its programs?

And that is just the income inequality; their wealth inequality is even more extreme because Oxfam also has a £35 million defined benefit pension scheme for some of its staff, including four of its senior employees. Again this demonstrates inequality within the organization, because not all staff are allowed to share in this (the scheme was closed to new members in 2003). But even more shocking is the global inequality it enshrines; that pension scheme alone gives some of Oxfam’s staff more wealth than about the poorest third of the world combined.

The reality

So ignoring Oxfam’s rhetoric, what is really happening?

1percentEven on Oxfam’s own figures, the poor are getting richer – and they are doing so faster than the rich.

Between 2000 and 2015, the wealth of the poorest half of the world’s population increased by 149 percent, leaving them with two and a half times the wealth they started off with. In contrast, the wealth of the wealthiest tenth only increased by 111 percent.

And the same thing is happening to global incomes; between 1988 and 2011 the income of the poorest half rose by 166 percent, but the income of the richest tenth only rose by 75 percent. Every one of the poorer 10 percent bands saw their income rise by a higher percentage than the richest tenth did.

And these are on Oxfam’s own figures; if we used proper methods (purchasing power parity, gross assets rather than net), the improvement for the poorest in the world would be even greater.

The poor are actually catching up on the rich. Yes, very slowly, but if it is equality that Oxfam wants, the capitalist, free market world is actually moving in the right direction.

Damaging tax proposals

Oxfam’s questionable statistics on inequality are bad enough, but its proposals for tax reforms could be truly damaging to the poorest.

The report calls for several of the classic tax errors, tax reforms that may sound good but which are known to be seriously damaging.

So Oxfam calls for “national wealth taxes” even though of the few things that we know with something close to certainty about tax economics is that wealth taxes are one of the most damaging ways to raise money. By taxing investment, they discourage it, which destroys decent job opportunities.

The report also claims “the tax burden is falling on ordinary people, while the richest companies … pay too little.” This is to ignore the strong research about tax incidence; that when taxes on companies are increased, a lot of the economic damage falls not on the shareholders but on workers and those looking for jobs. If companies are taxed more, they will invest less, and if they invest less there will be fewer jobs, or those jobs will be less productive (because of lower investment in machinery or innovation) and therefore be less well paid.

The role of offshore finance

As well as questionable financial analysis, Oxfam’s report also has the standard attacks on “tax havens,” which operates a “global spider’s web … maintained by a highly paid, industrious bevy of professionals” (for those readers in the offshore finance industry, that’s probably the nicest thing they are likely to say about you).

We even see the old canard that low tax countries encourage high tax countries to reduce their taxes in a “race to the bottom.” Have any major economies stopped taxing businesses? No, of course they haven’t. As I have analyzed elsewhere, that “race to the bottom” simply hasn’t happened. Tax competition has probably stopped the high tax countries hiking their tax rates even higher, but it certainly hasn’t turned the world into a tax-free paradise.

And this claim, again from the Oxfam report, is simply ludicrously naïve: “Almost a third (30 percent) of rich Africans’ wealth – a total of $500bn – is held offshore in tax havens. It is estimated that this costs African countries $14bn a year in lost tax revenues. This is enough money to pay for healthcare that could save the lives of 4 million children and employ enough teachers to get every African child into school.”

The reason so much African wealth is held offshore is that so many of the continent’s political systems are mired in corruption, and too many of its governments are spending their money on oppression and civil war. The sad fact is that for many African governments, more tax revenues means more weapons; not more healthcare and education but more torture and killings.

The report is very clear: “Oxfam is calling on world leaders to … end the era of tax havens.” Yet one of the standard mechanisms for investment into developing countries is for that investment to be made through an offshore financial center that Oxfam would probably characterise as a “tax haven.”
Many developing nations are in a low state of development because they have unstable political, legal and financial systems, so investment via a stable, familiar jurisdiction makes an investment more attractive and therefore more likely to happen. Again, the cost of attacking tax avoidance is less involvement by multinationals, and so fewer jobs and fewer opportunities for the less well off, and the loss of exposure to expertise, knowledge, training and international business practices.

True poverty reduction

The huge factor that Oxfam seems to ignore is that the spread of free market capitalism and free trade in the last twenty years has brought about the biggest reduction in poverty that the world has ever seen.

On the World Bank’s calculations, between 1990 and 2010 the growth of international trade and investment lifted almost a billion people around the world out of poverty.

That’s almost a billion people rescued, not from the relative poverty of the Yale graduate with a student loan but from the true grinding poverty of less than $1.25 a day. That’s people scratching a living from subsistence farming on meagre land in Africa, or scavenging from rubbish heaps in South America, moving into productive, paid, reliable employment that provides for their families.

It is this poverty reduction that Oxfam seems to want to halt and even reverse, by criticising the companies who are engaging with the developing world and by proposing tax changes that will reduce investment and therefore reduce these opportunities for the poorest, leaving people in poor countries with no way to escape poverty and dependence on aid.

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Richard Teather
Richard acts as a tax policy consultant, including advising the Jersey parliament on their recent tax reforms, is a Fellow of the Adam Smith Institute. and is an editor or member of the editorial board of various journals. His book, "The Benefits of Tax Competition", is published by the London-based Institute for Economic Affairs. His work has been the subject of a debate in the UK Parliament and quoted in government studies in the UK, EU and Australia, and hit the national press when the UK government tried to suppress its own civil servants favourable comments on it.Richard TeatherSenior Lecturer Tax LawBournemouth UniversityChristchurch House C206Poole, BH12 5BBUKT: 01202 961870E: rteather@bournemouth.ac.ukW: bournemouth.ac.uk   

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