On Maximum Wages and Inequality

In his recent burst of activity, UK opposition leader Jeremy Corbyn has made several fairly controversial statements. Some I agree with him totally on (the crisis in the NHS due to underfunding), and others I disagree with him totally on (needing to keep the foreigns out). I would imagine my regular readers probably already know my positions on those issues.

The other idea he’s floated recently, though, is rather more interesting. I think he’s wrong about a maximum wage, but not for the right-wing reasons most commenters are trotting out.

Corbyn has said, simply, that there should be a cap on wages in order to reduce inequality — that he’d be in favour of an absolute maximum on what anyone could be paid.

Now, at first glance, I’m OK with this idea — no-one should have billions while there are people on the streets or starving. And I could eventually be persuaded to support a maximum wage, but only after other things have been tried first.

You see, most truly rich people *do not make their money from wages*. They don’t do a job, which they get paid for doing by an employer — or if they do, that doesn’t make up the source of most of their money. They make money, mostly, from already having money. From share dividends and share price rises, from rents on land or houses they own, from having “property” they own — usually as the result of legislation skewed their way, granting them monopolies on things that should be public goods. That money isn’t wages.

To use a simple, clear, example, since I’m listening to a Paul McCartney live album while I write this, we’ll take McCartney. He’s a very rich man — obscenely rich — but there are two very different ways he makes his money.

(There are probably dozens of ways, because the super-rich have all sorts of private arrangements, but these are a couple I know about).

The first way he makes his money is to go out and play concerts, where people pay a ticket price they think is worth it to see him play, and he does the job they’ve paid him to. That is, basically, a wage. He’s doing a job of work, and getting paid by the people who want him to do that job.

(It’s almost certainly more complex than that in terms of the legal arrangements around his tours, but you get the idea — in principle this is no different to a plumber coming round and fixing your washing machine).

The other way he makes his money is by owning a music publishing company that exploits the copyrights to thousands of songs, many of them by people dead for fifty years or more, which he had nothing to do with creating and to which he has a legal monopoly largely because of legislation influenced by other hugely rich people.

If a maximum wage were brought in, McCartney would presumably stop doing the concerts — which are an actual useful service to paying customers, which have some social value, and which are actual new work being done. But he wouldn’t stop collecting money every time anyone played “Rock-a-Bye Your Baby with a Dixie Melody” (a song written in 1918, by people who died between 1939 and 1959) or “That’ll Be The Day” (written sixty-one years ago by someone who died fifty-eight years ago) on the TV.

The same thing goes for capping executives’ pay. All a cap on executives’ pay would achieve is to leave companies with more money to go to shareholders, so the end result is to redistribute money from people who are doing *something* to people who are doing *nothing*.

Collecting money from “investments” such as shares and property is the ultimate in privilege in the most literal sense — private law — it’s only possible because of particular legal systems that have been created for the benefit of the rich, and is only accessible to the rich. It’s a way for the rich to get richer without working, a way for money to make more money and to widen inequality.

And currently, in the UK, that money is taxed under Capital Gains Tax — which is taxed at a *far* lower rate than income. We currently have a system that actively discourages working for a living in favour of just sitting back and taking money from other people — people who *do* have to work for a living.

Fundamentally, I think that people should be able to keep most of their income — if someone is doing an actual job of work, which other people are willing to pay them for, they’ve earned that money. They should have to pay as much in taxes as is necessary to fund public services, keep society going, and provide a decent safety net so the poorest can get by, and so on, and there’s a good argument that the amount they should be paying is much higher than it currently is. But fundamentally, when you’re a worker by hand or brain, you should keep the fruits of your labour.

But if you’re a rich person who inherited a few million from daddy, bought a load of houses cheap, and turned the few million into a few billion by jacking up the rents and inflating the property market… well, you haven’t earned anything at all, and all you’ve done is take away money other people have earned.

If we’re going to work on inequality, yes, it may well eventually be necessary to go after the merely very rich people who get paid huge amounts of money for their job. But I’d argue that that should *only* be done after going after the even richer people who get even huger amounts of money and do nothing for it.

Unless and until capital gains are taxed more than income — and at the top end taxed *far* more — a cap on income will tend to exacerbate, rather than to decrease, inequality. Cap capital gains — tax the 1% properly — and then we can talk about capping income if there’s still a problem.

As the song says, “why should we work hard and let the landlords take the best?”

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6 Responses to On Maximum Wages and Inequality

  1. Per Kurowski says:

    Impose minimum wages and payroll taxes on robots so humans can compete on a level playing field
    http://teawithft.blogspot.com/2016/10/let-robots-make-us-offer-we-cant-refuse.html

  2. Capital Gains Tax taxes gains on selling shares. There’s a separate tax for dividends which is also lower than income tax and has a £5,000 tax free allowance separate from the personal allowance for income tax (although dividends were effectively tax free up to a much higher level until George Osborne, of all people, abolished the dividend tax credit).

    As I said on Twitter, it would also be a good idea to make Corporation Tax more progressive as even before Osborne cut it, it was far too low for big companies making millions in profits (although it’s still a bit too high for very small companies, which have also suffered from the changes to dividend tax). The differences between rates and thresholds for Corporation Tax and Income Tax are truly absurd.

    And of course I agree with you that a Land Value Tax would be a good thing.

    Once we have a fairer tax system and a basic income, I think the next priority should be to abolish VAT because it’s horribly regressive, overcomplicated and prone to fraud. That would free up lots of civil servants to administer wealth taxes.

    • Andrew Hickey says:

      You’re quite right that I lumped together two different taxes there — thanks for the clarification.
      And agreed on VAT. It’s a ridiculous system. We should be taxing wealth first, then if we can’t bring in enough revenue from wealth taxes taxing income, and only then taxing consumption if there’s still a gap. Instead we appear to be doing the reverse, so someone on the dole buying a sausage roll from Greggs is taxed at a far higher rate than a billionaire…

  3. Pingback: Interesting Links for 11-01-2017 | Made from Truth and Lies

  4. Jack V says:

    *sigh* I think I’d assumed that when people said “maximum wage” they meant “income of any sort”, but were saying wage because it sounded easier to understand. But now I think they probably haven’t thought about it either way.

    If they genuinely mean “cap on WAGES but not other income”, I agree that’s generally unhelpful and possible counterproductive. I don’t know if people saying that genuinely want that (I guess not?) or want to be seen to be doing something (or more cynically, want to sound like they’re doing something to 90% of the population, while signalling to rich people that they won’t actually do anything).

    If “maximum” applied to all income, presumably it would be equivalent to capital gains being set at 100% above a certain limit. That sounds pretty good to me! But I agree, it’s silly to propose that in isolation, without considering “increasing it to be as much as income tax” first.

    (I’m sure there’s SOME reasons why some forms of capital gain are treated differently, maybe there are exceptions that genuinely should be treated differently, but there’s no reason it shouldn’t be progressive like income tax but preferably more so, so people who earn millions in capital gains or dividends or others, it’s basically their main income, get taxed on it.)

  5. glyncoch says:

    The problem that I have with any discussion on tax, is that the moment you think you understand what is going on, the Chancellor starts tinkering, and what you believed no longer holds. I prefer to think about sources of wealth. Some sources are good and others, well not so good.
    Think about a new business. For at least the first decade the proprietor may not pay themselves a regular wage, and if they do, perhaps half might go back into the business. they rarely take a holiday, and most of their spending is in the local community. Their gradually increasing personal wealth is probably held in local banks as they have not time and probably don’t have enough spare capital to invest in off shore schemes etc.
    The case is completely different for those that inherit the wealth. Sometimes heirs simply squander their inheritance, and even if conscientious and as determined as their parents, might find that they do not have the skills to maintain an existing company, so they may either destroy the company through incompetence or sell out to an asset stripper etc. The local community suffers.
    But deciding whether an heir is a suitable person to inherit a particular company is a very fine matter. Should you tax or cap the heirs of particular companies. Who knows?
    But an employed Chief Executive is a different matter. S/he may have been head hunted from another country and has no local loyalties. If the company is listed publicly then doing right by the share- holders becomes the first priority, and shareholders may live anywhere in the world. The CEOs are unlikely to rate the interests of the community around the founders’ factory very highly, and may feel compelled to close down that factory and destroy the community that has built up around it. So CEOs of publicly listed companies are not necessarily good for local communities, and however much money they make for the company it may be of little benefit to those who have dedicated their lives to it, or the communities that they live in. So from a national and local point of view it might make sense to limit the pay of CEOs whose main focus may be outside the country anyway.
    Sorry, I could take this further, but I expect that others will knock this down, or fill in the gaps!

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