About a couple of days ago I came across a news article and a blog post that serve as the inspiration for this post. The news article is by non-profit organization Oxfam and it says that the richest 1% of the world is most likely to control 50% of global wealth by 2016. The report is interestingly titled: ‘WEALTH: HAVING IT ALL AND WANTING MORE.’ The executive summary of the report reads:

‘Global wealth is increasingly being concentrated in the hands of a small wealthy elite. These wealthy individuals have generated and sustained their vast riches through their interests and activities in a few important economic sectors, including finance and pharmaceuticals/healthcare. Companies from these sectors spend millions of dollars every year on lobbying to create a policy environment that protects and enhances their interests further. The most prolific lobbying activities in the US are on budget and tax issues; public resources that should be directed to benefit the whole population, rather than reflect the interests of powerful lobbyists.’

One key finding of the report caught my eye: ‘The very richest of the top 1%, the billionaires on the Forbes list, have seen their wealth accumulate even faster over this period. In 2010, the richest 80 people in the world had a net wealth of $1.3tn. By 2014, the 80 people who top the Forbes rich list had a collective wealth of $1.9tn; an increase of $600bn in just 4 years, or 50% in nominal terms. Meanwhile, between 2002 and 2010 the total wealth of the poorest half of the world in current US$ had been increasing more or less at the same rate as that of billionaires; however since 2010, it has been decreasing over this time.’ It seems to me that the global recession and country specific recessions since 2008 have not had much impact on the wealth of the global superrich. Another interesting information from the report: ‘In 2010, it took 388 billionaires to equal the wealth of the bottom half of the world’s population; by 2014, the figure had fallen to just 80 billionaires.’ The wealthy are getting wealthier by the day.

The report also finds that, ‘Companies from the finance and pharmaceutical sectors spent millions of dollars in 2013 on lobbying.’  All these lobbying has resulted in favorable results for the companies in these sectors at the expense of tax payers. Again to quote from the report: ‘While the financial sector has recovered well as a result of this bailout, median income levels in the USA are yet to return to their pre-crisis levels. The ongoing cost to the tax payer for “systematically important financial institutions‟ – in other words those that are too big to fail – has been estimated by the IMF to be $83bn every year.’  The report goes on to say, ‘In the US, the two issues which most lobbying is reported against are the federal budget and appropriations and taxes. These are the public’s resources, which companies are aiming to directly influence for their own benefit, using their substantial cash resources. Lobbying on tax issues in particular can directly undermine public interests, where a reduction in the tax burden to companies results in less money for delivering essential public services.’

Another interesting observation from the report: ‘The three pharmaceutical companies (GSK, Johnson & Johnson and Novartis) that are members of the International Federation of Pharmaceutical Manufacturers & Associations (IFPMA) have made the largest contribution to the Ebola relief effort, have collectively donated more than $3m in cash and medical products. But the amount of money that has been spent on Ebola and other activities that have a broader benefit to society needs to be looked at in the context of their expenditure on corporate lobbying to influence for their own interests. These three companies together spent more than $18m on lobbying activities in the US during 2013.’ Did I read that right: $18 MN for lobbying in U.S. but only $3MN to fight Ebola, a disease that was killing roughly 1 in 2 of the infected people in the current outbreak?

Some of the remedies suggested by Oxfam to alleviate such extreme inequality include:

• Make governments work for citizens and tackle extreme inequality
• Pay workers a living wage and close the gap with skyrocketing executive reward
• Close international tax loopholes and fill holes in tax governance

I was interested in looking at examples of difference in tax rates between the wealthy and the rest when I ran into a videos in which none other than Warren Buffett, one of richest men in the world, had claimed in 2007 (if I’m not wrong) that he is taxed at a lower rate than people who work for him!!!

Looks like things have not changed since then, a proof for which I came in the blog post ‘The Taxman Cometh’ by ‘I Pledge a Fallegiance’. He quotes the Institute on Taxation and Economic Policy study on taxation in the United States that finds that: ‘in 2015 the poorest fifth of Americans will pay on average 10.9 percent of their income in state and local taxes, the middle fifth will pay 9.4 percent and the top 1 percent will average 5.4 percent.’ The author concludes that: ‘It seems that States and localities have regressive tax systems because they tend to rely more on sales and excise taxes (fees tacked onto items like gas, liquor and cigarettes), which are the same rate for rich and poor alike. Even property taxes, which account for much of local tax revenue, hit working- and middle-class families harder than the wealthy because their homes often represent their largest asset.’ All this makes the author conclude: ‘poverty is a waste product of wealth.’

Years ago when I was chatting with some of MBA batch mates, one of them said that USA has made an important contribution to mankind by introducing the concept of wealth creation to the world. He said that because of this contribution by USA, accumulation of wealth is no more a zero-sum game and one person does not have to plunder another person to increase his wealth. He claimed that this concept of ‘wealth creation’ is the fairest system possible. Looking at the findings of Oxfam and the Institute on Taxation and Economic Policy, it doesn’t look the current world’s approach to wealth creation is fair by any yardstick.

I have always found it interesting that the government would let corporations to deduct their expenses first and then levy income tax on what is left of their revenue but would not follow the same taxation approach when it comes to individual tax payers. Clearly just like in a corporation, some of the expenses for an individual are also mandatory/ inevitable. So shouldn’t they be deducted first before levying any income tax? I am starting to wonder if transaction taxes would be a fairer taxation system (on the common man) than income taxes.