By Will Denayer. This article was first published on Flassbeck Economics.
- The Duke of Westminster
Last week, the fifth duke of Westminster died. The new Duke of Westminster, 25-year-old Hugh Grosvenor, will avoid paying inheritance tax on his late father’s £9.9 bn fortune. Had he been taxed at the normal 40% rate, he would have paid up to £3.6bn in tax. This is substantially more than the entire NHS deficit of £ 2.45bn and it is only about £1bn short of the total inheritance tax collected in the UK last year. Grosvenor will now become the third wealthiest landowner in Britain and the 68th wealthiest person in the world (see here).
As Jessica Gay explains in the Canary, UK citizens are contracted by law to pay an inheritance tax after they inherit (see here). But Grosvenor is able to avoid a significant cut to his £9.9 bn inheritance due to the fact that the estates are held in a trust. By having an estate in a trust, he is the ‘legal owner’ but not the ‘beneficial official owner’ of the estate. According to this legal hocus pocus, the legal owner has no entitlements to either income or the assets themselves, but, as legal owners, the trustees can do anything an ordinary owner can do in terms of selling and trading the assets within the trust. Furthermore, income and other benefits can be paid out to beneficiaries, who may or may not include the trustees. Money can stay in the trust and cascade down from generation to generation and nobody pays inheritance tax on it (see here).
This system is, literally, feudal. It originated at the time of the Crusades when the aristocracy did not trust the king, or one another, to safeguard their inheritances. The Dukes of Westminster have a long history of what Murphy calls tax abuse. The fifth duke, for example, argued that the fourth duke died of a war wound 22 years after he suffered it to escape all charges on the estate in the 1960s (see here).
Just one word more on the Duke and what can be done against it, because it is a lesson to all those who consider inequality to be natural and inevitable. Labour tried to introduce effective tax charges on inheritance in the 1970s and, later, in the 1990s, when it targeted these trusts, but they were by and large unsuccessful and changes remained cosmetic. Richard Murphy, who is professor of economics in London and a Corbyn advisor, explains why (see here). Since 1980, no one had the real political courage and will to tackle the use and abuse of trusts. There is the continuing power of the aristocracy and their chosen professional agents – lawyers, accountants, bankers and wealth managers – who have been willing to compromise themselves in exchange for fees to perpetuate the situation. Third, the Conservatives have been keen to let the situation continue unchanged as they support the largely unfettered inheritance of substantial wealth (see here).
Murphy makes another trivial but essential point: there remains the fact that the public knows so little about trusts, although they are extremely powerful. They are not only legal constructions with the purpose of evading taxes, but extremely influential shadowy networks of power. This can of course be corrected. We need transparency, which means a full register of trusts and their accounts on public record. In addition, the inheritance tax reliefs that permit this tax avoidance need to be abolished. To put it another way, 800 years of claims by the elite to be above the law applicable to everyone else so that wealth can remain in the hands of the few has to be brought to an end (see here).
- Do not tax labour, tax land
This proposal was explained yesterday by Dominic Frisby in the Guardian (see here). There are about 65 million people in the UK and 60 million acres of land. Yet about two-thirds of the land – 40 million acres – is owned by fewer than 6,000 people. In the 19th century, landowners paid tax on their land. Today, so corrupt is the system of taxation that they actually receive subsidies for it. The rest of the population must pay council tax. In fact, the problem is much worse than Frisby explains. It is not only the case that the landowners pay no tax and receive subsidies. They are actively destroying the land. Let me make this clear first. I will then come back to the proposal to tax land.
- Brother, can you spare a tree?
Nothing proved the utter dysfunctional state of the environment in the UK more than the consequences of the torrential rains that poured down last December. At one point, 5 million houses were in danger of flooding. How is this possible? The main intermediate cause was water run-off. According to a study, in the south-west 38% of the sites that were investigated cannot hold water (see here). Instead of percolating into the ground, the water pours off the fields until it finds a river that transports the silt – soil, fertilisers and pesticides – to the sea. This leads to loss of land fertility, the poisoning of watercourses and increasing flood hazards in rivers.
The water no longer percolates into the ground because of several reasons which all have to do with land ownership. As Monbiot writes ‘You might have entertained the naive belief that in handing out billions to wealthy landowners we would get something in return. We pay £3.6bn a year for the privilege of having our wildlife exterminated, our hills grazed bare, our rivers polluted and our sitting rooms flooded’ (see here).
Monbiot is not exaggerating. Farm subsidies are conditional on the land being in “agricultural condition.” No actual farming has to take place (see here). It suffices that it looks like farmland. All areas of wildlife habitat, ponds, wetland, hedges, meadows, woodland and scrub are deducted from any claim, up the square meter. As a result, land owners tear out every scrap of hedge, wood, ditch and fences they possibly can to create huge fields with no barriers to runoff. It is an insane situation. Maize, the production of which has grown from from 1,400 hectares to 160,000 since 1970 is also especially bad because it leaves the fields without the stubble or weeds required to keep the soil in place (see here). In one study in Wales, the soil beneath woodland was found to absorb water at 67 times the rate of the soil beneath sheep pasture. The last Labour government attached conditions to maize farm subsidies for this reason: maize should not be grown on areas at risk of high erosion. The Tories not only dropped these conditions, they issued a specific exemption for maize cultivation from all soil conservation measures.
Europe has an average forest cover of 37%. In the UK, the lowlands are largely treeless, as anywhere else, but the uplands are also bare. Britain only has 13% of tree cover. Why is that? It is because of elitism, a parasite class of rich land owners, cronyism, lack of democratic oversight and the absence of rational policies.
In England and Wales sheep are ruining the hills. Sheep selectively browse out tree seedlings, ensuring that no trees can grow. The denuding of hills by sheep (and deer in Scotland) is supplemented by the burning of grouse moors, which Monbiot calls a ‘fantastically destructive activity carried out for the benefit of a very small number of exceedingly rich people’ (see here and here). Landowners burn the peat uplands, thereby deepening the water table depth. This deeper water table means that the peat nearer to the surface dries out. As a consequence it releases pollutants such a heavy metals into rivers and carbon into the atmosphere. This is important, because peat lands are the largest natural store for carbon on the land surface of the UK and play a role in climate change (see here).
In economic terms, sheep are almost merely ornamental, but who cares if you are getting paid because you have land? The more land you own, the more ‘subsidies’ you receive. The size of land holdings is the main underlying problem. Britain has, on one estimate, the second highest concentration of landholding in the world, after Brazil. Sheep farming persists only as a result of public money – transfers from everyone else to the rich, £3.6 bn every year. The landholdings do not harvest anything, except subsidies, which are paid by the hectare. Some take millions of pounds every year.
Across the EU, €55 bn a year is given to farmers and landowners. As Monbiot proposes, instead of letting sheep denuding the land, let us pay people to restore watersheds, woodlands, rivers and wildlife. Let us look into the possibilities of how rural people can enhance their livelihoods by enhancing the ecosystem. But nothing of this makes a chance: the land is privately owned, it is all in trusts, the wealthy pay no taxes, they ruin the land, contribute to climate change, we pay for it, their cronies in power call it good business and nothing changes.
Would it not make sense to tax land and not labour (see here)? Instead of subsidising them, they should be taxed. Land is passed from one generation to the next via trusts. The rest of us pay inheritance tax. These tax systems are to blame for much wealth inequality and ecological damage. The arrogance of these people is bottomless. Taxes are for stupid people. It is workers who pay the vast majority of taxes: 40% of government revenue comes from income tax and national insurance, with another 20% from VAT. Taxing the land sounds extremely left wing of course, but the problem is that everything which is not mainstream is being hallmarked as radical these days, as Sebastian Muller wrote in Makroskop only a couple of days ago (see here). We are all being pushed into the corner of being ‘radicals’ – people may forget that the grandfather of right-wing economics, Milton Friedman described it as the “least bad tax.” It does not matter what Friedman said. It just shows how much the societal debate has suffered by 40 or so years of conservative counterrevolution.
- A positive contribution to society?
The aristocracy is an inherently parasitical class. As Frisby writes, the late duke may have been a canny businessman, but he did not invent anything, he did not bring create a new product or service (see here). His ancestors benefited from the corn laws 200 years ago when the estates were built. Today, planning laws are such that few can build anything new. The estate, which owns some of the most desirable land in London, was effectively handed a monopoly and the duke made good from the fact that so many people want to live and work in London. There is big money to be made in land banking, but there is nothing creative about it. The duke did not bring anything new to the world or improved upon something. He simply exploited restrictive planning laws that prevent any progress (see here).
Of course, right wingers vehemently disagree. Who are the real ‘radicals’ here? Considering this maddening article by Moore in the Telegraph, A duke’s wealth is the natural result of a free society – and should be celebrated (see here). Moore writes that:
“Continuity in a nation is generally a benefit. It is encouraging that a man whose family first got rich because his ancestor was the fat huntsman (gros veneur) of William the Conqueror has £9 billion today, 950 years later. It shows that our culture respects private property over government interference. It gives hope to us all” (see here).
Why even bother with this drivel? It is because it is a first rate problem. The wealthy will always find people to make the argument that everybody needs to pay tax, but not the rich. If a rich man dies and leaves a fortune of nearly £10bn behind on which no inheritance tax paid is being paid, some ‘journalists,’ ‘commentators’ and ‘opinion-makers’ will write up pieces saying that this is good politics, that it is to the advantage of society as a whole, that we need to respect wealth, that is the living proof that the system is fair, meritocratic (yes, really), efficient and healthy. These articles will be printed in national newspapers and a lot of stupid people will believe it.
This article is one of the very worst in a long time. Moore goes on to explain the need “to fasten on the lot of what (May) calls the ‘ordinary, working-class family.’” These people need to ‘managed’ (see here). There is not one honest word in this article (energy bills are for example inflated by green levies – we don’t need them). God thank we have the wealth creators such as the duke. These people need nothing else in order to perform their magic than low taxes and sparing regulation. The song is always the same and it always ends up with the same refrain: change is impossible.
“Most wealth creation works to the general good, but one of its inevitable consequences is that some people do a lot better than others. This helps provide an index of what works and what doesn’t. (May) is right that too many CEOs are better at taking large sums out of their companies than in improving their long-term profitability, but if she tries to lay down exactly how companies should be run, she will only ensure a flight of talent, and mediocrity for all” (here).
Let’s stop this nonsense and talk about something serious.
- The amazing history of social stratification
In the course of many hundreds of years, the world changed beyond recognition. There were wars, political upheavals, epidemics and pandemics, technological evolution, imperialism, the labour movement, totalitarianism, redistribution and social mobility, advances in medicine, the democratisation of education and more. Remarkably, one thing did not seem to have changed much at all. It is the genealogical composition of the top of the social stratification.
In a recent paper, Guglielmo Barone and Sauro Mocetti show that this is the case for Florence (see here). They made use of figures from the census of 1427. These are great studies because, for a long time, research on economic mobility looked not much further than one, two or three generations. Typically, the incomes of fathers and sons were being compared. Economic mobility varies significantly from one country to another – it has traditionally been low in the Nordic countries and high in the UK, the US and Italy. Importantly, even a relatively high elasticity implies great mobility in the longer run. For example, an elasticity of 0.5 in one generation implies 0.25 in two generations and only 0.125 in three generations (an elasticity of 1 means that income status is perfectly inherited between father and son and 0 means that there is no inheritance). This is the reason why Garry Becker concluded in the 1980s that almost all the earnings advantages or disadvantages are wiped out in 3 generations (see here).
Becker is wrong. Barone and Mocetti show this on the basis of a surprisingly detailed set of tax records left behind by the city of Florence. They find meaningful income persistence across seven centuries. Gregory Clark from Davis in California reached a similar conclusion with regards to Sweden, going back to the 17th Century. The message is that there is much less economic mobility over the long turn than short-term figures would lead us to believe – even in countries where short-term mobility is high.
Barone and Mocetti looked at 2011 income data to identify the five highest-earning surnames in present-day Florence. They then looked back at 1427 data to find information about earnings and occupations for those five surnames 700 years ago. The data show that the four highest-earning surnames of 2011 were all above averages surnames in 1427. Indeed, three of the four were in the top 10 per cent. Such inter-generational income persistence is amazing, also considering the massive political and social upheavals that occurred, foreign conquest, domestic revolutions, the plague and, much later, the unification of Italy, fascism, the welfare state, leftist policies and redistribution – nothing seemed to have had a significant effect on the genealogical composition of the wealthiest (see here and here).
Gregory Clark’s study of Sweden is different because he did not have access to historical income data. Clark used the fact that when surnames were introduced in the 1600s in Sweden, they had strong class implications (see here for the paper and here for the book he wrote in the meantime). Noble families had surnames based on the names of their noble houses and localities. As was the case everywhere in Europe, middle-class crafts people adopted a name based on their profession. Peasants usually adopted a surname based on the first name of their father, adding ‘son’ to it – the first Andersson had a father called Anders (see here).
Clarke showed that, hundreds of years later, in 2008, people with surnames of the first category were significantly more likely to be a part of the Swedish financial elite than people who’s surname ends with ‘son.’ This is also amazing because the historical case is so different. Sweden had much less political upheaval than Italy. It also had much more explicit income redistribution than Italy and a much greater level of social mobility. The research shows that short-term mobility does not translate into long-term mobility, not even in countries like Sweden where short-term mobility is very high. Certainly, more of such studies are needed. Becker’s reassurance that inequality is nothing to worry about because of long-term mobility (3 generations at the most) is wrong. However, the notion that Sweden-style redistribution policies promote long-term mobility also needs qualification. These policies undoubtedly did a lot of good in terms of inequality, social mobility, poverty, educational attainment and democratisation – this is why the title of Clark’s book is The son also rises – but they ultimately had little effect on the composition of the economic elite of the country. Four hundred later, the elite consists of mostly the same families (see here).
- Rebuilding social democracy and beyond
The results of Barone and Mocetti and Clark are not difficult to explain. There is no contradiction between short-term high mobility and long-term low mobility. One reason is that income and occupational social status are linked imperfectly. For example, it is not unusual that the child or the grandchild of someone who has been economically successful moves into another career, say an artistic or a scientific field. According to Merton, this is almost a rule in gifted families: two generations accumulate wealth, the third generation goes off in another direction (the Darwins are an example). This child or grandchild will accrue much less income than her or his father’s. Statistics would show income change in three generations. But in the longer term, nothing changes because, although some generations will accumulate less wealth than others, no wealth, no fortune is being destroyed.
This is of course trivial. Another way of putting this is that the elite is not only financial, it is a network. A society is not stratified only in terms of wealth, but also in terms of education, status, networks, family relationships, access to strategic decisions and access to the political sphere. It is a system of the best schools, finding the best wedding partners, knowing the ‘right’ people, having access to strategic information and political influence and control. Everybody knows this, but we nonetheless fail to deduce the correct consequences from it. Social-democracy left the stratification of the top of society intact, after all social democracy is not socialist. A case for these policies could certainly be made: if we could create a society which ‘works for all,’ like the one we had in the 1960s (not that this was perfect, but it can also not be denied that important advances were being made), in which there was full employment, good wages, social mobility, decent housing, decent health care and decent education, it did not seem to be a problem if these policies did nothing to change the composition of the top of society. In other words, there was a congruence of interests between labour and capital, including the elite. It was not perfect, but it worked for some time. Living conditions got better for a lot of people. It was real social progress.
This congruence no longer exists or only in an extremely diminutive form. If the new duke would pay taxes, the hole in the NHS can be plugged immediately and 78.000 cancer patients, who now have to wait for treatment can be helped immediately. If the new duke and his class would pay taxes, 4 million children would not grew up in poverty. It has been predicted that half of the children in the UK will grow up in poverty by 2020. There is nothing ‘academic’ about discussing issues of tax evasion, poverty and inequality – people die because of it, others never get a decent chance. What we are talking about are vicious crimes. It is nothing less than a criminal system. Now that the British have ‘their country back,’ it is easy to raise the Union Jack, promote patriotism and blame immigrants for explosions in other galaxies, but all of this is a smokescreen for people who are responsible for the death of others and for enormous amounts of misery. I am not saying that everything can be solved by redistribution alone. That is another discussion.
No appeals to morality are of any use. We therefore need to do what humanity has always done in order to make a difference: we need to organise. We need a rebirth of social democracy and democratic leftist politics which will make no concessions to the conservatives and the neoliberals and we need to purge (yes – purge) our own ranks of the right wingers which remain. This is not easy, but there is no other way. No appeal to humanity will help, no rational argumentation will make any impression, no inherently sensible and intelligent proposals will make even the beginning of a dent as long as they are not being supported by a large base of people who dissent.