Over the last year or so, the Occupy movement has garnered wide attention, with people of all backgrounds gathering to protest the deteriorating social conditions.
However, these grievances have been running for decades. The bottom 80% of US income earners have seen their wages decline (adjusted for inflation) since 1973. The median household under the Bush and Obama administrations also saw their real incomes decline as well. On the other hand, the rich (or 1%) has managed to increase their share of incomes and wealth over the decades.
In Australia, waning social democratic policies have ensured an economic assault against the public by political and economic elites has not had the same deleterious impact on equality that exists in the US.
Nevertheless, the wealthy have certainly become relatively richer than the rest of us. Our own 99% movement, while smaller than those in the US, has highlighted that all is not well in our “lucky country”.
As some may retort, isn’t progressive taxation and the social welfare state supposed to even out the social and economic inequalities in Australia? While the tax and transfer system redistributes wealth and income from the relatively wealthy to the middle and working class, the rich still appear to be racing ahead.
The reason why the rich are rich is primarily due to one factor: rent. This is an economic term to define the excess of market prices and income over the prevailing cost of production. It has also been defined as “unearned income” - income or revenue over and above what would exist under competitive market conditions. Those who make their living off economic rent are called rentiers.
Far from eliminating or taxing away this unearned income, so-called neoliberal policies are designed to create as much rent as possible for the rich to feed upon. The term “neoliberal” itself has two problems: it is not new and has little to do with economic liberalisation. These policies have been embedded in all modern economies.
I will briefly cover some of the ways that the rich become ever wealthier.
Possibly the worst of the policies concerns the land market. UK economist Fred Harrison - who has predicted housing bubbles years in advance in Australia, the US and UK - authored a book called Ricardo’s Law: House Prices and the Tax Clawback Scam to explain how the rich feed off this market.
Using economic and historical evidence, Harrison showed that the wealthy do not pay a single cent in tax because they manage to claw back decades of progressive taxes through the uplift in land values of their property holdings.
The way this is achieved is twofold. Taxpayer-funded infrastructure - whether highways, public libraries, transport, schools and so forth - has the effect of raising land values, though the owner has done nothing to earn it (outside of property improvements). This disproportionately benefits those who own the most land - the top 10% of households own 38% of all net property wealth and 45% of all wealth in Australia.
The second is through the boom-bust housing cycle that has afflicted economies over the centuries. The speculative pyramid schemes result in colossal increases in land values - capital gains - that owners have not done anything to earn.
Our own Ponzi scheme has seen the land market in Australia rapidly increase from $1.2 trillion in 1996, peaking at $4.1 trillion in 2010. As Harrison points out, this process allows the rich to recoup all taxes and more, whereas those with no land holdings get jack squat. Even as bubbles deflate, Harrison notes they simply make up their lost wealth with the next bubble, which is typically larger than the last.
The optimal method of stifling or preventing housing bubbles it to place substantial taxes upon land. Land is not like capital; nobody has created it, taxing does not reduce supply and land cannot move to a tax-free haven.
Taxes on land and natural resources distort the economy far less than the 125 burdensome taxes placed upon productive business and labour. Our tax system leads to deadweight losses of approximately 30 cents to the dollar (or $100 billion per year in Australia). It has been shown that land taxes can replace all business and personal income taxes.
Mining and super profits
The super profits that accrue to mining companies by selling sub-soil or natural resources, making their owners and managers fabulously wealthy in the process, are another form of rent, similar to land. There is no natural law that makes Gina Rinehart and Andrew Forrest billionaires from resources they have recovered through mining, but did not create.
Intellectual property rights
Intellectual property rights (IPRs) – patents, copyrights and trademarks - are another policy favored by the rentier class. The super-profits inherent in this form of medieval government monopoly ensure a torrent of wealth redistribution upwards to the rich, even though far better mechanisms for financing R&D and creative art exist. This is how Bill Gates became the world’s richest person - “entrepreneur”, “self-made”, “business wonder” – from government monopoly.
The enormous compensation and pay packages for the executives and managers of corporations is a pure form of rent, having nothing to do with the necessary cost of doing business. Conventional economists defend this on the basis that markets ensure incomes equal productivity.
One may ask what the productivity of the most highly paid managers in the FIRE sector (finance, insurance and real estate) is. After all, they pay themselves millions for having bankrupted billion-dollar firms and have driven trillion-dollar economies off the cliff. These corporate pay packages have nothing to do with attracting and retaining talent but rather rentiers enriching themselves at our expense.
Another method favoured by the rentier class is transferring wealth through inheritance, where a few fortunate children are made rich by been born to wealthy parents. It is essentially winning the lotto without ever having purchased a ticket. Wealth through inheritance is great for the 1%, but the rest of us in the 99% actually have to work for a living.
For those who believe in the phrase “there is no such thing as a free lunch”, reality shows otherwise. Not only has the rich in Australia being receiving a free lunch, government policy has created an overflowing banquet for them to feast upon each and every day.
Millionaires, billionaires and their supporters prefer to delude themselves into believing they have earned their wealth; rather, policy ensures that the nanny state will always cater to the needs of the 1%.
While some of the policies that benefit the rentier class have been discussed in the media, others have remained hidden from view. Treasurer Wayne Swan has spoken out against the rentier class, but this is rank hypocrisy; ALP policy has been decidedly neoliberal, feeding the wealth of those he condemns in his article in The Monthly.
If the 99% are serious about dealing with inequality and the social problems it causes, then it is high time to move the debate past progressive taxation and social welfare and onto the issue of eliminating rent from our economy.