JP Floru: Why both the left and the right should do nothing about inequality

J P Floru is the Director of Programmes at the Adam Smith Institute.

Based on empirical evidence, abandoning inequality policies could be desirable for both the left and the right.  Doing nothing about inequality could become mainstream and middle-of-the-road ; precisely where all parties want to be. 

Why the left should abandon inequality policies

The attraction for Mr. Milliband consists of the fact that empirical evidence shows that equality can best be promoted by… doing absolutely nothing about it.  Labour introduced substantial measures to fight inequality during the thirteen years it was in power.  The result was the opposite: inequality increased.  In fact, in 2007/8, inequality was higher than at any time since records began in 1961.  Inequality also increased under Thatcher, in line with international trends (though not as high as under Labour).  Under John Major, inequality declined.

It is worthwhile pointing out that inequality as measured by the Gini Coefficient is a typical left-wing way of seeing the world – I am using it here as it is a measure which the left understands.  Those on the right generally believe poverty is absolute, not relative.  One is poor because one has no food and or no roof and or no clothes – not because your neighbour has a Rolls Royce and you haven’t.  Thatcher would typically say that under her policies everybody was better off, including the poor.

The fact that inequality policies have the opposite effect is not surprising.  It has been recorded in numerous pieces of research.  Progressive taxation, for example, typically makes the poorest and the richest worse off, while helping the lower middle classes (which also happen to be the largest voter class).

Incidentally, high taxes for the super rich always bring in very little money. What is raised as a percentage of the total tax take is invariably minute in proportion to the total tax take.  The reason is twofold: the very rich will pay experts to limit their taxes or move away; and there are usually just not enough very rich people about to raise a lot.  The suggestion that “this tax revenue is needed to pay for services” is therefore rather fanciful.

So Mr. Milliband – do you want to be truly revolutionary?  Then you should abandon inequality policies.  You may want to start promoting a flat tax – which will make the economy and therefore the tax take grow – which might allow you to spend more on programmes for the poor.

Why the right should abandon inequality policies

The attraction for the right is perhaps less surprising.   As said, empirical evidence shows that inequality increased less under Thatcher than under Labour.  Inequality as measured by the Gini Coefficient decreased under Major – the years when Thatcher’s policies started to achieve their full impact.  Some say that Major went much further than Thatcher in introducing Conservative economic and employment policies.

Conservative policies consisting of encouraging enterprise, work, and responsibility are all inherently meritorious: you climb as high as your drive, labour, and intelligence allows – thereby improving the living conditions of all.  “We are all Middle Class now” is the natural outcome of Conservative policies.  Self-help Thatcherism was always more popular with the aspirational, rather than the wealthy.  The wealthy will typically not trust people to help themselves, but resort to Macmillanite paternalism instead.

But there is a second argument for the right not to pursue redistributive policies.  This is the simple fact that inequality actually drives advance and civilisation – thereby benefitting all.  I refer again to the philosopher FA Hayek, who, in The Constitution of Liberty, extensively explains why, counter-intuitively, income inequality is a good thing. 

First of all, it shows society which behaviour should be copied, and which shouldn’t.  In its most simple form: it shows that it pays to get out of bed in the morning.  This encourages activity and production.  It doesn’t just point at desirable patterns of labour, but also at what should be imitated in all other fields: billions of people beavering away learn through trial and error what the best methods for delivering the best outcomes are.  This drives advance and therefore civilisation. 

Secondly, unequal spending patterns drive civilisation as well.  The rich typically buy products at a stage when they are still exclusive and expensive.  This expenditure allows the producers to start mass-producing those goods – whereby they eventually become affordable to all.

It is worthwhile pointing out that countries which abandoned the key inequality policy of progressive taxation in favour of a proportional or flat tax, all increased their tax take through the economic growth it created.  As written in an earlier blog, Hong Kong, which has a flat income tax of 15%, raised so much tax revenue that it didn’t know what to do with the money on top of all the public works projects it could think of – so it handed every resident an HK $6,000 cheque in 2011.