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Social justice
10 May 2013

Heresy of the week: The rich keep getting richer because the state keeps giving them money

In the run-up to the financial crisis of 2008, the rich got a whole lot richer. But they must have taken a hit in the years since, right?

Not in America, they haven’t. Writing for Business Insider, Henry Blodget tells it like it is: 

  • “In case you were hoping that America's three-decade-long trend toward extreme wealth inequality was starting to reverse itself, Pew has some bad news for you. Nothing has changed. The rich are still getting richer... and everyone else is still getting hosed.
  • “The richest 7% of American households – 8 million with more than $836,000 in net worth – did quite well from 2009 to 2011. Their average net worth rose from $2.5 million to $3.2 million, a 28% jump.
  • “The other 93% of American households, meanwhile, lost out. Their average net worth dropped from a measly $140,000 to $134,000.”

As a result the share of the nation’s wealth owned by the richest 7% has increased from 56% to 63%.

How can this be happening? And under that nice Mr Obama too!

  • “The source of this relative wealth bonanza for the richest households, not surprisingly, is the stock market. America's richest households own most of the stocks in this country. The stock market has more than doubled since the 2009 lows and is hitting new highs.”

But why are shares doing so well when the economy is doing so badly? As we’ve noted before on the Deep End, quantitative easing is driving demand for stocks and securities – and, therefore, pushing up their prices. And that’s not the only way in which governments are effectively giving money to the rich.

Consider the case of Apple – one of the biggest and richest companies on the planet – which is borrowing $17 billion to buy back its own shares when it’s sitting on savings of $145 billion. ‘Buttonwood’, of the Economist, asks and answers the obvious question – “why doesn't [Apple] just use its cash to do the same thing?”:

  • “First, because a lot of that cash is overseas, and bringing it back to America would incur a tax charge. Second, because interest rates are low and debt interest is tax-deductible, making this look a great arbitrage.”

Good for Apple, not so good for the ordinary American taxpayer:

  • “Apple's money will still sit overseas and not be invested at home to create jobs. Apple's tax bill will fall, as it offsets the interest payments against its profits. The buy-back will probably push up the share price in the short term… boosting the value of executive options; profits from those options will probably be taxed at the long-term capital gains tax rate of 15%, lower than the rate many workers pay.” 

And that’s not the end of the bonanza. Apple’s bond issue will generate lots of lovely fees for Wall Street bankers – “the same bankers taxpayers helped support five years ago.”

So, whether in term of QE or a distorted corporate tax system, the state is merrily shoveling cash into the gaping maws of the wealthy.

It’s time to do something about this blatant injustice, but what?

Well, our elected governments could borrow even more money and shovel it down some other throats in the hope of evening things up. This is Labour’s solution. It won’t work and will make the state even more dependent on the money men than it is now.

Instead, we need tax reform that advantages real wealth creation, not accountancy tricks; and, if we must have quantitative easing, let it be in a form that puts money in the hands of ordinary people, not just the rich.


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