Tax systems favour the wealthy
In the second part of his two-part commentary on inequality in Bermuda, economist Robert Stubbs discusses tax burdens on people of varying incomes.
If governments globally are reluctant to publish data concerning poverty, they regard releasing information disclosing who pays what in tax as positively “verboten”. As surprising as it may seem in 2018, for all intents and purposes, the world’s governments have successfully maintained a strict embargo on the public release of relative tax burdens. (Public registries of beneficial ownership are not the only information governments abhor publishing.)
Of all the world’s governments, only the British government publishes a tax incidence analysis for the public’s review, and, even then, it does so only in sparse detail. As in Bermuda, the most recent data from the British government shows the country’s highest tax burden is actually paid by Britain’s lowest income households. Households in the bottom 10 per cent of Britain’s income distribution pay 42 per cent of their income towards direct and indirect taxes.
Once above the bottom 10 per cent, however, Britain’s tax incidence shows a modicum of progressivity, rising from 29 per cent to 35 per cent. Given the current level of detail offered by British government officials, that’s as much as we can say about tax burdens in Britain. (Although it is a matter of public record in Britain, some billionaires in London probably pay less in tax to the UK Treasury than their domestic help, an item known only after George Osborne, in a particular flight of fancy, betrayed as much in the House of Commons).
We know considerably more, however, about tax burdens in France and Germany. The laborious work required to produce detailed tax incidence analyses was performed by French and German academics in each of their respective countries, and the granularity of their work far exceeds that of the British government. In both France and Germany, the more detailed analyses reveal the full extent of fiscal favouritism granted their highest income earners.
In fact, such are the benefits extended to France’s highest income households, they actually enjoy the lowest tax burdens of all households in the country. Above the 96th percentile of household income, tax burdens become highly regressive in France, with the benefits extended to households in the highest 0.1 per cent sufficient to lower their tax burdens below those of the rest of the country.
Germany’s favourable tax treatment of high-income earners benefits an even greater proportion of the country, albeit the benefits extended are slightly less than those enjoyed by the most fortunate households in France, in more ways than one. Germany’s tax burden turns highly regressive above the 87th percentile, with households in the upper 0.1 per cent paying less than all others in the top half of Germany’s income distribution.
Indeed, the granting of favourable tax treatment to elites appears now to be common practice globally. Although a full US tax incidence analysis including both federal and state taxes does not exist in the public domain, by all indications the US government bestows even greater benefits on America’s highest income earners.
In a 2011 New York Times op-ed, titled “Stop coddling the super-rich”, Warren Buffett disclosed his taxes paid the previous year cost him 17 per cent of income, while his staff paid between 33 per cent and 41 per cent of theirs.
No doubt, governments have good reason to oppose publishing relative tax burdens. The unfair tax advantages now routinely extended to financial and economic elites provides damning evidence of the politically corrupting influence of income inequality and concentrated wealth. What’s more, the severe distributional imbalances in power and influence over our political processes has not gone unnoticed by the general public.
Stagnant wages, rising income inequality and a trail of broken political promises have served to seriously erode public trust in their political and business leaders worldwide (see graph). Everywhere, many people believe political elites, whether of the right or left, no longer act in the best interest of the public. Global opinion surveys now suggest feelings of disenfranchisement have reached crisis proportion.
Today, many believe the current system is broken, that it is unfair, and it offers them no hope for the future. Indeed, disillusionment is now so widespread, the legitimacy of government itself in many countries is questioned. Worldwide, faith in democracy is crumbling.
And this in countries with economies performing much better than our own. The scale of our crisis makes Bermuda’s circumstances potentially even more volatile. Last summer, the Progressive Labour Party were elected on a promise of delivering landmark reform. During the campaign, we heard much of the “Two Bermudas”. They adopted a slogan of “Putting Bermudians first” and called their election platform, An Agenda for a Better and Fairer Bermuda. They vowed they would dismantle the economic inequities and wrong-headed policies of their predecessors responsible for the island’s economic hardships and preventing Bermudians from achieving their full potential (see jobs graph). In short, they pledged to be both progressive and pro-labour in driving reform.
But, almost a full year on since Bermudians went to the polls, confidence in their political leadership is being severely tested by their distinct lack of progress in developing their promised reforms, by their feverish response to the legislative priorities of Bermuda’s influential finance sector, by their seeming inability to accept the true scale of Bermuda’s economic crisis and by their pursuit of an independence agenda only one in eight of us really supports.
These political circumstances are untenable. Bermuda’s hesitance in producing the meaningful reforms necessary to redress our structural inequalities and systemic lack of opportunity can persist for so long before, here too, faith in our ability to govern ourselves implodes.
•Robert Stubbs is an economist, Chartered Financial Analyst, holds an International Bond Dealer Diploma and has completed the ACAS actuarial exams. He was formerly head of research for Bank of Bermuda and his professional interests at present lie in enterprise risk management
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