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 The political heat over soaring income and wealth gaps in the United
States, Britain and much of the developing world has built up since
the credit shock and global recession of 2008/09.
Even though protest groups such as Occupy failed to gain traction
much beyond 2011, the evidence of inequality continuing to balloon
so soon after such a seismic economic bust has refocussed the minds
of economists, politicians and voters.
There's little doubt the richer are getting much richer.
Last week's annual CapGemini/RBC survey of investors worldwide
showed the number of households with more than $1 million in
investable wealth rose almost 15 percent to 13.7 million in the year
through 2013. Their total wealth rose almost 14 percent to $53
trillion, it estimated.
Both the ranks of the rich and their collective wealth have now
risen 60 percent since 2008, the survey showed, and those fortunes
are expected to rise a further 22 percent by 2016.
By contrast, world economic output has expanded just 16 percent over
the past five years and the slow, sub-par recovery and subdued wage
growth for most workers sharpens the political divide. Near zero
interest rates and money printing designed to kickstart credit
growth and job creation helped stabilise the situation but has had
the side-effect of inflating the financial assets and real estate
holdings of the richest even further.
What's more, anger has risen over a disproportionate hit taken by
ordinary taxpayers for repairing government finances even as
corporate and wealth tax rises were largely eschewed.
Policies adopted since the 'Great Recession' have clearly done
little to balance the scales on personal wealth. And International
Monetary Fund analysis shows more countries have cut corporate taxes
over recent years than raised them - even as most countries have
increased personal taxes.
But with U.S. mid-term elections due in November and UK
parliamentary elections early next year, political pressure is
mounting again. Cutting through the rhetoric is tricky, but some
feel we may be on the cusp of action.
"Consumers and workers are paying far more than corporations to
finance governments’ austerity efforts," said Luca Paolini,
strategist at Swiss asset manager Pictet. "This is politically
unsustainable and is sure to reverse."
HOARDING
If that view's widely held, you would imagine those with the money
are already braced for it.
And one glaring and enduring observation of the post-crisis years is
the extent of cash hoarding by large companies and the wealthy. This
at least partly reveals the level of anxiety among these groups that
changes to taxation or income regimes are only a matter of time.
Estimates of the amount of cash that non-financial U.S., European
and Japanese companies are sitting on is as high as $5 trillion -
twice the levels of 10 years ago as capital expenditure and
investment has largely seized up. A pick up in mergers and
acquisitions this year is modest by comparison with bloated balance
sheets.
Moreover, the CapGemini/RBC survey showed rich investors still
stored a whopping 27 percent of their expanding portfolios in cash
or equivalents through last year - more than they held in any other
asset class and twice pre-crisis levels.
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With cash now effectively losing money when adjusted for inflation,
that's an extraordinary level of caution. But for many it may be a
price worth paying for keeping money highly liquid and
geographically mobile if a domestic tax hammer is about to come down
or profit margins are to be squeezed.
Many economists reckon the fear is simply due the dire state of the
world economy and expectation of paltry growth for years to come.
Others reckon it's exaggerated due to the overvaluation of
conventional assets from super-easy monetary policy and quantitative
easing everywhere.
Yet worries about a political backlash to stabilise inequality are
intertwined with growth worries.
Although IMF studies show higher taxes and redistribution are
generally benign in terms of growth impact, uncertainty about how
those policies are implemented and "future game rules" holds back
investment today, said SEB chief economist Robert Berqvist.
With the 'effective' tax rate paid by U.S. firms having fallen some
18 percentage points below the statutory 37 percent rate, there may
be good reason to fret on that score.
Paolini at Pictet pointed to G20-led initiatives to clamp down on
aggressive corporate tax avoidance - such as recent 'tax inversion'
M&A activity in which U.S. pharma firms target Irish-based peers to
avail themselves of super-low Irish taxes.
And a forecast rise in the effective U.S. corporate tax rate by 3
percentage points over the coming years as a result of these
measures could lower profit growth by one percent a year, he
estimates.
To that, add pressure for income rebalancing that will crimp
corporate profits further. Higher minimum wage proposals are on the
table in the United States, Britain and Germany and could eventually
halt the decade-long decline in real U.S. wages.
The ultimate pincer movement by the authorities would be to find
ways to tax unproductive cash holdings themselves. Zero interest
rates are already doing much of the work on that score and negative
rates are no longer taboo.
But the fact that cash continues to pile up regardless shows the
depth of the concern that change is at hand. "Business conditions
are about to become harsher," Paolini said.
(This story was corrected in paragraph 11 to reflect Paolini works
at asset manager Pictet
(Additional reporting by Francesco Canepa and Nigel Stephenson;
Editing by Ruth Pitchford)
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