OECD takes aim at “disproportionate” 1%

The OECD’s latest research – which warns about concentrating power and privilege at the top, and advocates new tax measures – is yet another sign that even major international institutions have woken up to the danger of inequality.

The Focus on Top Incomes shows New Zealand isn’t immune from the 1%er phenomenon. Over the last 30 years, our top 1% has got one dollar in every six (14%) of all the income generated in that time. While that’s nowhere near as bad as in the US, where that figure is an almost unbelievable 47%, we’ve done much worse than, say, Denmark, where the top 1% got just 2.5% of income growth since 1981.

“The disproportionate surge in top incomes … helps explain why so many people have not felt their incomes rising in line with national GDP growth,” the OECD says. “This explains why the majority of the population cannot reconcile the aggregate income growth figures with the performance of their incomes.”

This will be precisely the left’s narrative for the election campaign: the economy may be recovering, but are you seeing your share of it?

This phenomenon also makes a big difference to those comparisons of growth rates you often see. The United States may have fantastic overall GDP growth – but most of it goes to the rich, and if you look at growth rates for ordinary people, they’re actually much higher in many other countries.

What’s also fascinating is that the OECD rejects the explanations often given for the 1%’s income gains. In particular, it has little time for the idea that the 1% are earning more because they are now global superstars. That can’t be true, it points out, because incomes aren’t soaring right across the globe.

In another break from orthodoxy, the OECD says we need to think very hard about tax rates at the top. Governments have “several options at hand to increase effective taxation paid by top income recipients”.

For reasons that aren’t clear, the OECD doesn’t like the idea of just increasing the top tax rate. But it does recommend a whole lot of other ideas, including:

•  Abolishing or scaling back tax deductions, credits and exemptions (more relevant to America than New Zealand)

• Taxing as ordinary income all remuneration, including fringe benefits, carried interest  arrangements and stock options;

• More taxes on immovable property, i.e. wealth

• Reviewing other forms of wealth taxes such as inheritance taxes

• Increasing transparency and international cooperation on tax rules to minimise “treaty shopping”

• Developing policies to improve transparency and tax compliance

Throughout the document you can feel the influence of Thomas Piketty, whose bestselling book Capital in the Twenty-First Century hones in on the 1%, and warns of the danger of allowing the buildup of great wealth. Echoing his book’s message very closely, the OECD concludes: “Decreasing marginal tax rates for top incomes and tax exemptions for capital income may result in top income groups accumulating more capital and wealth and transmitting this through bequests to younger generations, continually concentrating power and privilege.”

It’s yet another sign of change. A generation ago, you wouldn’t have heard the OECD warning about “concentrating power and privilege”, or finding new ways to tax the rich. But that’s how far the debate has come.

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