David R. Henderson  

A War on the Rich Won't Help the Poor

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It has now been 30 days since my Wall Street Journal article on Oxfam appeared. So I have permission to run the whole thing below.

A War on the Rich Won't Help the Poor

Oxfam notes that poverty has declined sharply, then ignores the quickest way to reduce it even more.

The antipoverty charity Oxfam recently published a 76-page report, "Reward Work, Not Wealth," that advocates taxing the rich to reduce inequality and help the poor. But the report's conclusions contradict its empirical findings.

Early in the document, the authors write: "Between 1990 and 2010, the number of people living in extreme poverty (i.e. on less than $1.90 a day) halved, and has continued to decline since then." A few sentences later, they add: "Unless we close the gap between rich and poor, we will miss the goal of eliminating extreme poverty by a wide margin." It's a curious assertion, given that the authors just acknowledged 20 years of enormous progress, despite persistent inequality.

There are two ways to close the gap. The first is to concentrate on making the poor better off. Mostly that has happened, thanks to liberalized international trade and reduced costs for shipping goods. Just as Walmart and Amazon have cut costs for Americans, the introduction of container shipping crushed transportation costs for the world. The second way to reduce inequality is to make the rich worse off. Any guess which method Oxfam's report emphasizes? "Governments should use regulation and taxation to radically reduce levels of extreme wealth," the authors conclude.

Which taxes, specifically, should be raised? Those that "are disproportionately paid by the very rich, such as wealth, property, inheritance and capital gains taxes." The report calls for increased taxes on high incomes, as well as "a global wealth tax on billionaires."

In a relatively free economy, the main way to get wealthy is to produce something that people value. This has been a basic economic insight at least since Adam Smith's "The Wealth of Nations," published in 1776. But it's missing from the Oxfam report. The document's title, "Reward Work, Not Wealth," is strange: Wealth is one of the main rewards for productive work. High taxes on wealth and the wealthy reduce the incentive to produce.

The Oxfam authors, to their credit, do criticize government-made monopolies. They note that crony capitalist Carlos Slim is the world's sixth-richest man because the Mexican government gave him total control over the telecommunications industry. But then the report fails to draw the obvious conclusion: It's a mistake to give the government enough power over economic life that it can create monopolies.

Although the report doesn't use the phrase, what it effectively advocates is the creation of a tax cartel. Since capital is extremely mobile and will go where it is lightly taxed--witness the corporate "inversions" of American companies--the report suggests "a new generation of international tax reforms." Negotiating tax rates would take place under the aegis of "a new global tax body that ensures all countries participate on an equal footing."

The report also compares the income of the poor with the wealth of the rich. For instance: "Between 2006 and 2015, ordinary workers saw their incomes rise by an average of just 2% a year, while billionaire wealth rose by nearly 13% a year." But it's a false comparison: one person's paycheck versus another's net worth.

To get the story right, you need to compare income for both groups. Two economists, Tomas Hellebrandt and Paolo Mauro, studied this and concluded, in a 2015 paper published by the Peterson Institute for International Economics, that global income inequality declined between 2003 and 2013 due to rapid economic growth in poor nations.

This is even more impressive than it sounds, given the math involved. Say that wages in a developing country rose by 10%, and in the U.S. by only 1%. For a family in the poor country earning $2,000, that would mean an extra $200. But for a family in the U.S. making $50,000, it would equate to $500. In other words, income inequality would increase, even though wages grew 10 times as fast for the poor family. [By the way, this is incorrect: Hat tip to my frequent co-author Charley Hooper for pointing it out.]

Finally, the Oxfam report mentions nothing about what would be the quickest way to reduce world-wide economic inequality: let people emigrate from poor countries to rich ones. Michael Clemens, an economist at the Center for Global Development, has written that wealthy nations' tight restrictions on immigration leave "trillion-dollar bills on the sidewalk." Allowing people to move to jobs in which their productivity would soon multiply by fivefold or more would make everyone better off.

Oxfam started honorably during World War II as a group of Quakers, social activists and academics at Oxford who wanted freer trade. Specifically, Oxfam wanted the British government to allow food to reach the citizens of Nazi-occupied Greece. That was a long time ago. Today Oxfam's annual budget exceeds $1 billion, and it gets almost half of that from governments and the United Nations. So maybe it's time for a new name. Oxgov has a nice ring to it.

Mr. Henderson, a research fellow with the Hoover Institution, is editor of the Concise Encyclopedia of Economics.

Comments and Sharing

COMMENTS (12 to date)
TMC writes:

Excellent piece, packed with wisdom. I have no doubt the authors of the report have heard all of your points and have rejected them. This is a club to punish the rich not a shovel to help the poor.

john hare writes:

And yesterday I was doing my listen to opposing viewpoint thing on the truck radio. Liberal callers suggesting that Democrats should call for tariffs on everything as The Donald didn't go far enough, massive taxes on high wealth and income, and more regulations. One suggested tariffs to make all imported goods as expensive as US produced, "If shoe labor cost a dollar in the US, fifty cents in Mexico, and twenty cents in China, tariffs should be fifty cents on the Mexican shoe and eighty cents on the Chinese". I was groaning at my radio. I guess it's a sign I've been reading econlog too much.

Then later listened to some 'conservative' radio almost as bad. It seems to me that the more certain one is of a top down answer, the less likely it works in the real world.

Thaomas writes:

How timely to be concerned about a "War on the Rich" when the US Congress just borrowed a trillion dollars to give to owners of common stock!

David R Henderson writes:

Excellent piece, packed with wisdom.
Thanks, TMC.
I have no doubt the authors of the report have heard all of your points and have rejected them.
I actually have some doubt. But you're probably right.
This is a club to punish the rich not a shovel to help the poor.
How timely to be concerned about a "War on the Rich" when the US Congress just borrowed a trillion dollars to give to owners of common stock!
I'm not familiar with the policy you're alleging. Can you be more specific?

IVV writes:

A bit of a taboo musing here, but the basic idea of letting the poor migrate to richer places begs the question of why there are rich and poor places in the first place. We've got many of those answers, and although unfortunate histories do underlie the results, the big one I see is that stronger institutions create richer places.

So, why not convince the institutions of the rich places to establish themselves in the poor places?

On the surface, we'd say "No, that's colonialism, and that impoverished a lot of people," but that's because the institutions set up were designed for extraction of resources from those regions without reinvestment. To think of a somewhat more palatable situation, why not agree to let Puerto Rico become a state, and mandate the building of the infrastructure necessary to support it as well as any other US state?

If bringing the poor to rich countries is unpalatable for some, is bringing rich institutions to poor regions a better solution for them?

Seth writes:

@IVV -- There are a few reasons why that doesn't work. Those with the political power in those places won't easily give it up to such institutions. But, more important, such institutions emerge from norms. If the norms haven't developed in the culture, bolting them on usually doesn't take.

It has about the same effect as a person buying a treadmill to get motivated to exercise. It will be a clothes hanger in six months if the person had not previously established exercise habits.

David R Henderson writes:

Good answer to IVV and good analogy with clothes hanger.
I think an even better analogy, given that it involves some people choosing for others, is wanting someone to exercise who has not shown that inclination and then you buying him a treadmill rather than his buying his own.

Lert345 writes:

Eh ... how many poor people should the rich countries let in?

Pajser writes:

According to Washington Post, "Extreme poverty returns to America," 1.5 million US households live in "extreme poverty" (not just "poverty" or even "deep poverty"), twice more than 20 years ago. If true, it is unlikely that capitalism by itself will eliminate extreme poverty in world (1.3 billion people) in foreseeable future. Uganda needs half century or more to reach the wealth of current USA, and even that is not enough. On the other side, redistribution of ~$300 billion per year could be sufficient. It can be done relatively fast, with little harm to economy; as health and nutritional status of extremely poor improves, they'll produce more.

Roger writes:

Seth, IVV and David,

But the "institutions built up from norms" argument (which I strongly agree with) works both ways. In excessively large numbers, immigrants bring in new norms and can undermine the very institutions which they are fleeing to.

Econlog's own Garrett Jones just did a post on this documenting the data on this argument over on the Evonomics site.


I am certainly pro legal immigration, but strongly anti unlimited immigration.

I know this is politically unrealistic today, but another step in the right direction would be an international effort to create free enterprise zones or cities which allowed immigration for people leaving dystopias. These can be within developed nations, but segmented, or in some other neutral sparsely populated area.

For example if Mexico is consistently losing tens of millions of its citizens to the US each decade, then perhaps we should negotiate a neutral border zone of unlimited legal immigration using the proven preferred institutions.

Just an idea....

David R Henderson writes:

Eh ... how many poor people should the rich countries let in?
Many more than now.

Fred Anderson writes:

I'm continually amazed that the "tax the rich" crowd never considers the practical effects of what they propose.

Raising taxes on wealthy families won't significantly curb their "extravagant" lifestyles. Rather it just reduces the amount leftover for savings/investment. Reducing the amounts invested into our economy cuts down the number of facilities where workers might find employment and it cuts back on investment into new & better equipment -- that is, it dampens productivity (and hence wages).

A "wealth" tax ("property" tax, anyone?) makes the bizarre assumption that the rich keep their money in basement swimming pools, ala Scrooge McDuck. They don't. It's all invested -- mostly in the plant & equipment referenced above. And a forced closure and firesale of those businesses (because our political overseers need the cash for their social engineering projects) would be disastrous. I think the last time we had such a net shrinkage in national business plant was the Great Depression.

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