To the rediscovery of Pigou
At the end of the first war, a Cambridge economist, whose name is almost unknown today but as visionary as Keynes, made a radical proposal to get public finances coventrified by 4 years of war effort back on track.
He called for a flat 25% wealth tax on the assets of the richest. A proposal that, more than others such as nationalizations, in a capitalist system truly had the flavor of socialism. So much so that it was the Labor members of the Fabian Society, the society founded by Beatrice and Sidney Webb, who advocated it. But they did not propose the crisis to exacerbate the class conflict but rather to mitigate it.
Un extensive document of 1919 drawn up by Sidney Webb and bearing the title National Finance and the Levy on Capital, What the Labor Party intends, explained in detail the good reasons. not only purely economic, to embrace this drastic measure.
The document stated bluntly that the main concern of the Labor Party in the post-war settlement was public finances and ways to restore them so as to return to providing the necessary services to the country and to carry on the hard post-war conversion so as to manage the social cohesion whose rupture had resulted in revolution in Russia. No cake for anyone until all have bread».
The taxes pigovian
Arthur Cecil Pigou was hardly a socialist. At King's College, Cambridge he had succeeded Marshall in the chair of political economy. Throughout his entire intellectual career he was concerned with the issues of welfare economics. He collected his ideas of him in a book with a similar title, The Economics of Welfare, which remains his most important work. It was the Cambridge economist himself who coined the concept of negative externalities of the economy for which he prepared a series of containment measures which took the name of Pigovian taxes.
Friend of Keynes, who esteemed him, he was overshadowed by the work and action of John Maynard without any form of rivalry arising between the two scholars.
Nature lover and mountaineer Pigou took part in the first British expedition that climbed Mount Everest.
In the following article, the young Harvard historian Ian Kumekawa who published a recent book on Pigou's thinking tells us why Pigou's ideas about a wealth tax on great wealth is still an idea that has great economic strength, social and political in the eyes of the radical left. Ian Kumekawa's talk was hosted on the op-ed page of the Financial Times of 7 June 2020.
Two similar crises
A century ago, in the midst of an unprecedented crisis, the British economist AC Pigou proposed a flat wealth tax. Writing during the First World War, Pigou called for the introduction of a huge one-off tax to pay off the skyrocketing war debts.
Today, faced with billions of euros of public spending to address the Covid-19 crisis — and the urgent need to address inequality — we would do well to reconsider the idea of such a tax.
In Pigou's time, as now, governments spent almost inconceivable sums of money to repair the national disaster. Britain's debt had more than tripled in the first three years of the First World War.
Then as now, a wealth tax was the left's preferred proposition. Then as now, such a tax, which was never instituted, would have strongly detached from the political ordinary and from the rules established by public finance.
Not a tax but a project
For Pigou - the first economist to study environmental costs and one of the first to analyze inequalities - the reasons for introducing a special tax were not only economic. It was about justice and fairness.
Pigou viewed the one-time fee as a project. "Young people - he wrote in 1916 - are asked to sacrifice not so much a part of their assets, but the whole of what they possess". If this was socially believed to be "the right principle to apply to the lives of men in those circumstances," Pigou argued, then it would also be "the right principle to apply to the nation's money."
This led Pigou to think of radical measures: a levy of 25% on all wealth, excluding the poor.
Widening economic inequality in today's world
There is no war today, but many people have been asked to risk their lives. "Essential" services in the United States are largely provided by often underpaid workers.
Orderlies and paramedics employed in American hospitals, 1 million people, bring home a median salary of less than $30.000 a year. The 3 million people-care workers earn just over $24.000 a year.
… and gender inequality
Both the virus and the resulting economic fallout have disproportionately affected already disadvantaged communities, especially those of color.
Even before Covid-19, the median wealth of white American households was nearly ten times that of African-American households. A tax on wealth would smooth this disparity and begin to accommodate pressing demands for racial equality in the wake of the brutal police killing of George Floyd.
Reward the sacrifice
Meanwhile, the costs of Covid-19 are many, varied and widespread. Some people, however, had to sacrifice more than others. For millions of people living in precarious economic situations, the crisis will be — if it isn't already — a life-changing disaster.
Social distancing is a very different experience in affluent city fringes than in crowded suburbs, where many poor people live.
Yet despite this state of affairs, political leaders have come to expect—and even cling to the idea—that the poorest continue to act with a public-spirited ethic. However, doing so for them often means giving up their means of subsistence. The personal sacrifices necessary to stop the spread of the coronavirus are not limited to health or psychological risk. They are also of the economic type.
The patrimonial implements the public spirit
A one-off tax, distinct from a continuous wealth tax, would implement the ideas of public spirit and community solidarity. It would offer the wealthiest a way to more equally share the burden of an exceptional disaster.
Those who are supposed to pay the tax have not been fired from a low-wage job. They did not face eviction. They were not forced to take public transport during the lockdown. They were not forced by necessity to work without personal protective equipment. Yet, they received health care, food through the take-away service, mail delivery.
In short, they continued to depend on the work of those who put themselves at risk out of necessity or civic sense.
As Pigou said more than a century ago: "Imposing such a levy is not unfair at all, but an act of social equity".
An act of social equity?
This logic rings even louder today than in Pigou's time, when taxes were discussed but hardly implemented. Economic inequality in Western democracies has skyrocketed over the past three decades. In the United States, the richest 1 percent — households with assets over $10 million — own more than a third of total wealth.
Pigou has proposed a 25 percent levy on the assets of the richest. Today, even a 5% levy on the richest 1% of Americans could raise $5 trillion. An additional levy of 0,1% on the 500% of Scrooges could raise another XNUMX billion.
Such measures would cover half of the $2800 trillion pandemic fiscal stimulus implemented in the United States to date.
They would help more evenly distribute the costs of the unfolding disaster. They could also help steer the United States towards a more equitable future.
Crises—whether wars or the current pandemic—are transformative events. Their legacies are profound and long-lasting. Our response to COVID-19 should prioritize fairness and safety.
