Income differences | Award-winning economist: Income inequality is growing at a furious pace, and it could soon destabilize the welfare state

“Mankind chooses itself how much and how much inequality it wants. Such a decision does not come as if given from heaven, but the task of each society is to choose for itself.”

This is how one of the world’s most respected inequality researchers, a professor of economics at the University of California, Berkeley, sums up his message Emmanuel Saez.

Saez arrived in Helsinki on Monday evening. During his visit, he will, among other things, speak at a summer course for economics students and participate in a seminar for inequality researchers.

French-American During the 25 years he spent in America, Saez specialized in researching, among other things, the effects of tax evasion by the rich.

In Saez’s opinion, the rich, and especially the ultra-rich, should participate more in financing society. His views are listened to by influential people.

For example, he is the president Joe Biden proposed wealth tax on billionaires and Democratic senators Elizabeth Warren and Bernie Sanders behind the tax proposals.

Nowadays especially billionaires find it easy to plan their taxes so that they don’t pay much taxes.

In the United States, the richest 1% still contribute to the payment of taxes to some extent, but billionaires do not, Saez’s research shows. Tax systems typically focus on taxing earned income or capital gains, not on asset appreciation.

At the same time, the technological revolution is making the world’s richest people unimaginably rich.

For example, the founder-CEO of the technology company Nvidia by Jensen Huang the value of the wealth has grown from three billion dollars in 2016 to one hundred billion dollars.

Amazon’s Jeff BezosMethan Mark Zuckerberg and Tesla Elon Musk are examples of a similar explosive development of wealth.

Emmanuel In an interview with Helsingin Sanomat, Saez says that the recent increase in the wealth of technology billionaires is part of a wider trend.

We are in the conference room of the Jenny and Antti Wihuri fund’s Salus building in Kaivopuisto.

Saez first takes careful notes of what the interviewer wants to ask and then answers coherently.

The essence exudes the kindness of a wise professor without a trace of harshness.

In Western countries, the growth of inequality has been historically high for 44 years, says Saez.

“Before that, Western countries and their economic system distributed wealth growth quite neatly. We thought we had it figured out [eriarvoisuuden] the problem. Unfortunately, that time did not last.”

According to Saez, two people in particular, the President of the United States Ronald Reagan and British Prime Minister Margaret Thatcher’s the personal significance should not be underestimated.

“They have to be given credit for really changing the thinking to be pro-market. A belief that if the rich benefit, then everyone wins.”

Reagan’s period saw the launch of a major tax reform in the United States that set off a huge tax race all over the world.

While corporate taxes used to be around 50 percent, they even dropped to around 15-25 percent, not to mention tax havens.

And when the really rich get most of their income from the profits of big business, the increased profits ended up in their pockets a lot, Saez estimates.

Thatcher, on the other hand, was a key influencer in the neoliberal political thinking in which the size of the welfare state and the role of taxation were actively reduced. The idea grew into an international movement.

“The change was most visible in the English-speaking countries, but the Nordic countries also changed a lot.”

According to Saez, technology billionaires are an extreme example of the power of this change.

With deregulation, they were able to take over the market unchecked. “And when there was no progressive taxation, nothing stopped the growth of wealth.”

Inequality it was hoped that growth would increase economic growth so that the wealth of the rich would eventually also flow to the joy of the poor.

That didn’t happen.

Many economic theories are largely stories and myths, Saez reminds.

In the United States, the real incomes of the poorest half of the population, adjusted for inflation, have remained practically the same for more than 40 years since the 1980s, Saez says.

“At the same time, the real incomes of the top earners doubled.”

A similar phenomenon can be seen in the change in income distribution between the top 1% of the US population and the “bottom” 50% of the population from the 1980s to 2020.

“The share of the top one percent of the income has increased from ten to 20 percent, and the share of the lowest-income half of the population has correspondingly decreased from 20 to ten.”

Saez reminds that the strong concentration of assets always also leads to an increase in the political power of these owners.

“The owners want to prevent others from entering the same industry to benefit. They act like dictators. That’s why their financial power should be limited.”

Saez has tried to develop, for example, his own wealth tax models in such a way that they take into account all the real wealth of individuals as well as possible, without various valuation gimmicks.

He is also known as an advocate of high marginal taxes and progressive taxation.

“Did you know that the progressive tax was invented in the United States to finance the costs of World War I?” He asks.

In times of crisis, the United States has therefore had the ability to make even the wealthiest citizens pay the bills.

Saez participates in a seminar for inequality researchers that lasts until Friday in Finland, where the future of the welfare state will be discussed, among other things.

Saez himself is a solid supporter of the welfare state. “As a humanist as well as an economist,” he elaborates.

In the United States, many of the basic pillars of the welfare state are already in a weak state. The price of education has skyrocketed. Inequality in studies is growing, student loans weigh on graduates.

A population educated for societies is a key economic raw material and resource, says Saez. That is why the state should invest in it.

People’s ability to choose their children’s education or the savings targets for their pensions are also weak, so a variety of welfare state security and income transfers are needed to support an efficient society that takes care of the elderly and children.

Saez sees as one concern the fact that the rich may soon no longer want to participate in financing society if they no longer use the services of the welfare state themselves.

Saez says that he hopes that there would be clearly more discussion in politics than at present about how the wealth created in the economy should be distributed between the different parties.

It is a fundamental debate about how much taxes can be collected in national economies for the common good.

A similar discussion is ahead in other big issues of humanity, such as combating climate change, he reminds.

Saez considers the position of the welfare state still quite strong, even though dark clouds have already gathered in the sky.

“I am concerned about the concentration of wealth. It can hurt us in the long run. The position of the welfare state is not yet shaken, but it may happen in the next decades.”