An easy fix
I don’t follow the news from the annual meeting of the World Economic Forum. Most often referred to as Davos, the name of the Swiss town where some 2,500 billionaires, celebrities and politicians meet to talk, to listen to each other and invited economists, to network and to party over four days in late January. Since their view of the rest of the world is largely ludicrous, and the talk fest is notable for the lack of action that flows from the annual junket, why bother?
Then, like many others, I read about Dutch historian Rutger Bregman accusing the wealthy attendees of the World Economic Forum of hypocrisy, and arguing they should be taxed more. He was speaking on a panel about poverty, and started by questioning the billionaire attendees’ use of fuel-guzzling private jets to attend a conference with a strong focus on tackling climate change. “This is my first time at Davos and I find it quite a bewildering experience to be honest,” he said. “I mean, 1,500 private jets flown in to hear David Attenborough speak about how we’re wrecking the planet. I hear people talking the language of participation and justice and equality and transparency. But then almost no-one raises the real issue of tax avoidance, right, and of the rich just not paying their fair share. It feels like I’m at a firefighters’ conference and no-one’s allowed to speak about water.” With commendable Australian-style forthrightness he added “All the rest is bullshit.” [i] Reading Rutger Bregman was encouraging, and fun!
It’s all about taxes? Ah, if only it were that easy. Understanding what to do, and why it is so hard, that’s a different matter. How did we end up in a world were a small number of people own a huge proportion of the world’s wealth? A quick overview of the way the capitalist game is played right now is instructive, from CEO salaries through to business profitability. What follows is admittedly simplistic, but it explains why it is about taxes, but more than just taxes.
We can begin with the compensation paid to people at the top of corporations. Let’s consider the case of Peter, Paul and Mary. Peter has been CEO at Amazing Inc. for a few years now. With salary and stock options, he comfortably clears $40m a year. Paul is also a CEO, at Incredible Ltd. He recently heard details of Peter’s salary package, and went to talk to his Chairman. “I’m falling behind the market benchmark, Jim.’ Jim understood. The Board would have to approve an increase, or Paul might move. The next meeting saw his compensation increase to $45m. But then Peter heard about that … In practice, neither man needs more than $5m (probably a lot less), nor stock options, encouraging them to inflate their value. However, envious comparisons push salaries up, as CEO’s brood about a competitor getting more. It’s a status game.
Mary works for Excellent Corp. She earns $5m a year, and is very happy in her job. The Board and her staff see continuous growth in the business. Then one day, the Chairman of Incredible, Alf, meets the Chairman of Amazing for a drink, and they talk about compensation. As he goes home that night, he can’t forget Jim’s last words to him: “In this world, Alf, if you pay peanuts, you get monkeys.” Is Excellent not doing what it should? Is Mary who they really need? The Board meets in private, and decide to ask Mary to move on, and appoint Peter. His package will be $50m, but it will be worth it. Mary talks to an executive placement company, and they explain what she needs to do: “We’ll set your minimum at $45m. We’ll find the positions, you just have to sell yourself”! Don’t be misled, this is the way this part of the game is played.
Part two of the game concerns stocks (shares for Australians). Wealth is grown, for CEOs, board members and investors, by growing the value of a company’s stock; the other people who get rich out of trading are investment managers, but they have the system so well designed they make money if a company’s stock goes up or down (that’s another story). Stock prices go up if market ‘sentiment’ is positive: as I am writing, sentiment for pharmaceutical companies is moving to a ‘maybe sell’ because the government is threatening to look into drug prices! [ii]
I’ve often described analysts’ view of companies as rather like driving a car using the rear-view mirror only: each quarter, the performance of a company is reviewed by assessing the previous quarter’s performance against what had been promised. Then you look back and see if other companies in the same industry demonstrated similar performance levels. After that, you ask the company what it will achieve in the next quarter. So now you are driving by using the rear-view mirror, while hoping that you’ve been told the truth and the invisible road ahead is straight and wide!! Sentiment is how you see what happened, and what you believe will happen next.
How to deal with sentiment? There are many issues. One is to ‘tilt the playing field’: what that means is ensure your company has an advantage over competitors. There are several ways you can do this, but among the best are either to ensure there is a virtual monopoly, with just two or three companies dominating the industry (some unkind people call that a cartel!); or use patents and/or platforms to make it almost impossible to get into the business area. There’s a lot more, but that should do for now. You can also look after the industry analysts, who rate stocks as hot (buy) or risky (sell). Establish confidential briefings, keep them informed, and make sure they are ‘looked after’ (but you wouldn’t bribe them, of course!). Help them see the ways things are.
What about actual company performance? That is the third part of this game. To put it at its simplest, companies make profits in one of two ways: they either cut costs, or increase sales revenues. Amazon is an excellent case study. Their business relies on getting the goods ordered online to their customers: success depends on keeping logistics costs down. Pay staff working in the warehouses as little as you can, with demanding expectations of performance. I am sure you have read about the working conditions at Amazon. [iii] Lower delivery costs by making ‘deals’ with FedEx, UPS and the Post Office, and at the same time quietly move to replace them with drones, or your own cheaper drivers (perhaps your drivers will use their own vehicles?).[iv]
At the same time, Amazon has created a virtual monopoly, or more accurately, a natural monopoly. What is that? Our friend Rutger Bregman explained all that a couple of years ago: a company in a natural monopoly is “operating in a positive feedback loop of increasing growth and value as more and more people contribute free content to their platforms. Companies like this are incredibly difficult to compete with, because as they grow bigger, they only get stronger … Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. So, what do these companies own? A platform. A platform that lots and lots of people want to use. Why? First and foremost, because they’re cool and they’re fun – and in that respect, they do offer something of value. However, the main reason why we’re all happy to hand over free content to Facebook is because all of our friends are on Facebook too, because their friends are on Facebook … because their friends are on Facebook.” [v]
It is also possible to increase profits for your product or service by setting a price well over the costs of materials, manufacture, etc. In a competitive environment, that’s difficult. Companies in that situation often find themselves in a price fight (a downward spiral in which profits get smaller and smaller). Clearly, they want to avoid that, which is why they prefer to be in a monopolistic situation of one kind or another, where they can set prices, but there are some other opportunities at play here. Customers pay more for an item if it is desirable and scarce (look at the price of special edition cars or clothes from the top fashion houses). Alternatively, you can make something essential, an object you have to have because your friends, movie stars or other trend setters have it. This is the world of Apple products. The markup on Apple’s iPhones is more than 100%, but you are paying that premium because you need to have an Apple iPhone [vi]; not to have one would make you feel embarrassed among your friends!
Before you start getting critical, I know this is an oversimplification, but the key elements are there. As I see it, the current capitalist system is out of control, with excessive salaries at the top, wealth obtained through (managed) stock ownership, and company profits increased through market control, exploiting workers and price gouging. As Rutger Bregman said, “It’s not rocket science”! He could have added Karl Marx explained all this more than 150 years ago.
With that as background, we can now return to the issue of raising taxes. The Davos panel where Rutger Bregman spoke was discussing an Oxfam report. Apparently that report stated 26 billionaires had the same wealth as the world’s poorest 3.8 billion people combined: the panel was asked whether this inequality was likely to lead to a backlash. Our plain-speaking Mr. Bregman said, “Ten years ago the WEF asked the question, ‘What must industry do to prevent a broad social backlash?’ The answer is very simple: just stop talking about philanthropy and start talking about taxes. Taxes, taxes”, he said. “Just two days ago there was a billionaire in here — Michael Dell — and he asked a question like, ‘Name me one country where a top marginal tax rate of 70 per cent has actually worked’. I’m a historian. The United States. That’s where it has actually worked, in the 1950s during Republican president Eisenhower, the war veteran, the top marginal tax rate in the US was 91 per cent for people like Michael Dell. The top estate tax for people like Michael Dell was more than 70 per cent.” Go, Rutger, historians rule!
Michael Dell had spoken at another Davos panel a few days earlier, arguing against a proposal put forward by Democrat representative Alexandria Ocasio-Cortez for a tax rate of 70 per cent for people with incomes exceeding $US10 million. He argued it “would not help the growth of the US economy”, while other panels said increasing tax was just an ‘easy fix’ and providing education and access to technologies would be a better long-term solution to tackling inequality.[vii]
An easy fix? So, fix it, then move on to other issues. Easy? There are two issues to consider as politicians and commentators are proposing tax increases, now the topic’s back in the limelight.
First, will increased taxes make enough of a difference? The data is not encouraging. Newly elected Ms. Ocasio-Cortez has argued for a top rate of 70% on the highest incomes. In terms of income, it seems that might pull in $12bn, which sounds a lot, but is only 0.3% of the annual tax income in the US. Similarly, Senator Elizabeth Warren is proposing a wealth tax: an annual levy of 2% on wealth above $50m and of 3% on wealth above $1bn: at the most this would raise $210bn, but most observers suggest it would be less than that, given the skills of the wealthy in tax avoidance. As usual, companies were quick to add it might impact on economic growth. [viii]
There is a second point, however, which is the symbolic value of these proposed taxes. Taxing the rich is a good idea, especially as they are quite clearly disproportionately rich. Even The Economist supported the idea. If there is a need to increase revenues (for universal medical care, better education, etc.), as they say ,“there are good grounds to look first to the rich .” [ix] It may not be an ‘easy fix’, but it is one step to bring some sanity back to salaries.
Taxes are one part of the problem. Is there any way to fix the whole mess, whether easy or difficult? Or is this a system that is irretrievably out of control?
I have written before about one key change, and that has to do with the stock market and stock holders. As long as we continue to treat investors buying stock as the only stakeholders in a company, stock prices and dividends will rule companies. As I observed in a previous blog, Charles Handy had it right: investors should be seen like punters at the race track. They put their money on a company (like a horse), and hope it performs (wins, or at least comes in the first three). They have no role in looking after the company, nor what it should do, nor do they own it (just as the punter doesn’t own the horse, has no role in stud management, horse training or choosing the jockey). Scrap the pernicious view that stockholders own the company and can determine what it should do. It would be an important step forward, enabling executives to focus on meeting the needs of all stakeholders and long-term results, not last quarter’s performance.
Right now, we live in a world where the ‘rentier economy’ is thriving. The rich make money by leveraging control over something that already exists, such as land, knowledge, or money, to further increase their wealth. By definition, the rentier makes his living at others’ expense, using his power to claim economic benefit. But in his article on the need for taxation, Rutger Bregman pointed out that “One thing is certain: countries where rentiers gain the upper hand gradually fall into decline. Just look at the Roman Empire. Or Venice in the 15th century. Look at the Dutch Republic in the 18th century. Like a parasite stunts a child’s growth, so the rentier drains a country of its vitality.”[x] Hmm. Good point, Rutger: once again, listen to historians!
Put a brake on greed, rethink who companies work for, reduce excessive wealth. Yes, education and access to technologies would help, too, that panelist was correct, but tax is central. It could be done, but in a world run by plutocrats and their powerful political allies, it seems unlikely. That doesn’t mean we should give up: we just have to keep pushing.
Rutger Bregman has offered to speak at Davos in 2020. As he has pointed out, he can’t lose. If they don’t let him speak, it shows they won’t debate his views; if they do, he has promised he will say exactly what he said this time! The need for higher taxes isn’t rocket science. Nor is the need for major reform of a capitalist rentier system out of control, even if it isn’t an easy fix.
[i] Widely reported, I took these comments from the ABC website: https://www.abc.net.au/news/2019-01-31/dutch-historian-rutger-bregman-goes-viral-after-davos-tax-speech/10766504
[ii] This story ran in the Winston-Salem Journal, 31 January 2019, page A11: “Pharma under fire”
[iii] An example: https://www.inc.com/marcel-schwantes/whats-it-really-like-working-for-amazon-a-survey-of-241-warehouse-employees-says-its-toxic-one-called-it-worse-than-prison.html
[iv] https://www.seattletimes.com/business/amazons-delivery-dream-is-a-nightmare-for-fedex-and-ups/
[v] No, wealth isn’t created at the top. It is merely devoured there, Rutger Bregman, The Guardian, 30 March 2017
[vi] https://www.foxnews.com/tech/apples-iphone-8-heres-how-much-it-really-costs-to-build
[vii] https://www.bloomberg.com/news/articles/2019-01-23/dell-ceo-joins-davos-debate-on-70-tax-rate-not-supportive
[viii] The Economist, How to tax the rich, and how to limit the economic damage, Feb 2nd, 2019
[ix] Op Cit
[x] Op Cit, Bregman 2017
