A new form of capitalism

Markets and taxation will be redesigned to provide a better balance between growth and distribution

Earlier this year I wrote that “2022 will be remembered as the year the world started to turn differently”, and here we are, just three weeks later, and there are multiple signs that remarkable structural changes are in the air.

First of all, it seems that the populist surge of the last 20 years is running out of steam. An analysis by the Tony Blair Institute for Global Change found that “the number of populist leaders in power at the start of 2022 fell from 17 at the start of 2021 to 13 – the lowest since 2004”. One of the main reasons for this could be that the pandemic “…reminds the public of the importance of seriousness and expertise in policy-making. Countries with populist leaders around the world had higher Covid-19 case and death rates than those without populist leaders.”

But even before the pandemic, it was growing. A YouGov survey in early 2020 showed a “…sharp decline in populist tendencies in the eight European countries surveyed”. And the trend continues – a recent Cambridge University survey of half a million people showed that in most parts of the world populism is definitely on the decline.

Second, although the United States seems mired in decision-making mud, the leadership of the liberal democratic movement is broadening. While Europeans have been ahead of the mental health curve – at least since the 1960s – this year in Davos, it was Japan who took over. Prime Minister Kishida Fumio stressed that “history has proven that state capitalism without checks and balances carries risks at home and abroad, challenges such as climate change, widening income gaps , rural-urban disparities and social tensions… Instead of leaving everything to the market and competition, [we should] focus on public and private sector collaboration on reforms…build a virtuous circle where investment in people leads to a continuous increase in company value and attracts new investment in human capital. With Japan taking the lead in the G-7 this year, these will hopefully be more than the empty words we expect from Davos.

Third, still from Davos, there is a letter written by 102 millionaires and billionaires calling on governments to “tax us now…[and institute] permanent taxes on the wealth of the wealthiest to help reduce extreme inequality and raise incomes for a sustained, long-term increase in public services.” As I wrote in my previous post, it’s clear “that humans, effectively chastened by the pandemic, have become more human (for lack of a better word)”. The pandemic has also highlighted the obvious folly of having “frontline workers” in the back of the bus when it comes to sharing rewards. A substantial change is coming.

Wealth tax, especially since the figures in terms of private wealth and public budgets are surprising, is increasingly talked about. In India, there are 700,000 [dollar] millionaires with an estimated total wealth of $12.83 trillion, more than 35 times the Center’s total budgeted expenditures for FY21! In other words, a wealth tax of just 3% on all wealthy men and women — I’m also raising my hand — would cover 100% of government spending.

Now, there is often an instinctive horror at the idea of ​​a wealth tax. But the arithmetic (and the mood) today is just too strong. Admittedly, the establishment of a wealth tax requires serious reflection on its impact in several areas. Since a large part of people’s wealth consists of holdings of market instruments such as stocks, there could be a reasonable fear that the value of these holdings would fall due to tax, which would make tax less effective. However, if the wealth tax were part of a larger package that reduced and directed income tax (including corporate profits) and indirect taxes to ZERO, the market should balance the impact of the direct impact on wealth with the increase in valuations and the economy. growth from zero taxes. (By the way, that’s why I wouldn’t perpetuate the estate tax; it should be time titled against income taxes to ensure a reasonable balance – today the balance is tilting so far in favor of the assets we would need to start with 100 and zero.)

Another important consideration is the impact on real estate, a major component of private wealth; the estimated value of all private real estate in India is around Rs 80 lakh crore, more than twice the value of all listed shares. The major problem here is that many people own an apartment or a house but may not have the cash to pay taxes. Although we can make exceptions, I think a simpler solution would be to levy no wealth tax on owner-occupied housing; second homes and other real estate would come into the net. This may change the arithmetic slightly, say at a tax rate of 3.5%, which again, as a potential payer, is no big deal.

Unlike stocks, a tax on real estate would certainly drive prices down, which is actually a very good thing. Housing desperately needs to become more affordable; this would greatly increase the number of people who could buy a property so that many more units could be sold, which in turn would increase the demand for cement, steel, etc., while creating jobs.

Obviously, the many aspects of the tax should be handled with care, and there are people far more qualified than me to undertake this exercise.
As the cycle towards a new world order gathers pace, we will see a continued shift away from populism and what Fumio calls “a new form of capitalism” with markets and taxation designed to provide a better balance between growth and distribution.

The author is the CEO of Mecklai Financial http://www.mecklai.com

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