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A new form of capitalism

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

The pandemic also highlighted the obvious foolishness of having “front-line workers” at the back of the bus when it comes to sharing rewards. Substantive change is coming.
The pandemic also highlighted the obvious foolishness of having “front-line workers” at the back of the bus when it comes to sharing rewards. Substantive change is coming.

At the start of the year, I had written that “2022 will be remembered as the year that the world started turning differently”, and here we are, just three weeks in, and there are multiple signs that remarkable structural changes are in the air.

First, it looks like the populist surge of the last 20 years is losing steam. An analysis by the Tony Blair Institute for Global Change found that “the number of populist leaders in power at the beginning of 2022 is down from 17 at the beginning of 2021 to 13 – the lowest since 2004.” One of the key reasons for this could be that the pandemic “…reminded the public of the importance of seriousness and expertise in policymaking. 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, this had been building. A YouGov survey in early 2020 showed a “…steep decline in populist tendencies in all eight of the European countries surveyed”. And the trend persists—a recent Cambridge University survey, covering half a million people, showed that in most parts of the world, populism is in definitive retreat.

Second, despite the US seemingly mired in decision-making mud, leadership of the liberal democratic movement is broadening. While the Europeans have been ahead of the sanity curve—at least since the 1960s—this year at Davos, it was Japan that stepped up to the plate. PM Kishida Fumio pointed out that “History has proven that state capitalism without checks and balances carries risks at home and abroad, of challenges including 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 cycle where investment in people leads to a continuous increase in company value and attracts further investment in human capital.” With Japan taking over the leadership of the G-7 this year, these will, hopefully, be more than the empty words we have come to expect from Davos.

Third, again from Davos, is a letter written by 102 millionaires and billionaires which called on governments to “tax us now…[and institute] permanent wealth taxes on the richest to help reduce extreme inequality and raise revenue for sustained, long-term increases in public services”. As I wrote in my earlier piece, it is clear “that humans, effectively chastised by the pandemic, became more human (for want of a better word)”. The pandemic also highlighted the obvious foolishness of having “front-line workers” at the back of the bus when it comes to sharing rewards. Substantive change is coming.

Wealth tax—particularly as the numbers in terms of private wealth and government budgets are startling—is being increasingly talked about. In India, there are 700,000 [dollar] millionaires whose total wealth is estimated at $12.83 trillion, more than 35X the Centre’s total budgeted expenditure for FY21! In other words, a wealth tax of just 3% on all the rich guys and girls—I’m putting my hand up as well—would cover 100% of the government’s expenses.

Now, there is often a kneejerk horror at the concept of a wealth tax. But the arithmetic (and the mood) today is just too strong. To be sure, implementing a wealth tax requires serious consideration of its impact in several domains. Since much of peoples’ wealth consists of holdings of market instruments like equity shares, there would be a reasonable concern that the value of these holdings would fall as a result of the tax, rendering the tax less effective. However, if wealth tax was part of a wider package that reduced and direct tax on earnings (including corporate profits) and indirect taxes to ZERO, the market would need to balance the impact of the direct hit on wealth with the boost to valuations and economic growth from zero taxes. (Incidentally, this is why I would not make the tax on assets permanent; it should be titrated over time against taxes on earnings to ensure a reasonable balance—today, the scale is tipped so far in favour of assets that 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 privately-held real estate in India is around Rs 80 lakh crore, more than twice the value of all listed equities. The major issue here is that there are many people who own a flat or home but may not have the cash-flow to pay the taxes. While we could make exceptions, I believe a simpler solution would be to charge no wealth tax on owner-occupied housing; second homes and other real estate holdings would come into the net. This may tweak the arithmetic slightly—say, to a 3.5% tax rate, which, again, as a potential payer, is no big deal.

Unlike in equities, a tax on real estate would certainly lead to a decline in prices, which is, in fact, a very good thing. Housing desperately needs to become more affordable; this would dramatically increase the number of people who could buy property so that many more units could be sold, which, in turn would increase demand for cement, steel, etc, as well as generate jobs.

Obviously, the many aspects of the tax would need to be carefully tuned, and there are far more qualified people than myself to undertake this exercise.
As the cycle towards a new world order accelerates, we will see a continuing shift away from populism, and towards 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 CEO, Mecklai Financial http://www.mecklai.com

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