Warren Buffett does not have the answer. But John Lewis might
We are in the midst of an interesting debate about taxing the rich. On the one hand, we have Warren Buffett, several French billionaires and a group of 50 wealthy Germans joining what the Guardian calls the "tax me harder" movement. Meanwhile in the UK, the Treasury is dropping very large hints that the 50p tax rate levied on high earners could soon be abandoned.
Yet debates about the right tax rates to levy on the rich skilfully avoid a more important question: why does our economic system allow, and encourage, a minority of people to amass such huge wealth in the first place?
Research by IPPR has found that what concerns people most about such inequalities in wealth is the hazy relationship between effort and reward. People work hard to make a contribution to their employer yet many see little benefit when their employer does well, with all the rewards going to a few people at the top.
Over the last 20 years an assumption has developed that a company's success is derived from a small group of people at the top who must be rewarded in increasingly large sums to keep them motivated and loyal. There is scant evidence that this is the case. But in accepting this "talent myth" we've forgotten that in any organisation, as in any society, most people contribute and should be rewarded accordingly.
What many of the people we spoke to wanted was "fair" or "proportionate" rewards – so the people at the top still earn more, sometimes considerably more, but everyone across the organisation gets a pay packet that reflects what they collectively put in. This isn't about more individualised performance-related pay; individual performance is almost impossible to measure in most contexts and the spread of performance-related pay is one reason that top pay deals have been able to spiral. Instead it's about pay and reward structures that recognise the contribution that everyone makes – the example of the John Lewis shared bonus scheme was almost universally applauded in the focus groups IPPR conducted.
With historically high levels of income inequality in Britain, even after tax and benefit transfers, and stagnating wages for ordinary workers, it's vital that we look beyond the tax system as a way to solve our problems. The recession has shown us that this is an unsustainable model in any case, but it also fails to address legitimate concerns about the ability of a minority to take an ever increasing share of our national wealth. And shifting the tax burden to the rich risks creating an unbalanced tax base that requires the rich to get richer when we need additional revenues.
An alternative model could consider why wage disparities have been able to rocket and why many employees feel their efforts go unrecognised in their pay packets. One possibility is that the long-term decline of unions and collective bargaining has made it harder to maintain sensible wage structures in firms. It's difficult to see how this trend can be reversed, but there could be other ways for employees to have greater power in the workplace.
The John Lewis example is useful here too – its staff council scrutinises pay deals across the organisation, so senior managers are accountable to staff when developing pay structures and setting individual pay packets. Are there ways that this model could be expanded to other organisations, particularly those with different ownership models? Similar systems are in place in a number of European countries, with no evidence that economic performance is diminished.
Essentially, this is about making workplaces, and the economy more broadly, more democratic so that a greater range of stakeholders – not just shareholders and senior executives – can have a say in how companies are run. Greater democratic participation in the workplace and the economy could see the promotion of goals that go beyond short-term profit-making for the few, such as fair pay, full employment, and long-term growth and innovation. This could be part of creating a more sustainable economic model that properly rewards low and middle earners so that we don't have to rely purely on the benevolence of Warren Buffett and his well-meaning super-rich friends.