Jeremy Cobyn’s proposal to bring in a maximum wage (or, if you like, a 100% tax rate) would not work, for two reasons. The first, is that the swing voters he needs to attract would never vote for a party with this potty policy. If you are flirting with voting for the Conservatives, you are not going to like the idea of a wage cap.
If any further discussion is needed, then the second reason is that it would not have the intended effect. Presumably the reason to bring down wages would be to reduce inequality. But most rich people do not get their income from salaries, but from dividends, capital gains, rental income etc.
I don’t know if the Duke of Westminster takes a salary, but capping it would not change one iota the fact that he owns a huge swathe of London’s most valuable real estate. If your only source of income is your salary, then capping it only stops you being able to catch up with the already-rich. Or encourages you to take income in other forms.
Okay, so you could change the policy to a maximum income, but that doesn’t solve the problem because the rich can just sit on their investments and wait until the policy was reversed.
So how do you really reduce inequality? In his famous book Capital, the French economist Thomas Piketty showed that inequality has increased over the past few decades because the return on capital has outpaced the rise in wages.
Piketty says that the 20th century, when growth outpaced the return on capital, was incredibly rare. For most of history, inequality has been very high. He predicts that unless growth can increase significantly, that will once again become the norm. (That some people earn high salaries is irrelevant to the broader picture.)
So if you really want to reduce inequality, you need to boost growth. How do we do that in the UK? In a fascinating study the Centre for European Reform has shown that Britons have become poorer relative to the richest 14 EU countries since 2000. Why?
Largely, because we have poor productivity levels, ie we work harder to get the same done. Why? Because we have fewer 18-year-olds in education than comparable countries, and more young people with poor literacy and numeracy. Our young people have similar levels of skills to 55-year-olds, whereas in other EU countries young people are better trained.
We build too few houses, meaning that people cannot move to where the work is. And comparatively poor rail, and road and air infrastructure mean that people cannot commute easily. Also, we have unusually centralised government, meaning that regions cannot make policies to boost their own growth. We also have a uniquely short-termist corporate culture, because so many companies are owned by shareholders who demand short-term returns instead of, say families, who look for long-term stability.
So, the answer to reducing inequality is not to raise the tax rate, but to educate and train people better, to sort out our infrastructure, and to devolve government. What’s more, people might actually vote for such policies.
* Jeremy Hazlehurst is a journalist who writes for the FT and Management Today. He recently joined the Liberal Democrats.