A global backlash against the rich

As politicians across the world seek to channel chagrin over living standards pressure, an end to the era of lower taxes and deregulation that began in the late 1970 could be approaching.

Financial Times

It is never a great sign when politicians start appealing to taxpayers’ patriotism. Defending the French government’s recent decision to raise the top rate of income tax to 75 per cent, Pierre Moscovici, the country’s finance minister, told Le Monde: "This is not a punitive measure, but a patriotic measure.” The rich, he explained, are being given an opportunity to make "an exceptional contribution” to solving France’s financial problems. I am sure they are very grateful.

France is clearly taking a big risk by raising its tax rates so much higher than those of its neighbours. But it is a mistake to portray the Hollande administration as Socialist dinosaurs. The truth is that the new French government is at the extreme end of a new global trend: an international backlash against the wealthy that is reshaping politics from Europe to the US to China.

David Cameron, the British prime minister, has offered to roll out the red carpet for French tax exiles. But even in Britain, where the top tax rate is 45 per cent, there is a new mood of antagonism towards the rich. Even conservative politicians dare not defend bankers’ pay.

In the US, meanwhile, Barack Obama is campaigning to increase taxes on "millionaires and billionaires”. It is true that the tax rises that the US president wants would be laughably small by French standards. Obama merely wants to raise the top rate from 35 per cent to 39.6 per cent, as well as increasing taxes on capital gains and dividends.

But some of the president’s rhetoric has distinct echoes of the successful Hollande campaign in France. The French socialists made great play of Nicolas Sarkozy’s allegedly 'bling' lifestyle and friendships with the super-rich. In similar vein, the Obama campaign has attacked Mitt Romney as a tax-dodging representative of "the 1 per cent” – and mocked his wife’s ownership of a dressage horse. These tactics sound risky because Americans are traditionally said to admire the wealthy, rather than to envy them. But the Obama camp can read polls. By a margin of 64 per cent to 33 per cent, Americans are in favour of higher taxes on those earning more than $250,000.

Political sensitivities about the gap between the wealthy and the rest are not confined to the west. The lifestyles of the rich and powerful is now the most sensitive and dangerous topic in Chinese politics. The website of Bloomberg News was recently shut down in China, apparently as punishment for the publication of an article on the family wealth of Xi Jinping, soon to be China’s new president.

In one incident a couple of weeks ago, riots over pollution in the city of Qindong took a nasty turn when demonstrators demanded to know what brand of clothing the local party secretary was wearing. The BBC reports: "On discovering it was an expensive Italian brand, they are said to have stripped him to the waist.”

Why is all this happening? As Zanny Minton Beddoes of The Economist writes in a recent essay, "a majority of the world’s citizens now live in countries where the gap between the rich and the rest is a lot bigger than it was a generation ago”. The trend has been most extreme in the west. As Minton Beddoes points out, in the US "the portion of national income going to the richest 1 per cent tripled from 8 per cent in the 1970s to 24 per cent in 2007”.

Eventually that kind of shift is liable to spark a political backlash. The trigger for that reaction has been the Great Recession, which has increased the pressure on the living standards of ordinary people, while exposing misbehaviour at the top. Western politicians, from Barack Obama to Franois Hollande, are seeking to capture and channel this new mood. In Asia, where the Great Recession has hit less hard, other factors may be at work. The internet and the rise of microblogging have made it easier to spread information and to whip up indignation about the gap between the hard-pressed worker and the super-rich.

If this new mood hardens, it could mark the end of an era of lower taxes, deregulation and rising inequality that began in the late 1970s, with the rise of Margaret Thatcher and Ronald Reagan in the west and of Deng Xiaoping in China. When Lady Thatcher came to office in 1979, Britain’s top tax rate was 83 per cent. She cut it, first to 60 per cent and then to 40 per cent – where it stayed until the financial crisis. Reagan inherited a top income tax rate of 70 per cent and cut it to 50 per cent and finally to 28 per cent. In China, Deng Xiaoping captured the spirit of the times when he remarked: "To get rich is glorious.”

Now a new global mood has taken hold. In China, political leaders have eschewed the frank celebration of wealth. In the western world, cash-strapped politicians are eager to raise taxes on the newly unpopular rich. The big question is whether this is still possible in a globalised world. As Cameron’s tactless remarks about red carpets have underlined, any government that raises taxes too far and fast is in danger of sparking a flight of capital and business. The super-rich are mobile and well-advised.

The merely well-off, however, are likely to find it harder to evade a new push for higher taxes across the west. James Callaghan, the prime minister Thatcher defeated in 1979, remarked perceptively: "There are times, perhaps once every 30 years, when there is a sea change in politics.” Roughly 30 years after the beginning of the Thatcher-Reagan era, another sea change is upon us.

Copyright The Financial Times Limited 2012.

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