The Robin Hood state: taxes are getting more progressive

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1:05Lane Greene:The Economist

1:12Callum Williams:Hello and welcome to The Intelligence from The Economist. I'm your host, Rosie Blore.

1:18Lane Greene:And I'm Jason Palmer. Every weekday, we provide a fresh perspective on the events shaping your world.

1:27Callum Williams:You've probably heard about the armies of mercenaries fighting in conflict zones around the world. Many of them come from a single country in Latin America.

1:39Lane Greene:And there are nearly as many people who speak Spanish in America as there are in Spain. Spanish language podcasts and books and Oscar nominees all point to a boom. But in fact, Spanish may be reaching its peak in the country.

2:04Lane Greene:First up, though.

2:12Lane Greene:Pretty much everybody agrees that income inequality is bad, and nobody is a particularly big fan of paying taxes. Governments have to do a lesser of the evils balancing act here with progressive tax systems, taking a bit more from the rich than from the poor, or a lot more from the rich. You might call that wealth redistribution or chalk it up to means-tested entitlements, or you could just call it the welfare state, even if in lots of places that phrase comes with lots of stigma. In an era when the richest of the rich have an even greater share of wealth than back in the robber baron days, you might think the Welfare Balancing Act is out of balance.

2:53Lane Greene:But if you dig into the numbers, it seems that on average, tax systems are getting more progressive, not less.

3:00Rosie Blau:Across the world, the welfare state has turned into what you might call a Robin Hood state. Callum Williams is our senior economics writer. There is more redistribution than ever from the rich to the poor. And the scale of redistribution, in fact, is such that it has managed to outweigh, in many cases, the increase in inequality that we've seen in recent decades.

3:25Lane Greene:So what do you mean about this Robin Hood state, the redistribution? What are you seeing in the data?

3:30Rosie Blau:Okay, so you can analyze this in a number of ways. One simple measure involves comparing the income distribution of a country, both before the welfare state and after the welfare state. And what typically happens is that the pre-welfare state inequality goes down when you get the welfare state involved. And so by this measure, America redistributes from rich to poor about twice as much as it used to in the 1960s. Germany, Japan, Canada, Britain, they all redistribute much more than they used to. And in fact, if you look globally, roughly 7 out of 10 countries today have more progressive welfare states than they did in 1990.

4:06Rosie Blau:And of the minority that have become less progressive, they tend to be very dysfunctional countries or they were extraordinarily progressive to start with. The upshot is quite simple, really. There was a big rise in pre-tax inequality across the rich world that began in the 1980s. But what you've actually seen since then is that governments have become much more interested in alleviating these inequalities through the welfare state. And what that means is that in many countries, post-tax inequality, so post-welfare state inequality, is actually no higher than it was in the 1990s.

4:40Lane Greene:So that's the sort of aggregate picture, but surely in different jurisdictions, the degree of that redistribution has been changing differently through the years.

4:50Rosie Blau:Absolutely. So if you start, say, with the US, yes, the welfare state has become a lot more progressive. So inequality of post-tax incomes in the US is probably about flat slash going up a little bit relative to the 1970s, 1980s. The picture elsewhere is much clearer. So say, for example, if you look at Britain, you look at France, you look at Japan, and you compare the very rich with the bottom 50%, so the median person and below, the 1 % in recent decades, so say, for example, since the 2000s have actually done pretty badly in all three of those countries. At the same time, the bottom 50 % have seen pretty strong real income growth in Britain, France, and Japan.

5:32Rosie Blau:When you dig into the history of this, what becomes very clear is that, yes, you had very high marginal tax rates in the 1950s, 1960s, and 1970s. But if you were rich, in practice, it was very, very easy to get around those rates. And there were all these schemes that people took advantage of if you were rich. So if you were Don Draper or Roger Sterling in Mad Men, you would just put as much as you possibly could on your expense account. So you'd put your food on the expense account, you'd put your car on the expense account, you might even put your house on the expense account. And so that wouldn't count as income, so you wouldn't be taxed on it.

6:09Rosie Blau:So what you find actually is that back then the rich paid a lot less tax than they do today and the poor paid a lot more tax back then than they do today.

6:20Lane Greene:So how much of this story then is a change in tax policy at the government level and how much of it is just simply tightening up really leaky tax systems?

6:30Rosie Blau:I think probably the biggest effect has been to tighten up the loopholes. It's now much more difficult if you're very rich to avoid paying tax than it was. But on the other hand, there have been more recent moves, particularly in Europe, to increase the headline rates that the rich pay. So it's a bit of both, but I think the clamping down on tax avoidance is definitely a big part of the story.

6:51Lane Greene:What you were saying there seems to run counter to a lot of the stories we have heard as certain billionaires are revealed to pay very little or zero tax at all. Like the very, very rich are still getting away with it, aren't they?

7:04Rosie Blau:Very, very wealthy people have a lot of potential ways of getting around paying high income taxes. One is that they might take income as profits rather than labor income. And that means you might pay corporation tax instead of income tax and corporation tax tends to be lower. Some rich people borrow against their assets to fund their consumption, this buy, borrow, die, wheeze. So there's lots of belief that people do this. The evidence, I would say, is mixed. It's actually really hard to know exactly how the super, super rich are doing.

7:35Lane Greene:But what about the other end of the spectrum? If the idea here is to reduce inequality, what's going on at the far lower end of the income scale?

7:43Rosie Blau:Here, the story, I would say, is much simpler. Two big things have happened. One is that people who are sort of middle income and below pay a lot less tax now than they did in the past. That is very clear. That's clear in the UK. That's very, very clear in the US. And the second thing is that the amount of redistribution of benefits or transfers, or whatever you want to call it, welfare, is a lot higher than it was.

8:12Lane Greene:What about a sort of assessment on whether all of this amounts to good policy, the degree to which it's sustainable and sensible and efficient and a good way to run things so that the greatest number of people are happy and participating in the system, following the rules?

8:27Rosie Blau:Yes. So there's a trade-off, I guess, between equality and efficiency. It doesn't seem unreasonable that as pre-tax inequality went up, governments decided that they wanted to redistribute more from rich to poor. The question then becomes, at what point do efforts to redistribute compromise efficiency? Now, you are starting to see some evidence that governments are perhaps pushing things a little bit too far. So you look at the billionaires tax that is proposed currently in California. The bottom line is that you have already seen some very wealthy people move business out of the state. That probably is not great.

9:09Rosie Blau:You are also starting to see some evidence in the UK that extra taxes on the rich are encouraging people to move. Now, some people will say good riddance to those people, but I think there are potential costs to getting people like that to leave. On the whole, though, I think it's fair to say that the sort of behavioural impacts that a few economists might have predicted from putting super high taxes on the rich have not really come to pass. And so what you're seeing now, actually, is a lot of politicians basically saying, we can push this a lot further than we thought we could in the past. So I would say the direction of travel on balance is towards even higher taxes on the rich rather than lighter ones.

9:53Lane Greene:So that then speaks to broadly, on average, a reduction in inequality, which was the point of all of these progressive tax systems in the first place.

10:02Rosie Blau:Absolutely. And if pre-tax inequality rises or continues to rise, depending on where you are, then yes, I suspect that the welfare state will become ever more Robin Hoodie and the rich will face ever higher marginal tax rates.

10:18Lane Greene:Thanks very much for joining us, Callum. Thanks, Jason.

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11:56Carla Subirana:TikTok is filled with videos of Colombian soldiers recruiting other Colombians to fight in the war in Ukraine.

12:04Callum Williams:Carla Zuburana works on The Economist Newsdesk.

12:08Carla Subirana:And in them you can see men dressed in military uniform who talk about the huge amount of money they're making, the sense of camaraderie, and the sense of purpose they get fighting for freedom and justice. The market for mercenaries is booming, and Colombias are one of the nationalities that are most in demand. Some academics estimate that as many as 10 ,000 are fighting in foreign conflicts, and this is becoming a huge problem for the Colombian government.

12:42Callum Williams:Carla, I find this mind-blowing to hear about Colombian mercenaries going all over the world. What kind of work are they doing?

12:48Carla Subirana:Yeah, I was very surprised when I found that too. So their work falls into three categories. So the first would be security work, which would be guarding compounds abroad or oil rigs. This is quite low-paid, low-risk security work. Then there's another category, which is higher-paid, higher-risk, which would be joining criminal organizations. And then the third category would be fighting in foreign conflicts, like in the war in Ukraine. And it's really hard to know how many of those men are out there because the Colombian government doesn't have an official tally. But around 3 ,000 are thought to have fought in the war in Ukraine since it started.

13:29Carla Subirana:There have also been accounts of Colombian soldiers fighting in Sudan's civil war and also in Mexico's cartel violence.

13:37Callum Williams:So there's a growing body of international mercenaries. Why are so many from Colombia?

13:43Carla Subirana:So part of it is because supply is growing. Colombia has one of Latin America's biggest army. And the armed forces expanded a lot during the worst parts of the campaign against guerrilla groups during the early 2000s. And that cohort is cycling out of uniform now. and the military's rules are sort of accelerating the exit because soldiers are typically forced to retire when they turn 45 years old or when they've been in service for 20 years and those who are passed over for promotion are required to leave altogether. So the result is sort of a steady stream of soldiers leaving the forces at a relatively young age and those people are in high demand.