The rich really are different from you. While the pall of the financial crisis still hangs over the ordinary worker, whose income is lower today than in 2008, the share of pre-tax income going to the top 0.1% of UK adults, the 53,000 who earn half a million pounds a year, is approaching the level just before the crash a decade ago. How have the rich done it? One reason is the “light touch” nature of UK company regulation. Another is that they can muster armies of lawyers and accountants to help them reduce their tax bills. A third is that they extract a great deal of wealth from their ownership and control of companies. To see how these factors might coalesce it is instructive to note that in 2017, to avoid paying a new higher rate of tax, 100 extremely wealthy individuals withdrew dividends averaging £30m each from their companies to save a total of £100m before the change took effect.
The French economist Thomas Piketty presented a simple explanation for rising inequality. He argued that wealth generally grows faster than the economy, and it tended to become concentrated, as more wealth brings more opportunities to save and invest. Tackling disparities in power and capital has become the leitmotif of the left globally. This is a very good thing. The chosen method is often some form of collective action by the state on behalf of workers. France’s president, Emmanuel Macron, has just pushed through a law for mandatory profit-sharing schemes for employees in firms with more than 50 workers. In the US, Democratic presidential hopefuls Bernie Sanders and Elizabeth Warren propose to tackle soaring wealth inequality by giving employees a stake in their companies – and increased authority over the profits and decisions made by their employers.
In Britain it is the Labour party’s John McDonnell who is looking to reshape and repurpose the firm, transforming it from an engine of wealth extraction and power concentration into a more egalitarian and inclusive vehicle for social change. Mr McDonnell wants nothing less than for the company to be “for the many, not the few”. Next week at the party conference in Brighton the shadow chancellor will push ahead with plans, devised originally by Mathew Lawrence of the Common Wealth thinktank, for large companies to issue 1% of outstanding equity a year into a fund, held and managed by the workforce, which would grant dividend and voting rights. Over 10 years this worker-owned fund would build up a 10% stake in a company. Workers would each receive dividends up to £500 a year. Dividend income above this level would go to the exchequer.
While some decry this as a “socialist revolution”, Mr McDonnell’s plans are hardly subversive. The Investment Association, a City trade body, recommends that executives can be paid via a share scheme which does not exceed 10% of the issued shares in any rolling 10-year period. Why one rule for workers and another for bosses? Worker-ownership funds might check the explosion in executive pay. There are things to straighten out in Labour’s plan: whether the dividend is derived from global or UK profits; whether excess dividend payments ought to end up in a wider public fund. These decisions can tweak the scheme further in favour of labour versus capital. Given the yawning gap between rich and poor, this would be welcome indeed.
